BUY. Doray Minerals Ltd. 7. Equity Research DRM-ASX. Stoping resolved and Deflector understood. Last: A$0.45 March 16, 2015 Target: A$0.

Transcription

1 Doray Minerals Ltd. 7 DRM-ASX Equity Research BUY Last: A$0.45 March 16, 2015 Target: A$0.70 Stoping resolved and Deflector understood Stoping dilution issues look to be resolved DRM has made good progress maintaining its head grade at revised reserve grades in the region of 8.5-9g/t Au. This has been achieved by reducing the sublevel stoping interval to a more controllable 17m, increasing drive heights and the successful implementation of the Reverse Avoca mining method. Stage 2 open pit well advanced The stage 2 pit is well underway with oxide ore already being put through the plant. Grade control drilling has already indicated that grades could be even better than the 16g/t Au reserve grade. The additional high grade open pit supply provides flexibility and enabled the increased guidance for FY15. Deflector looks like a strong project We maintain our view that Deflector was a sensible acquisition for DRM. The project looks likely to complement production from Andy Well from 2016 and extend DRM production to We value the project using a 0.9x risked NAV at A$43m, or A$0.18/share. Exploration upside is apparent at Andy Well and Deflector We continue to be optimistic that Wilber Deeps and Judy Deeps will deliver near term mining inventory at Andy Well. At Deflector, an EM programme is planned that could potentially unlock regional exploration potential. Interim profit largely in line with expectations As expected improved production performance over the half year, favourable hedging of gold and an improved Australian gold price during the latter part of the half year has resulted in an A$4m profit which was largely in line with expectations. The outlook remains positive for 2HFY15. Maintain BUY rating and with price target of A$0.70/sh Our SOTP valuation based price target has decreased 3c/ share to reflect the effect of pushing initial production at Deflector back one quarter. In addition, we model the ~A$10m Sandstorm loan (on Deflector) to be converted into a gold stream over LOM. We also assume A$57m of additional debt, cash flow from Andy Well and A$15m of additional equity to finance Deflector. What's Changed Old New Rating BUY n.c. Target (A$) $0.73 $0.70 Gold Production 2015E (koz) Gold Production 2016E (koz) Gold Production 2017E (koz) Share Data Share o/s (mm, basic/f.d. itm)* 52-week high/low (A$) Market cap (A$m)* EV (A$m)* Net debt (A$m)* Projected return* NAV0%/share NAV8%/share P/NAV0% P/NAV8% /0.265 $ $ $ % $0.92 $ Financial Data YE Jun. 30 FY15E FY16E FY17E Gold production (k oz) Cash costs (A$/oz) $711 $680 $506 Capex (A$m) -$41 -$71 -$21 EBITDA (A$m) $59 $60 $123 EPS $0.09 $0.12 $0.24 CFPS $0.08 $0.04 $0.25 P/E P/CF EV/EBITDA *All figures in A$ unless otherwise noted Duncan Hughes dhughes@gmpsecurities.com Prepared by GMP Securities Australia Pty Limited See important disclosures on the last two pages of this report

