Dacian set for share price re-rating on production ramp-up and exploration success
Plus, rising prices for battery metals boost Panoramic’s campaign to re-start mothballed Savannah
25th May 2018
The gold producers have a lost a bit of their shine in recent weeks as a result of the gold price sinking below $US1,300/oz for the first time this year because of US dollar strength and an easing of geo-political tensions.
The price fall in local dollar terms is close enough to $50/oz. On an annual basis, that amounts to a revenue hit of some $450 million, something which might or might not prove to be the case, depending on where gold prices go from here.
At the current local price of a touch more $1,710/oz, much of the local industry is still enjoying margins of $500-$700/oz. So the industry is not exactly doing it tough.
But it’s a good thing for the producers to encourage some stickiness in its investor base should gold prices remain under pressure. One of the best ways of ensuring some stickiness is to have some near-term re-rating events up the sleeve.
That’s just what founder and executive chairman of Dacian Gold (DCN), Rohan Williams, has got at the newbie gold producer.
The first of the re-rating events is Dacian’s up-coming June quarter production report. It will cover the first full quarter since Dacian poured its first gold bar at its $197 million Mount Morgans gold project near Laverton in WA on March 29.
Dacian forecast gold output for the 2018 FY (essentially the June quarter) of 30,000-40,000oz and 180,000-210,000oz for the 2019 FY. The market always gets twitchy when any new project starts up.
So on the assumption that Mount Morgans comes in comfortably with 30,000-40,000oz in the June quarter (and the 2019 FY target gets refined somewhat), then a re-rating event will be upon the stock, currently trading at $2.86.
It sets up a situation in which barring dramatic moves in the gold price, Dacian could well start to work towards the much greater share price targets on the stock out there, ranging as they do from $3.25 a share (RBC) up to $3.70 a share (Macquarie).
There is little if anything in those price targets for the second near-term re-rating event Williams has up his sleeve – the likelihood that Dacian’s Cameron Well discovery will soon become a third ore source for the 2.5mtpa Mount Morgans treatment plant.
Cameron Well sits between the Westralia underground and the Jupiter open-cut mines. Following a pattern-bomb-style drilling campaign that’s been going on there since 2016, Dacian is not far off declaring a maiden oxide resource estimate, followed by a maiden reserve before year-end.
The likelihood of being able to run softer oxide material through the treatment plant suggests the potential for the 2.5mtpa annual rate to be comfortably exceeded, boosting ounces produced and shortening what is already a short pay-back period for the project.
The oxide mineralisation at Cameron Well is shallow and flat-lying and its extent remains to be full determined. The same goes for the four separate primary gold lodes in fresh rock below the oxide material identified to date.
While the oxide material is set to provide a short-term sugar hit for the project, it will be what Dacian turns up in the fresh rock at Cameron Well which could really move the dial.
The thematic of electric vehicles and battery storage has worked wonders on demand and pricing for nickel and cobalt. It hasn’t hurt copper’s outlook either.
Have a deposit from which all three are produced in meaningful numbers and the outlook is as good as it gets in the mining space.
And so it is for Panoramic Resources (PAN), the only glitch in that being that its Savannah operation, hard up against the Great Northern Highway in the East Kimberley region of WA, has been on ice since 2016 when things got tough.
But that will change soon with the market expecting a $40 million re-start decision to be made well before the end of the year, with production to follow some 10 months later.
It was a tough call but the right call by Panoramic to shut Savannah when it did. The nickel price averaged a miserable $US4.35/lb in CY 2016. Roll forward and the EV and battery storage thematic has everyone wondering how the demand for sulphide nickel units is going to be met, pushing prices back to a more respectable $US6.60/lb this week.
Cobalt, in the meantime, has rocketed from a CY2016 average of $US12/lb to $US41.50/lb and is in supply deficit, while copper has lifted from $US2.20/lb to $3.09/lb.
Panoramic’s intention has always been to return Savannah to production once there was the sustained recovery in nickel prices. That’s now been ticked off, with the prices for the “by-products” of cobalt and copper making them not so by-product any more.
A re-started Savannah is to be an annual producer of 10,800t of nickel, 6,100t of copper, and 800t of high-value cobalt (in concentrates).
Financial modelling for the restart pointed to a quick payback of less than two years on base case assumptions of $US5.50/lb nickel prices, $US3.10/lb copper, and $US28/lb cobalt. So either way it is diced, Savannah is set to return as one robust operation.
Much of that has been reflected in Panoramic’s price recovery from its shell-shocked levels back in 2016. It last traded at 54.5c with the market seemingly holding back on giving full value for Savannah’s earnings potential until a go-ahead is announced.
Before that happens, Panoramic needs to finalise offtake arrangements and secure vanilla project financing (it recently raised $20m from a rights issue at 34c a share). China’s Jinchuan was the previous offtaker and is presumably in the running this time around, but with a whole lot more competition.
As for financing, it should be a snack once the offtake is lined up.
Hartleys recently increased its price target on the stock to 76c from 72c, saying it thinks a production restart is possible in the June quarter next year. The firm is close to Panoramic and has a brief to handle the potential sale of Panoramic’s mothballed Lanfranchi nickel mine south of Kambalda.
Hartleys has a $17m valuation on the mine which when it was operating, had its ore toll treated at BHP’s Kambalda nickel concentrator. Given it too is excited about nickel’s role in the EV and battery storage revolution, BHP is no doubt keen to see any new owner return Lanfranchi to production.
But for Panoramic, the main game is getting Savannah back up and running and turning some of the cash flow to chasing up nearby and regional exploration potential to make for a long lived project.
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