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Consensus community valuation
$2.00
Average Intrinsic Value
312.4%
Undervalued by
Active Member Straws
#Bear Case
Added 3 months ago

Huge reserve, resource and production dowgrade. Future production relies on open pit for now and optimised of $2400/oz price so quite marginal. Recap required as per the release. If all debt has to be expunged in addition to a working capital top up and hedging reset, DCN needs $100m+ minimum (likely $120m). Recap equity raise would be under $0.70/sh. May be salvageable once balance sheet is cleaned up as new MD has a few successful turnarounds under his belt.

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#Recapitalisation
Last edited 2 months ago

08-Apr-20.  I sold out of Dacian when this downgrade cycle of theirs commenced in June last year.  When they emerged from that first trading halt, after their first guidance and production downgrade (which was massive), I sold out into the opening auction and got $1/share.  They closed that day at 51.5 cps - which was what I got for my virtual shares in Strawman.com (which I removed from my scorecard that day - i.e. "sold").  I said at the time that I'd lost faith in the competence and credibility of Dacian's management and I wasn't interested in owning shares in a company when I no longer trusted their management.  They subsequently found more gold and rallied back up to as high as $1.73 (in January 2020) and then entered a trading halt (at $1.40) on January 31st, which turned into a trading suspension, and they've been suspended ever since.  

Today (Wednesday 8th April 2020), they've announced all of this:

Equity Capital Raising to Recapitalise Dacian

Equity Raising Presentation

Prospectus - Non Renounceable Entitlement Offer

They are conducting an institutional share placement and a 1:1 (1 for 1) accelerated pro rata non-renounceable entitlement offer (ANREO) to raise up to approximately A$98 million, with all the new shares to be priced at 30 cents each.  

Dacian’s Managing Director, Leigh Junk, commented:  “Today’s equity raising recapitalises Dacian’s balance sheet and transitions the Company into a derisked, sustainable and high margin gold producer. Together with the appointment of a new leadership team, an updated and independently verified Mineral Resource and Ore Reserve, and a three-year outlook that focuses on proven open-pit operations, this equity raising will effect a recapitalisation that will position Dacian to unlock the full potential of its asset base.

Our substantial Mineral Resource, advanced near-mine exploration targets and historical stockpiles present several opportunities to extend Mt Morgans beyond the three year outlook, while the optionality that Westralia presents for the Company under a re-optimised operating model provides currently dormant upside potential.

The proceeds from the Offer will enable the Company to deleverage the balance sheet and execute on its operating plan to generate sustained positive cash flow, while also providing the ability to invest in the future growth strategy for Dacian and Mt Morgans.”

--- click on links above for more detail ---

Plenty of positive spin, but a fairly disastrous outcome for existing shareholders.  I'm not one of those.  It goes to show, as I've said before, that owning a gold mine doesn't mean you're necessarily going to make a lot of money.  The management of Dacian would certainly have made plenty, but ordinary shareholders who've "kept the faith" have not been rewarded for their loyalty - they've just been massively dilluted and seen severe value destruction.  It has proven to be a LOT safer and more profitable to stick with the bigger and better gold miners like NST, EVN, SAR and SBMThose 4 gold producers are all core holdings in my super fund and they're also in my other portfolios to various degrees.  This is a very good time to be holding quality gold miners with capable and trustworthy management.  Unfortunately, Dacian Gold (DCN) is not one of those.

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#Where does DCN fit in?
Last edited 2 months ago

Straw #2 of 2:

Being wrong - or making mistakes - is part of the game.  You don't even have to be right more often than you're wrong.  Geoff Wilson, a very succesful fund manager, disclosed a few years ago that his team at WAM Funds had analysed their win/loss ratio and found that they had lost money on around 60% of their trades and made money on around 40%, over the prior 12 months.  However they had still outperformed the market and their own benchmark index, because they tended to quit losing positions quickly as soon as they realised they'd got it wrong, and lose not very much, and when they were right, they let their winners run and made plenty. 

