GOLD! De Grey Mining

28th Sep '23 by Anton Crabbe

7 comments 530 reads

De Grey Mining (ASX:DEG) today announced their much anticipated definitive feasibility study (DFS) for their, Pilbara based, Hemi gold reserve. Based on this DFS findings, DEG believe they are sitting on a tier-1 gold mine that will rank 5th largest in Australia based on annual production rates at present. They are targeting first gold production from the mine in the second half of FY26 and expect to start construction and move to a final investment decision (FID) in FY24. To help fund this process, DEG also announced a $300m share placement as well.

For me this is a great time to revisit Elio's article on June 21st 2023 Riding the cycle - The Lassonde Curve to see where DEG sit in the life cycle of a mining company and what investors can expect from here. To put DEG's announcement into prospective, the ground that formed the De Grey IPO back in 2003 remains the ground on which Hemi was ultimately discovered in 2020 and in August this year DEG passed the 1.1 millionth metre drilled milestone on the project. There has been a lot of time, effort, luck, and funding to get Hemi to this stage!

Looking at the Lassonde Curve, we can see that DEG are at the Financing and Construction Stage and have de-risked the project through their drilling and exploration efforts and hopefully if the financing, development, and construction stages go smoothly they will become a producing mine in the not to distant future and ,looking at the red value line, this is the most rewarding stage for investors.

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Grandslam

29th Sep '23

Thanks Anton. This is the one I completely missed the boat on in the discovery phase, unfortunately.

The bottom of the cycle is defined by the "Financing and Construction" milestone. For me, the question is now exactly where the low point of the cycle will be. Will it be the upcoming capital raising, or will it be a later point during the construction phase where you have the potential for cost blowouts and possible further equity raising. Wherever it is, this will be the ideal time to take a position.

I'm a bit of a novice at this, but taking the DFS on face value I think there could be a possible uplift in SP of about 4x from this point, assuming a PE of 20x when in production (NST and EVN are on about 22x), using the headline FCF figure of about $450 million a year. That's if nothing goes wrong (which it probably will).

After listening to the Money of Mine podcast episode from yesterday, and reviewing some Twitter info, there seems to be scepticism about the estimated capex (perhaps it should be closer to $2 billion) and whether the opex has taken into consideration the inflationary pressures in recent times.

I'm punting that the bottom of the Lassonde curve will be sometime during the construction phase, possibly after they have to come back to the market for another capital raise. I'm a bag holder in BCI Minerals (ASX:BCI), and while I think that one will eventually come good, it has been a lesson in how construction never goes smoothly.

The Money of Mine episode is worth a listen if you get the chance.

Anton Crabbe

Absolutely spot on there with your thoughts and analysis. There is still a lot of work to be done before they produce one ounce of gold, and as the DFS is all theory and most of the time best case scenario, they may never reach the predicted production targets or grades, but that is all part of investing in mining stocks and why a lot of the upside/downside is still on the table at this stage. I haven't done my numbers on them yet but looking to do that over the long weekend. One thing I would suggest is using a cash flow multiple rather than a PE. As the PE is after tax profits and is affected by interest, tax, amortisations and depreciation and you are looking at FCF.

I use operating cash flow per share. So for NST this is 10.45/1.16 = 9.0. I also use scenario analysis where you can compare a low, middle and high multiples to simulate good, band and indifferent performances. I find this gives me a good price range and what to expect if any of the three out-comes eventuates and based on the current share price what the market is thinking about the stock too.

I can also highly recommend this book to help you with analysing and valuing mining companies. As you can tell by the name its a bit of a dry read haha but full of useful information! Dr Victor is an Australian uni lecturer and the book uses a lot of ASX listed companies and is relevant to Aus mining, exploration, and energy stocks.

That seems like a robust way of analysing it. I was using the undiscounted free cash flow after tax from the DFS ($4.5 billion over 10 years, or $450 million per year) as a proxy for earnings, but I agree they aren't the same thing.

It's a huge deposit - definitely one I'll be watching and hopefully get an entry at the right point of the cycle.

Thanks, that looks like a real pageturner

Fortunately I'm on leave atm with more free time than usual. Will see what I can do to locate a copy :)

codefluence

5th Oct '23

will it be a later point during the construction phase where you have the potential for cost blowouts and possible further equity raising. Wherever it is, this will be the ideal time to take a position.

This is what happened with Horizonte Minerals (LON:HZM) recently.

GOLD! De Grey Mining

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Anton Crabbe

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