Mt Morgan site visit - Hitting targets

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1 Deutsche Bank Markets Research Rating Buy Australasia Australia Company Reuters Bloomberg Exchange Ticker DCN.AX DCN AU ASX DCN Mt Morgan site visit - Hitting targets DCN on time and budget to deliver first gold by early next year We recently visited DCN s Mount Morgan development project near Laverton, Western Australia. Our three takeaways were i) underground development is progressing ahead of schedule and first development ore is planned for September, ii) construction has made solid progress in 14 weeks and is rapidly progressing towards DCN's target of first gold in March 218, and iii) exploration efforts continue to show the potential of the Mount Morgan gold district. Diamond drilling has been completed at the Cameron Well prospect targeting syenite hosted gold; assays remain pending. We believe DCN is the best pre-development gold project in Australia; maintain Buy. Construction makes rapid progress in 14 weeks, remains on time and budget GR Engineering has mobilised to site and in fourteen weeks has made rapid progress on the Mount Morgan plant. Construction of the CIL tanks have been a focus and the team plans to sequence the build so that multiple work streams can be completed at once. Foundations and steelwork is being completed in preparation for the SAG and ball mills which are due on site in late October. Camp accommodation will be largely completed over the next month before work intensity at the plant increases in September. Onsite contractors are confident in maintaining the schedule for first gold at the end of March. The underground mine is 16m ahead of schedule and the Company expects to cross cut the ore body in September. An underground grade control drill program is scheduled to begin next week to close the reserve drill spacing. Exploration continues to show potential of the Mount Morgan gold field DCN continues to actively explore the Mount Morgan project. Recent diamond drilling has focused on the Cameron Well prospect and we believe the system has the potential to host economic gold; assays are pending. The Company has leveraged the extensive historic core farm and built an exploration model to unlock value over the project area. Drilling in the second half will focus on identifying depth extensions of the Beresford deposit and the potential for shallow oxide ore above the Allanson deposit. A$3.1/sh PT (unchanged); construction risk remains but screening value; Buy Our A$3.1/sh PT is set in line with our DCF valuation. Construction, while at an early stage, is tracking well however we take a conservative view and assume a three month delay in our A$3.1/sh valuation. Downside risks: project delays, failure to convert resources to reserves & lower AUD gold price. See p. 6. Date 7 August 217 Company Update Price at 4 Aug Price target - 12mth week range (AUD) ALL ORDINARIES 5,773 Mathew Hocking Research Analyst (+61) mathew.hocking@db.com Tim Hoff Research Analyst (+61) tim.hoff@db.com Price/price relative /15 2/16 8/16 2/17 ALL ORDINARIES (Rebased) Performance (%) 1m 3m 12m Absolute ALL ORDINARIES Forecasts And Ratios Year End Jun 3 216A 217E 218E 219E 22E Sales (AUDm) EBITDA (AUDm) Net Profit (AUDm) EPS (AUD) EV/EBITDA (x) estimates, company data Distributed on: 7/8/217 :24:32 GMT Deutsche Bank does and seeks to do business with companies covered in its research reports. Thus, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision. DISCLOSURES AND ANALYST CERTIFICATIONS ARE LOCATED IN APPENDIX 1. MCI (P) 83/4/217. bed7b6cf11c

2 7 August 217 Model updated:27 July 217 Running the numbers Australasia Australia Reuters: DCN.AX Buy Bloomberg: DCN AU Price (4 Aug 17) AUD 2.7 Target Price AUD Week range AUD Market Cap (m) AUDm 36 Company Profile USDm 285 is a Western Australia-based gold exploration and development company. It owns 1% of the Mt. Morgans Gold Project, which is expected to come into production in 218. Price Performance Aug 15Nov 15Feb 16May 16Aug 16Nov 16Feb 17May 17 Margin Trends ALL ORDINARIES (Rebased) E 18E 19E EBITDA Margin Growth & Profitability Solvency EBIT Margin E 18E 19E Sales growth (LHS) 5 ROE (RHS) E 18E 19E Fiscal year end 3-Jun E 218E 219E Financial Summary DB EPS (AUD) Reported EPS (AUD) DPS (AUD) BVPS (AUD) Valuation Metrics Price/Sales (x) nm nm nm nm P/E (DB) (x) nm nm nm nm P/E (Reported) (x) nm nm nm nm P/BV (x) FCF yield (%) nm nm nm nm nm 22.9 Dividend yield (%) EV/Sales 77, ,91.5 3,48, , EV/EBITDA EV/EBIT Income Statement (AUDm) Sales EBITDA EBIT Pre-tax profit Net income Cash Flow (AUDm) Cash flow from operations Net Capex Free cash flow Equity raised/(bought back) Dividends paid -3 Net inc/(dec) in borrowings Other investing/financing cash flows 1-3 Net cash flow Change in working capital Balance Sheet (AUDm) Cash and cash equivalents Property, plant & equipment Goodwill Other assets Total assets Debt Other liabilities Total liabilities Total shareholders' equity Net debt Key Company Metrics Sales growth (%) nm nm DB EPS growth (%) na 11,45.5 Payout ratio (%) nm nm nm nm. 2. EBITDA Margin (%) nm nm nm nm EBIT Margin (%) , ,52, ,694, ,853,97. ROE (%) Net debt/equity (%) Net interest cover (x) DuPont Analysis EBIT margin (%) , x Asset turnover (x) 3,52, ,694, ,853, x Financial cost ratio (x) x Tax and other effects (x) = ROA (post tax) (%) x Financial leverage (x) = ROE (%) annual growth (%) na 9,671.1 x NTA/share (avg) (x) = Reported EPS annual growth (%) na 11,45.5 Source: Company data, Deutsche Bank estimates Net debt/equity (LHS) Net interest cover (RHS) Mathew Hocking mathew.hocking@db.com Page 2