It's not so much how right you are and how often, but more about what you do about it when you realise you've made a mistake.  The biggest losses tend to come from holding bad companies for too long.  Selling winners too early is also another common mistake that Wilson and his team tend to avoid, for the most part.

So - is Dacian one of those "bad" companies I refer to?  Time will tell.  For now I think there are better gold producers out there, and certainly other ASX-listed gold producers that I would prefer to be invested in, and I am.

But where do Dacian fit in?

In August-September last year they were the ASX's 9th largest listed gold producing company (of the pure-play gold producers - as I explained in the previous straw, so does not include BHP, OZL, SFR, IGO, etc who produce gold mainly as a byproduct of other production).  

Twelve months on, they have dropped 9 positions to #18, with their market cap falling from around $520 million to $315 million now - according to the ASX website.

AMI (Aurelia Metals) have also lost their market darling status, dropping from #10 to #17 and losing over 20% of their own market cap.

Of the 29 gold producers I mentioned in Straw #1, 25 are still trading on the ASX.  Of the other 4, one (GCY) is in voluntary administration (and is suspended from trading), one (DRA) has chosen to de-list here and instead list on the HKEx (in Hong Kong), and two have been taken over - being Doray Minerals (DRM) who were aquired by Silver Lake Resources (SLR) and Beadell Resources (BDR) who were bought out by Great Panther Mining (who are listed in the USA and Canada  - NYSE:GPL / TSX:GPR).

The 25 that are still mining and producing gold (as their main focus and activity) and are still ASX-listed - and trading - are below, in order of market capitalisation (from biggest to smallest).  I have added GOR (Gold Road Resources) as well, as they have just transitioned from project developers to gold producers in the past 4 months, so that makes 26.

  1. NCM, Newcrest Mining
  2. EVN, Evolution Mining
  3. NST, Northern Star Resources
  4. AGG, AngloGold Ashanti
  5. SAR, Saracen Mineral Holdings
  6. RRL, Regis Resources
  7. OGC, OceanaGold Corporation
  8. AQG, Alacer Gold Corporation
  9. SBM, St Barbara
  10. RSG, Resolute Mining
  11. GOR, Gold Road Resources
  12. WGX, WestGold Resources
  13. PRU, Perseus Mining
  14. SLR, Silver Lake Resources
  15. RMS, Ramelius Resources
  16. TBR, Tribune Resources
  17. AMI, Aurelia Metals
  18. DCN, Dacian Gold
  19. PNR, Pantoro
  20. RND, Rand Mining
  21. MML, Medusa Mining
  22. MOY, Millenium Minerals
  23. OBM, Ora Banda Mining (formerly Eastern Goldfields, EGS)
  24. TRY, Troy Resources
  25. BLK, Blackham Resources
  26. MAT, Matsa Resources

I guess where Dacian fits in now - is in the bottom half, with higher costs, a lower market capitalisation, and a few questions over management credibility.

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#Reports
Last edited a month ago

30-Apr-2020:  Quarterly Activities and Cashflow Report

This is a company I used to own shares in, but sold out in May last year, at $1.00/share, for a considerable loss, for reasons I explained at the time.  They are now trading at under 40 cents per share and have a LOT more shares on issue now than they did then, so each share is worth considerably less (as a proportion of the entire company) than it was last May.  They also have high costs - on track for June quarter production of between 33,000-36,000 ounces at MMGO (their Mt Morgans Gold Operation) at an AISC (all-in sustaining cost) of between $1,400-$1,500/oz - and hedging in place that limits the upside from the current high A$ gold price.  The A$ gold price today is around $2,600/ounce, and Dacian had a total forward hedge position as at 31 March 2020 of 115,455 ounces at an average price of A$1,978/oz, some 24% lower than the current spot gold price, which, in my opinion, is only going higher.

