Research Note - Dundee Precious Metals Inc. (DPM:TSX,$9.09|BUY $13.00 TRGT) FROM STRENGTH TO STRENGTHWe have revised our model and target price following our conversation with DPM on Friday, July 03. DPM is a stable and solid performing mid-tier producer. It generates cashflow from stable, low risk jurisdictions. And with its recent additions to the TSX composite index it has the requisite liquidity that represents a company having a significant re-rating potential. Moreover, its return of cash to shareholders, through a quarterly dividend of US$0.02/share and share repurchase program, is attractive to investors. DPM is backed by solid low-cost production which is growing and a cost structure that is declining. Q1 saw stellar production of 73 Koz Au and 9.4 Mlbs copper at a low AISC of $593/oz. Free cash flow is expected to be around $140 M to $180 M per year in the next three years. DPM remains on track to meet it production and cost guidance for 2020 at all of its operations. We maintain our BUY rating and have revised our 12-month target price to C$13.00/share (from C$9.50/share).
We spoke with the Company to gauge its general working conditions during COVID-19, the Company’s full year guidance and its Q2/19 expectations. DPM’s production is progressing well and is largely uninterrupted. Chelopech and Ada Tepe mines in Bulgaria continue to operate fully and in line with guidance. Tsumeb, the smelter in Namibia, is also operating in line with guidance albeit with reduced staff in certain areas, as government mandated.
Q1 Result Review: In Q1 DPM reported a record revenue of $152M (+9% Q/Q from $140M) and generated $77.5M in EBITDA (+41% Q/Q from $55M). Free cash flow came in at $49.2M (+315% Q/Q from $11.8M). In Q1/20 DPM’s consolidated gold production of 73.0 Koz and copper production of 9.4 Mlbs were achieved at an impressive cash cost of $511/oz and an AISC of $593/oz net of byproduct. Lower production costs, higher realized metal prices and lower sustaining and growth capital, as well as a solid production profile, contributed to an impressive AISC. Tsumeb processed 65 Kt also beat our estimate (MPI est. 55 Kt), at a cost of $357/t. The Company ended first quarter debt free, with $13.6M cash in hand and an undrawn portion of RCF of $175M. It expects to fully settle its prepaid forward gold sale of 20.97 Koz in 2020.
Valuation: We maintain our BUY rating and have revised our 12-month target price to C$13.00/share (from C$9.50/share). Our valuation is now based on a 1.3x NAV (from a 1.0x NA) and is based on a long-term gold and copper price of $1,550/oz and $2.75/lbs. DPM is currently trading at 0.9x our NAV estimate. Our NAV multiple is based on DPM’s strong track record of delivering on expectations since it declared commercial at Ada Tepe and completed ramping up in Q2/19 and transitioned from a single asset to multi asset gold producer.
DPM is trading at a valuation below to inline with other mid to large-cap producers. Its 2020E P/CFPS of 4.5x and 2021E P/CFPS of 3.7x reflects a significant discount to peers that are trading at 2020E P/CFPS of 7.2x and 2021E P/CFPS of 5.2x. For the rest of the year we expect DPM to continue to close that gap. With large capital investment ending, focus has turned to production optimization and cash flow generation. Its recently instituted quarterly dividend of US$0.02/share reflects its cash flow generating potential.
We are modeling an annual production of 272 Koz of gold and 37Mlbs of copper at an AISC of $717/oz, net of byproduct. For Q2/20 we expect a consolidated gold production of 67.75 Koz (40.67 Koz for Chelopech and 27.07 Koz for Ada Tepe) and 9.35Mlbs of copper, at an AISC of ~US$700/oz Au produced.
2020 Production Guidance: For FY20 consolidated gold production is expected to be between 257 Koz and 299 Koz. Copper production guidance is between 35 Mlbs to 40 Mlbs. The guidance for the Tsumeb smelter processed concentrate is 230 Kt to 265 Kt. DPM is guiding for 2020 AISC to be between US$700 and US$780/oz sold, net of byproduct.
E: research@mpartners.ca
www.mpartners.ca70 York Street Suite 1500
Toronto, ON Canada M5J 1S9