2 Site visit commentary Last week we attended a site visit to the Andy Well gold mine and the recently acquired Deflector gold/copper development project in the Murchison region of Western Australia. New mining method at Andy Well The Wilber South mine development is now complete. When open stoping was previously used on the Wilber shear zone mining encountered higher than expected dilution of grade as the brittle unmineralised basalt and porphyry host rock flaked off the edges of the stope. Since then the company has made good progress maintaining its head grade at revised reserve grades in the region of 8.5-9g/t Au. This has been achieved by reducing the sublevel stoping interval to a more controllable 17m (from 20m) increasing drive heights and the successful implementation of the Reverse Avoca mining method. This method involves backfilling stopes of a maximum length of 20m with waste and a cement rock fill (CRF) plug. Once backfilled the stoping continues another 20m and the process continues again. The support offered by the CRF has significantly reduced stope dilution allowing improved cost performance at Andy Well since its introduction. Figure 1. Reverse Avoca mining method used at Andy Well Source: DRM Stage 2 open pit well advanced and grades looking good The stage 2 pit is well underway with oxide ore already being put through the plant. Grade control drilling has already indicated that grades could be even better than the 16g/t Au reserve grade. The additional high grade open pit supply provides flexibility at Andy well and enabled the company to increase its production forecast for FY15. Some of the oxide material contains clay material that has created some small issues as screens are clogged up at the plant when the material gets wet. This is unlikely to represent much of a problem if blended with fresh underground ore. Processing of the stage 2 ore is expected to continue until September. Suzie Open pit to follow A study on the potential to mine a portion of the recently defined Suzie resource as an open pit operation is underway. Given that the open pit contractor is on site mining stage 2 Wilber, we feel it makes sense to mine the Suzie open cut in September on completion of the Stage 2 project. We envisage some ~10g/t Au of ore being mined from the Suzie open pit. The pit will be designed down to approximately 45m to enable a potential portal to any future 2

3 underground operation at Suzie to be established. We suspect that given the narrow widths and expected high strip ratio, the Suzie pit will be a high cost and likely unprofitable operation but is a necessary expense to access the remainder of the Suzie resource. Exploration upside at Andy Well Recent results from down dip of Wilber and Judy show that both ore bodies continue at depth. An underground drilling programme has commenced at Wilber Deeps with results expected next quarter, in time to update FY15 resources. We believe Wilber Deeps is the fastest and most likely path to near term additional mining inventory at Andy Well. An exploration decline has commenced to Judy Deeps where 17.3g/t Au has been intersected in favourable host rock some 600m below the Judy North resource. Drill testing of the encouraging Judy Deeps target is expected to commence 3QCY15. More drilling is required at the Suzie Resource to determine the likelihood of any underground mining here. In our view, Suzie is narrower than the Wilber mineralisation and infill drilling is definitely required to determine whether mining widths and ounce per vertical metre will support an underground operation here. Figure 2. Wilber and Judy Deposits with down dip potential Source: DRM The Deflector Gold Project The site visit was our first view of the Deflector Gold project. A summary of our site visit findings are presented below. The Deflector deposit is located 60km from the small town of Morawa and just a few kilometres from the historic Gullewa mine site and CIL processing plant. Mineralisation is hosted in 2 main lodes and is somewhat unique for Western Australia. An early phase of gold in quartz veining is overprinted and enriched by a later sulphide breccia that hosts gold, copper and silver mineralisation. The project hosts a reserve of 5.6g/t Au, 0.9% Cu & 6.3g/t Ag within a total resource of 6.4g/t Au, 0.9% Cu and 6.8g/t Ag. Whilst gold is not as high grade as at Andy Well, copper credits help to compensate for this. 3

4 Early studies on the ore body looked at a large open cut mining operation. However, the company intends to adopt a more cost effective small scale underground operation and purpose built gravity and flotation process plant (in line with Mutiny Gold s updated BFS). Mineralisation pinches and swells but averages 2-2.5m widths, it is very visual and is hosted in a very competent basalt. The mineralisation dips steeply, and carries 1,160 oz Au per vertical metre and 40t Cu per vertical metre and looks favourable for long hole open stoping. Management s experience at the similar Andy Well ore body looks set to be helpful here. A purpose built 380ktpa gravity and flotation plant is designed to process 63koz Au, 2,662 t Cu and 60koz Ag over a 6 year mine life for 365,000 oz Au, 15kt Cu and 325koz Ag. Initial capital is estimated in the BFS at A$68m with life of mine AISC of A$723/oz after Cu credits estimated. 80% of the ore body is in fresh rock that is expected to show overall mining recoveries of 91% Au (56% gravity) and 93% Cu utilising a relatively coarse grind of 130 microns. Gravity gold will report to dore that could be poured at the Andy Well gold room. The remaining 44% of the gold and all of the copper will report to a 21% Cu and 39g/t Au concentrate for export. Infrastructure is favourable with a tailings dam at the nearby Gullewa plant likely to be utilized for the first year of operation. A fresh water bore field is also at Gullewa. Relatively low power needs look likely to be supplied from a diesel power station. Figure 3. Deflector proposed mine site layout Source: DRM Offtake is yet to be determined and is likely to form part of current funding discussions. First production is likely 2HFY16 assuming funding is completed next quarter. Exploration potential is good at Deflector. Whilst soil geochemistry is of limited use given the largely stripped weathering profile and covering of transported clay and hardpan, electromagnetic surveys are planned to test the region given the conductive sulphide host at Deflector. One hole drilled some 300m southwest of Deflector has returned an encouraging 10g/t Au, 7.5g/t Au 7 56g/t Ag intersection that we believe could represent a structural repeat or offset of the deflector ore body. 4