They recapitalised the company in April at 30 cps after being suspended from trading for the whole of February and March.  They closed on 31-Jan-20 at $1.40 and opened up on 14-Apr-20 at 45 cents (-68% lower).  The capital raising/entitlement offer was priced at -78.6% below their last traded price (of $1.40).  What a ride for DCN shareholders!  

Post receipt of recapitalisation proceeds and initial debt repayment, Dacian pro-forma balance sheet at 31 March 2020 consists of $87.4 million in cash (before costs) with total debt of $70 million.  Not a big buffer there, so plenty more can go wrong from here.  High cost gold miner with limited upside from a rising gold price.  And they've still got substantial debt.  Their market capitalisation is now under $200m, even with all of the extra shares they've just issued, and they have debt of $70m AFTER planned repayments using the proceeds from the raisings.  Their retail entitlement offer closes tomorrow.  Luckily it's fully underwritten, so they will raise the planned money, but to secure that underwriting, they had to do it all at 30c, almost 80% below their last traded price. 

It's a terrible outcome for their retail shareholders. 

A rescue-raising, the second one in 12 months no less, and they've come out of it still looking quite sub-par when compared to their peers. 

They've got higher costs, poor hedging, and their ore is low-to-medium grade as well, with an average feed grade of 1.5 grams of gold per tonne of ore, and with a plant recovery of 92.8%, that means they are producing around 1.4 grams of gold for every tonne of ore they process.  Hence their higher costs.  Their 2nd half FY2020 AISC guidance is between $1,550-$1,650/oz, which takes into account higher costs in the March quarter and projected lower costs in the current June quarter.  They say, "The Company’s three year outlook over the period FY2021 – FY2023 delivers average annual production of 110,000 ounces at an AISC of $1,350/oz."

I am particularly wary of their forward guidance, as their history is of overpromising and underdelivering.  

They're still trying to put a positive spin on everything.  They have always tried to do that.  However, when you step back and look at Dacian as an investment, it has been a terrible one for the vast majority of their investors.  And there are clearly better gold producers you can invest in - who have better fundamentals as well as much better track records, so there's just no need to be invested in Dacian Gold.  Not much to like really.

[Disclosure - NOT a DCN shareholder.]

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#Company Presentations
Last edited 2 months ago
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#Reports
Last edited 3 months ago

23-Oct-2018:  Dacian Gold 2018 Annual Report - see here

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#Massive Downgrade
Last edited 5 months ago

05-June-2019:  Mt Morgans Operation & Corporate Update

Dacian Gold (DCN) came out of their trading halt this morning with a massive downgrade - Production guidance for the June quarter has now been revised down to 36,000-38,000oz at an MMGO (Mt Morgans Gold Operation) All-in Sustaining Cost (AISC) of A$1,500-$1,600/oz (previous guidance was 50,000-55,000oz at MMGO AISC of A$1,050-$1,150/oz).  Their gold production for the first three days of June was zilch (nil, nada, bugger all) after a ball mill motor failed and shut down their entire operation for three days.  They've also reported that underground contractor performance issues have resurfaced, which have resulted in lower productivity than previously anticipated.  

DCN’s preliminary FY20 production and cost guidance now anticipates production will be in the range of 150,000-170,000oz at an MMGO AISC of A$1,350-$1,450/oz.  A year ago, they had an aspirational target AISC of A$1,000/oz.  They're now saying costs are 50% to 60% higher (currently), and will still be 35% to 45% higher in FY20. 

A$1,400/oz (the mid-point of their latest FY20 AISC guidance) is NOT a low AISC and puts them in the least profitable 25% of our top 10 gold miners here in Australia.  I immediately sold all 5,000 of my DCN shares, at $1 (the price they resumed trading at this morning).  They're now down 56% to 70c.

