De Grey Mining Ltd (DEG)

Mallina to add to resource base, Scoping Study Late Q3

DEG has announced initial drilling results for the Mallina Project indicating broad zones of gold mineralisation in a number of parallel lodes. Mallina lies within the Indee Gold project, subject to an acquisition proposal from DEG for Indee Gold Pty Ltd, a 100% Subsidiary of the large Chinese SOE Northwest Nonferrous Australian Mining Pty Ltd. The Mallina drilling will likely now allow for a maiden JORC 2012 resource and incorporation into the Pilbara Gold Project (PGP) Scoping Study. Other work programs required for the Scoping Study are ongoing and we therefore estimate the study will be published late Q3 or early Q4. The outcome of the Scoping Study will inform the investment decision on Indee. We maintain our Speculative Buy recommendation.

Key Points

  • Acquisition to fast-track development: DEG’s announcement to acquire the Indee Gold Project is a strategic decision to gain size and to potentially fast-track the development option for DEG. The combined resource base now stands at 1.0 million ounces. Any additional ounces to the resource base will likely strengthen the case for the Indee acquisition (A$15m). In addition to Mallina, the Toweranna deposit is yet to be added as a JORC 2012 resource and presents another opportunity to increase resources prior to January 2018.
  • Mallina to add: The Mallina Project has an exploration target of 1.4 to 2.6Mt at 1.2g/t to 1.5g/t for between 53,000 and 125,000 ounces. Although previous workers had drilled Mallina, the drill density was not sufficient to justify a JORC 2012 resource. DEG has drilled an additional 90 RC holes and we now believe Mallina could add between 60,000 and 90,000 ounces to the resource base.
  • Wide zones of mineralisation: Early 4m composite intersections from the Central Area include 48m @ 1.00g/t from 8m, 40m @ 1.51g/t from 32m and 36m @1.43g/t from 76m. Once the 1m split assays are received, there is potential for the grade to lift and intersection lengths to be better defined.
  • Scoping Study by late Q3/early Q4: We are now expecting to see the PGP Scoping Study released around the end of Q3, given the ongoing programs to better define the metallurgy in the fresh rock and the inclusion of the Mallina deposit in the global resource.
  • Falling acquisition cost on per ounce basis: We believe that additional ounces from Mallina and other projects before January 2018, could deliver an additional c.+100,000 ounces for a projected total of ~638,000 ounces, or the equivalent of A$23.51 per ounce, almost half the original acquisition price per ounce at the time of the announcement.
  • Recommendation: We maintain a Speculative Buy recommendation on DEG believing that resource growth will be positive for the Scoping Study and strengthen the case for the Indee acquisition.

Disclaimer

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

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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.