5 Interim Financial results Increased production from Andy Well delivered increased revenue to A$60.1M with net cash flow from operations of A$27.1M maintained despite the lower gold price. The company reported EBITDA of A$24.3M, and a net profit after tax of A$4M. During the half year DRM reduced debt to A$12M (although a refinancing post reporting period results in debt standing at A$23m). DRM reiterated its positive outlook for second half and full year guidance of 85-90koz at a C1 cost of A$ /oz. Our View on the 1HFY15 financial result This period was flagged as a relatively high cost period by the company. But despite this, improved performance has led to a much improved performance than expected in June Most of this good news was factored in based on quarterly results and as a consequence the performance was largely in line with our expectations. Revenue was in line with expectations for the half year (GMPe: A$59.9m) aided by improved Australian dollar gold prices in November and December and the benefit from 50% of September quarterly production hedged at A$1620oz. Net profit of A$4.0m fell slightly short of our forecast of A$4.9m due to higher than expected costs (actual of A$29.9M versus GMPe of A$27.4m). Despite the very slight miss on net profit, the half year remains a good result and much improved from a challenging September monthly performance as the company has improved its stoping performance, head grades have improved and costs have reduced. Half yearly cash flow of A$1m was down on our estimates of A$3m largely due to an extra A$2m spend on exploration and an additional A$2m spend on Andy Well Mine development expenditure (likely due to improved stoping techniques). The company debt position was reduced to A$12m (Excl. DSRA of A$5m) over the period. Refinancing of the debt subsequent to period end is a prudent move by Doray to free up project cash flows at a time where cash flow will greatly assist development of the open pit, exploration expenditure and the commencement of development at Deflector. The company s debt position consequently lifts to A$23m with quarterly repayments of approximately A$4m to June DRM has a hedging policy in place with 55koz hedged at an average of A$1506/oz to March This follows the company s stated policy to manage debt risk with hedging. However, at current Australian gold prices at A$1525/oz these hedged prices represent downside protection (as designed) and not upside on our modelled gold price outlook. The outlook for the second half looks strong with improved grades, improved gold price, improved stoping performance and lower diesel costs likely to favourably impact margins. 5