An updated 5-year Mine Plan is set to be released by the end of June.  The Company’s preliminary review anticipates an annual average production level over the 5 years in the range of 160,000-180,000oz.  Several additional production sources that could increase this range are also being considered including from the Cameron Well, Morgans North and Mt Marven deposits.  The Company is confident ongoing exploration success will continue the indicative production levels of the 5-Year Mine Plan well beyond 5 years.

While they have given indicative FY20 guidance this morning (which I have commented on above), they have said that final FY20 guidance will be released by the end of June following completion of further optimisation analysis.

Also, following several recent unsolicited enquiries from corporate entities, the Company has commenced a strategic review process to consider potential corporate and funding initiatives which may culminate in a change of control transaction.

Dacian's "Mt Morgans" gold project and Gascoyne's "Dalgaranga" gold project were the two large EPC contracts that gave GR Engineering Services (ASX:GNG) such a successful FY18 (and why FY19 is going to be quieter due to the absence of large contracts of a similar size).  DCN & GNG also share a director, Barry Patterson, who has a decent personal shareholding in both companies (7.5m GNG shares and almost 7m DCN shares).  GNG also did the feasibility studies for Dacian prior to being awarded the EPC contract for the construction of Mt Morgans (MMGO).  GNG were NOT involved in the FS's (either the PFS or the BFS) for GCY (Gascoyne Resources), and Gascoyne's problems are now so bad they called in the administrators on Monday, which has had a knock on effect on NRW Holdings (NWH) yesterday (the mining contractors at GCY's "Dalgaranga" Gold Project) and Zenith Energy (ZEN) today (the electricity generation service providers at Dalgaranga). 

Both NWH and ZEN have released announcements over the past 2 days outlining their take on how the various possible outcomes at GCY could affect them.  The answer in both cases is "not too much" (my interpretation) although there is likely to be a decent provision in NWH's FY19 accounts for GCY when they report in August.  While NWH have said that they estimate their total financial exposure to GCY to be around $35m, most of that was expensed in the first half and the resulting likely cash movement in the current half is only around $8m.  To put that into some perspective, even with zero work at GCY's Dalgaranga, NRW Holdings (NWH) are guiding for FY20 revenue of around $1.5 billion, of which they have already secured $1.3 billion.

 

Disclosure:  I no longer hold any DCN shares, and I didn't own any GCY shares.  I do hold GNG & NWH, and a little ZEN as well.

 

08-Jul-2019:  More bad news to come?  DCN are in another trading halt pending the release of another announcement to the ASX regarding FY2020 guidance and an updated 8 year life of mine plan for their Mt Morgans Gold Operation (MMGO).  Voluntary Administration time yet?  Of course, with a A$ gold price that recently went over $2,000/ounce for the first time ever and a new high grade deposit found north of their existing operations since their last dowgrade, it could always be positive news...  ...But probably not...

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#Company Reports
Last edited 7 months ago

29-April-2019:  Dacian have released their March 2019 Quarter Activities and Cashflow Report this morning.

The report is titled:  MT MORGANS RAMP-UP GAINS MOMENTUM AS OPERATIONAL REBOUND PAVES WAY FOR STRONG FINISH TO FY2019.

They have provided June quarter guidance of 50,000-55,000oz at a MMGO (Mt Morgans Gold Operation) AISC of A$1,050-$1,150/oz, which is a very significant reduction in AISC (all-in sustaining costs) from their March quarter AISC of A$1,488/oz. 

Last year, they stated that their medium-to-long-term aspirational AISC target was A$1,000/oz (per ounce of gold produced) which I thought was pretty optimistic at the time.  If they can achieve an AISC result for the June Qtr within this A$1,050 to $1,150 guidance range, they will be well on their way to that aspirational AISC target, and they would also be well within the lowest quartile of Australian gold producers in terms of costs (in this case, lower is better, so they would be among the 25% of producers with the lowest costs).  IF they can hit that guidance.  As a DCN shareholder, I obviously hope they can!

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