De Grey Mining Ltd (DEG)

Kirkland, nuggets and 1.2 million ounces

DEG has announced a string of updates over the last few weeks. Importantly, Kirkland Lake Gold Ltd, the mid-tier Canadian-listed gold producer has taken a 10% stake in DEG for $5m, with an option to take another 10% through exercise of 33.3m options at 20c. Secondly, DEG has announced the discovery of nuggets at the base of a slope with outcropping conglomerate below an exposure of Mt Roe Basalt. This is the exact horizon that Novo/Artemis have been deriving their nuggets from, with Novo suggesting that this horizon is the key to the discovery of the “Witwatersrand-style” gold occurrences in the Pilbara. Thirdly, DEG has announced an increase in gold resources of 21% to take the combined gold resource to 1.2 million ounces over the Pilbara Gold Project.

Key Points

  • Kirkland Lake investments in DEG: DEG has announced a $5m equity investment from Kirkland Lake Gold Ltd (“Kirkland”). Kirkland is the largest shareholder in Novo Resources Inc. Novo has made a large ‘land-grab’ in the Pilbara and entered into several JV’s with existing Australian junior exploration companies, for example, Artemis (ASX:ARV), that have potential for Witwatersrand-style mineralisation. Kirkland aim to produce ~ 580,000 ounces of gold in 2017 from its 4 existing mines and has $337m in cash.
  • DEG discovers nuggets shed from conglomerate: DEG has discovered gold nuggets that appear to be shed from a conglomerate sitting at the base of an exposure of Mt Roe Basalt. The discovery at Loudens Patch is on a tenement in the Indee Gold Project, currently under a Binding Heads of Agreement, which now places the prospect along-side Purdy’s Reward, Comet Well and Beaton’s Creek, in recognition of this style of mineralisation. DEG had also previously announced a 12km strike of Mt Roe Basalt contact to the east of Loudens Patch that infers DEG may have a relatively large expanse of conglomerate beneath the basalts.
  • DEG increase resource base by 21%: DEG has also announced an increase in resources of 207,000 ounces to take the overall resource base to 1.2 million ounces over the combined tenements of the Pilbara Gold Project. We estimate that the additional ounces may have provided for a life-of-mine extension of one year over the existing scoping study, with the potential to provide high grade early in the mining schedule to improve the NPV and cashflow.
  • Acquisition cost per ounce now 20% lower than average: The additional ounces has driven the acquisition cost per ounce from $43.50 at the time of the announcement to just $20.10 per ounce currently. This is 20% lower than the average price paid per ounce for M&A transactions on the ASX over the last 18 months. DEG has also renegotiated terms for the acquisition.
  • Recommendation: We had a speculative buy recommendation on DEG prior to the discovery of the Witwatersrand-style mineralisation and equity injection from Kirkland. The 1.2 million ounce resource base justifies a value of $59m at the average EV/resource oz for DEG’s peer group of $49/oz, minus the purchase price for the Indee tenements. This equates to $0.15 per share on a diluted basis after the shares are issued to Kirkland. At this point it is not possible to attribute a fundamental value to the discovery of Witwatersrand-style mineralisation other than to say it could be significant. We therefore place our recommendation and valuation under review.

Disclaimer

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This Research report, accurately expresses the personal view of the Author.

DJ Carmichael Pty Limited, members of the Research Team; including authors of this report, its directors and employees advise that they may hold securities, may have an interest in and/or earn brokerage and other benefits or advantages, either directly or indirectly from client transactions in stocks mentioned in this report. DJ Carmichael Pty Limited acted as Lead Manager in two capital raisings for De Grey Mining Limited and was paid a fee for that service. DJ Carmichael Pty Limited holds 3,024,500 shares as principal in De Grey Mining Limited, equivalent to 1. 5% of the issued capital. DJ Carmichael Pty Limited’s Managing Director, Davide Bosio, is also a Non-Executive Director of De Grey Mining Limited. DJ Carmichael Pty Limited and or its advisers hold an interest of 12,500,000 unlisted options in De Grey Mining Limited.

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Recommendation Definitions

SPECULATIVE BUY – Potential 10% or more outperformance, high risk
BUY – Potential 10% or more outperformance
HOLD – Potential 10% underperformance to 10% over performance
SELL – Potential 10% or more underperformance
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Paul Adams

Head of Research

Paul joined DJ Carmichael in 2006 as a Resource Analyst. Paul has an honours degree in Geology, is a member of the Australian Institute of Mining and Metallurgy and has 16 years experience in the mining industry in exploration, open pit, underground and operational roles, both in Australia and overseas. Before joining the company, he was Chief Geologist and Evaluations Manager at Placer Dome's Granny Smith mine. Paul has a Graduate Diploma in Applied Finance and Investment, fromthe Financial Services Institute of Australasia.