6 Asset Doray updated valuation We have continued to model Doray on a sum of the parts basis. Completing NPV 8% valuations for Andy Well and Deflector, a valuation of exploration potential based on an assessment of value for similar projects and a cash valuation based on the combined cash balances. Figure 4. Our Valuation for Doray Minerals Discount rate NAV "X" Factor NAV Target (A$) Target Price (A$) Andy Well Project 8% 1.00 X $74.1 $0.32 Deflector 8% 0.90 X $42.6 $0.18 Exploration Upside n.a. p/nav $20.0 $0.11 Cash n.a. p/nav $22.7 $0.10 Total NAV $164.3 $0.70 Source: GMP research We have pushed back the commencement of production at the Deflector Project by one quarter to 2QCY16 to reflect the extended takeover process and the expectation of funding this quarter. We continue to see the project operating over a six year mine life based on a 0.36Mtpa operation. We have adjusted our sustaining capital and exploration expenditure at Andy Well to reflect higher than expected expenditure in 1HFY15, but brought down our operating expenditure slightly on the back of this. At Deflector we have used assumptions based on the updated BFS results (by Mutiny) and our own assumptions regarding cost. We have assumed a life-of-mine gold price of US$1,225/oz for both projects. The main assumptions in our model our outlined below Figure 5. Doray modelling assumptions Assumption Andy Well Deflector Underground Mining Cost (A$/t) Processing Cost (A$/t) G&A Cost (A$/t) Sustaining Capex (A$m pa) State Royalty (%) ** Vendor Royalty (%) Gold Price (US$/Oz)* 1,225 1,225 Silver Price (US$/Oz)* n.a 19 Copper Price (US$/t)* n.a 6,323 A$/US$ Initial Capex (A$m) n.a 68 Equity Assumed (A$m) n.a 15 Debt assumed (A$m) n.a 57 Source: GMP research. * Average over life of mine. **Copper royalty 5% 6

7 We have assumed that Deflector s initial capital will be funded through A$57m of debt and A$15m of equity next quarter. Working capital before cash flow at Deflector will be funded from an estimated A$20m in cash flow from Andy Well in 2HFY15. We assume that the Sandstorm ~A$10m facility that came with the Mutiny Gold acquisition will not be paid out this year. We have consequently modelled a gold stream whereby 2.6% of the gold produced from Deflector is sold to Sandstorm for just US$500/oz. This values the stream at A$8.7m over our assumed life of mine at Deflector giving an NPV 8% of A$6.4m. We value the Deflector Project on a post-tax, post funding DCF basis, calculating an NPV 8% of A$47m or A$0.20/share, as the project is not financed or constructed, but in our view has a strong likelihood of obtaining finance on DRM s balance sheet, we assign a 0.9x risk factor to our valuation to arrive at a risked NAV of A$43m, or A$0.18/share. Upcoming news flow Wilber Deeps exploration results 2Q15 Development and financing of Deflector 2015 Suzie Open Pit study 2Q15 7