3 7 August 217 Figure 1: Historical municipal chambers Figure 2: Fly over of Westralia pit Figure 3: Westralia portal and vent fans Figure 4: Beresford decline progressing ahead of plan Page 3

4 7 August 217 Figure 5: Jupiter pit Figure 6: ROM crusher stand Figure 7: Mount Morgan CIL tanks Page 4

5 7 August 217 Figure 8: Westralia ore can carry high grade at intersection of structures Figure 9: Jupiter ore shows profile of alteration in mineralised syenite Page 5

6 7 August 217 Investment Thesis Outlook was floated on the ASX in 212 with a primary focus on the Mt Morgan Project. Since listing the company has expanded the resource base from.8moz to 3.3Moz. In September 215 the company released a Scoping Study for the project outlining a 2.5Mtpa CIL process plant being fed by 2 mining areas, Westralia and Jupiter, producing 22kozpa. DCN has released the PFS for Mt. Morgan and has secured project financing. DCN is trading below our DCF derived valuation; we therefore rate the stock a Buy. Valuation Our 12 month price target is set at 1.x LOM NPV consistent with the other mid tier gold producers in our Australia coverage list. Our long-term forecasts for DCF valuation determinations are; gold US$1,3/oz, AUDUSD.75 and a 9% real WACC which is in line with our coverage. Risks DCN's production profile is leveraged to i) delivery of the Mount Morgan project, ii) successful resource definition and conversion into economic ounces and iii) AUD gold price which can influence returns on marginal ounces in the mine plan. Key down side risks include i) delays in project delivery and permitting, ii) lower AUD gold price, iii) project cost overruns and delays to project and iv) lack of exploration success finding additional ounces to extend mine life. Page 6

7 Security Price 7 August 217 Appendix 1 Important Disclosures *Other information available upon request Disclosure checklist Company Ticker Recent price* Disclosure DCN.AX 2.7 (AUD) 4 Aug 17 NA Prices are current as of the end of the previous trading session unless otherwise indicated and are sourced from local exchanges via Reuters, Bloomberg and other vendors. Other information is sourced from Deutsche Bank, subject companies, and other sources. For disclosures pertaining to recommendations or estimates made on securities other than the primary subject of this research, please see the most recently published company report or visit our global disclosure look-up page on our website at Aside from within this report, important conflict disclosures can also be found at under the "Disclosures Lookup" and "Legal" tabs. Investors are strongly encouraged to review this information before investing. For disclosures pertaining to recommendations or estimates made on securities other than the primary subject of this research, please see the most recently published company report or visit our global disclosure look-up page on our website at Analyst Certification The views expressed in this report accurately reflect the personal views of the undersigned lead analyst(s) about the subject issuer and the securities of the issuer. In addition, the undersigned lead analyst(s) has not and will not receive any compensation for providing a specific recommendation or view in this report. Mathew Hocking Historical recommendations and target price: (DCN.AX) (as of 8/4/217) Aug 15 Nov 15 Feb 16 May 16 Aug 16 Date Nov 16 Feb 17 May Previous Recommendations Strong Buy Buy Market Perform Underperform Not Rated Suspended Rating Current Recommendations Buy Hold Sell Not Rated Suspended Rating *New Recommendation Structure as of September 9,22 **Analyst is no longer at Deutsche Bank 1. 18/1/216: Upgrade to Buy, Target Price Change AUD4. Mathew Hocking 4. 16/12/216: Buy, Target Price Change AUD3.2 Paul-D Young 2. 25/11/216: Buy, Target Price Change AUD3.6 Mathew Hocking 5. 7/2/217: Buy, Target Price Change AUD3.1 Mathew Hocking 3. 6/12/216: Buy, Target Price Change AUD3.3 Mathew Hocking Page 7

8 7 August 217 Equity rating key Equity rating dispersion and banking relationships Buy: Based on a current 12- month view of total share-holder return (TSR = percentage change in share price from current price to projected target price plus pro-jected dividend yield ), we recommend that investors buy the stock. Sell: Based on a current 12-month view of total shareholder return, we recommend that investors sell the stock Hold: We take a neutral view on the stock 12-months out and, based on this time horizon, do not recommend either a Buy or Sell. Newly issued research recommendations and target prices supersede previously published research % 41 % 21 % 18 % 8 % 6 % Buy Hold Sell Companies Covered Cos. w/ Banking Relationship Australia Universe Page 8