8 Oz Au A$/oz Discount Rate Equity Research ` Ticker DRM-AU Financial Yr. End 30 June Recommendation BUY Shares on issue (m) Target Share price (A$) 0.70 Market Cap (A$) Current Share price (A$) 0.45 Enterprise Value (A$) Implied Return (%) 55% Cash (A$) 22.7 P/NAV (x) 0.64 Debt(A$) 19.3 Valuation Profit & Loss (A$m) Asset Discount rate NAV "X" Factor NAV Target (A$) Target Price (A$) A$M FY2015 FY2016 FY2017 FY2018 Andy Well Project 8% 1.00 X $74.1 $0.32 Revenue $129.4 $129.2 $244.4 $214.6 Deflector 8% 0.90 X $42.6 $0.18 Cost of Sales $56.8 $59.4 $109.2 $117.5 Exploration Upside n.a. p/nav $20.0 $0.11 Gross Profit $72.5 $69.8 $135.2 $97.1 Cash n.a. p/nav $22.7 $0.10 EBITDA $59.3 $60.2 $122.8 $84.9 Total NAV $164.3 $0.70 Net Profit before tax $30.6 $39.3 $82.3 $39.9 Tax Payable (-$8.2) (-$8.5) (-$20.3) (-$7.8) Valuation Split (%) Profit after tax $22.4 $30.8 $62.0 $ % 27% 14% Balance Sheet Assets Cash & Liquid assets* $28.9 $38.8 $97.2 $132.3 PPE & Exp. & Dev. $69.3 $66.3 $55.6 $37.3 Total Current Assets $40.8 $50.7 $109.0 $144.1 Total Assets $116.0 $123.0 $170.6 $187.4 * includes DSRA Liabilities Senior Debt $21.2 $60.2 $48.2 $36.2 Total Current Liabilities $42.9 $81.9 $69.9 $57.9 Total Liabilities $44.1 $83.1 $71.1 $59.1 Ratios and Key Financial Data EPS (AUDc) 9.1c 12.0c 24.2c 12.5c FCFPS (A$) 2.2c NM 27.4c 18.4c P/E ratio (x) P/FCF (x) X NM 1.64 X 2.4 X EV/EBITDA (x) 1.73 X 1.70 X 0.83 X 1.2 X Current ratio (x) Shares on Issue (M) Cashflow Generation Reserve and Resources Statement (100% of Project) Status Tonnes (Mt) Grade Au (g/t) Contained Au (Moz) EV / oz Cashflow generated $3.9 $9.0 $56.6 $32.0 Total Reserves $194 Equity Placement $15.0 $0.0 $0.0 $0.0 M&I only $126 Debt Funding $9.0 $54.0 $0.0 $0.0 Total Resource $99 Capital Expenditure $70.0 $95.4 $41.6 $41.6 Production $135 Production Profile (0zAu) Directors & Management Major Shareholders Operation FY2015 FY2016 FY2017 FY2018 Non Exec. Chairman Peter Alexander SG Hiscock 8.1% Andy Well 85,368 79,087 74,988 74,988 Managing Director Allan Kelly Colonial 6.6% Deflector 0 4,005 67,302 59,772 Non Exec. Director Leigh Junk Renaissance 5.6% Total 85,368 83, , ,760 Non Exec. Director Jay Stephenson Cash Cost (US$) Non Exec. Director Allan Brown Total 20.3% AUD / oz FY2015 FY2016 FY2017 FY2018 Non Exec. Director Peter Lester Gold Price $1,515 $1,527 $1,509 $1,510 C1 Cash costs* $711 $680 $506 $761 C3 Prod. Cost * $1,176 $1,058 $889 $1,209 AISC* $1,188 $1,093 $761 $1,023 Group Production and AISC per Financial Year 160, , , ,000 80,000 60,000 40,000 20, % Andy Well Project Deflector Exploration Upside Cash Andy Well (oz) Deflector (oz) AISC (A$/oz) 1,400 1,200 1, * after byproduct credits. Expensing and capitalising of C1 cash costs will vary and consequently differ from management guidance Gold Price and Discount Rate Matrix Gold price (US$) NAV $ 0.70 $ 900 $ 1,000 $ 1,200 $ 1,225 $ 1,350 $ 1,500 $ 1,800 20% % % % % % % Source: Company data, GMP estimates 8

9 Disclosures The information contained in this report is drawn from sources believed to be reliable but the accuracy or completeness of the information is not guaranteed, nor in providing it do GMP Securities L.P., GMP Securities Europe LLP or GMP Securities Australia Pty Limited (collectively referred to as GMP ) assume any responsibility or liability whatsoever. Information on which this report is based is available upon request. This report is not to be construed as a solicitation of an offer to buy or sell any securities. GMP and/or affiliated companies or persons may as principal or agent, buy and sell securities mentioned herein, including options, futures or other derivative instruments thereon. Griffiths McBurney Corp. ( GM Corp. ), an affiliate of GMP accepts responsibility for the contents of this research subject to the foregoing. U.S. clients wishing to effect transactions in any security referred to herein should do so through GM Corp. GMP Securities L.P. will provide upon request a statement of its financial condition and a list of the names of its Directors and senior officers. Company-Specific Disclosures: 1 GMP has, within the previous 12 months, provided paid investment banking services or acted as underwriter to the issuer. 2 GMP is a market maker for the securities of the subject issuer. 3 GMP owns 1% or more of this issuer s securities. 4 GMP Securities, LLC, an affiliate of GMP, discloses the following in relation to this issuer as required by the Financial Industry Regulatory Authority ( FINRA ) Rule 2711: as applicable. 5 The analyst is related to an officer, director or advisory board member of the issuer, but that individual has no influence in the preparation of this report. 6 The analyst has visited the operations of this issuer. The issuer and/or GMP clients paid all or a portion of the travel expenses associated with the analyst s site visit to its operations. 7 The analyst who prepared this report has viewed the operations of this issuer. 8 The analyst who prepared this research report owns this issuer's securities. 9 RESERVED 10 RESERVED Each research analyst and associate research analyst who authored this document and whose name appears herein certifies that: (1) the recommendations and opinions expressed in the research report accurately reflect their personal views about any and all of the securities or issuers discussed herein that are within their coverage universe; and (2) no part of their compensation was, is or will be, directly or indirectly, related to the provision of specific recommendations or views expressed herein. GMP Analysts are not registered and/or qualified as research analysts with the FINRA and/or the New York Stock Exchange and may not be associated persons of GMP Securities, LLC and therefore may not be subject to FINRA Rule 2711 restrictions on communications with a subject company, public appearances and trading securities held by a research analyst account as defined by FINRA but are subject to the applicable regulatory rules as mentioned in the next paragraph. All relevant disclosures required by regulatory rules (including The Investment Industry Regulatory Organization of Canada, Financial Conduct Authority and Australian Securities & Investments Commission), GMP s recommendation statistics and research dissemination policies can be obtained at or by calling the relevant GMP office s Compliance Department. GMP Analysts are compensated competitively based on several criteria. The Analyst compensation pool is comprised of several revenue sources, including secondary trading commissions, new issue commissions, investment banking fees, and directed payments from institutional clients. GMP prohibits any director, officer or employee of GMP from holding any office in publicly traded companies or any office in private companies in the financial services industry. The GMP research recommendation structure consists of the following ratings: Buy: A Buy rating reflects 1) bullish conviction on the part of the analyst; and 2) typically a 15% or greater return to target. Speculative Buy: A Speculative Buy rating reflects 1) bullish conviction on the part of the analyst accompanied by a substantially higher than normal risk, including the possibility of a binary outcome; and 2) typically a 30% or greater return to target. Hold: A Hold rating reflects 1) a lack of bullish or bearish conviction on the part of the analyst; and 2) typically a return of 0 to 20%. Reduce: A Reduce rating reflects 1) bearish conviction on the part of the analyst; and 2) typically a 5% or lower return to target. Tender: Clients are advised to tender their shares to a takeover bid or similar offer. 9

10 Country-Specific Disclaimers: Australia: GMP Securities Australia Pty Limited ( GMP Australia ). ACN ; Australian Financial Services License No: Level 9, 190 St. Georges Tce, Perth, WA, Australia 6000 Tel + (618) Fax + (618) Any advice contained in this document has been prepared without taking into account your objectives, financial situation or needs. Before acting on any advice in this document, GMP Australia recommends that you consider whether the advice is appropriate for your circumstances. GMP Australia recommends that you obtain and consider the relevant Product Disclosure Statement or other disclosure documents before making any decision about a product including whether to acquire or to continue to hold it. Canada: GMP Securities L.P. is a member of the Investment Industry Regulatory Organization of Canada and a participant of the TSX, TSX Venture and the Montreal Exchange. It is registered with all the provincial self-regulatory authorities of Canada. 145 King Street West, Suite 300 Toronto, Ontario M5H 1J8 Tel: (416) Fax: (416) United Kingdom: GMP Securities Europe LLP is authorised and regulated by the Financial Conduct Authority and is a member of the London Stock Exchange. 5 Stratton Street, London W1S 4GA Tel Fax This information is issued for the benefit of persons who qualify as eligible counterparties or professional clients and should be made available only to such persons and is exempt from the restriction on financial promotion in s21 of the Financial Services and Markets Act 2000 in reliance on provision in the Financial Services and Markets Act 2000 (Financial Promotion) Order 2005 particularly Article 19(5) for Investment Professionals and Article 49(2) for entities of prescribed net worth. Other countries: circulation of this report may be restricted by laws and regulations in other countries and persons in receipt of this document must satisfy any relevant legal requirements in that country. GMP. All rights reserved. Reproduction in whole or in part without permission is prohibited. 10