what with dom

Huntley's Recommendation: Dominion Mining Limited

Recommendation: Reduce

DOM is a low cost Australian based gold miner producing over 100,000oz a year from the underground Challenger mine in the Gawler Craton of SA. High grade reserves total 512koz with upgrades expected from M1 Deeps drilling. DOM has carried forward tax losses to last until 2010, is debt free, largely unhedged and dividend paying. The balance sheet is strong with about $45m in cash and marketable securities. Management is stable, conservative and well respected. Suitable for risk tolerant investors seeking low cost gold production with exploration and production upside. Single underground mine risk needs consideration.

Event29-Oct-2007
We now fully credit five years’ mine life at higher production rates of around 140kozpa. A decision to increase production could be made by March 2008. This requires the conversion of a further ~350koz of resources to reserves but seems feasible given successful Challenger Deeps drilling. DOM had a busy quarter, spending $2.13m on Challenger and other regional exploration. Challenger Deeps drilling was impressive and confirmed continuity of shoots to 910m vertical depth. An excellent result of 119m @ 18.1g/t Au was the deepest recorded intersection at Challenger and raises our confidence that reserves will increase below the current level.

Business Impact: Management guidance is for production to be maintained at current levels at cash costs of ~A$380oz which includes an A$37/oz royalty. We downgrade FY08 NPAT 20% to $24.5m after pushing out expanded production to the December 2008 quarter. Production of 27.3koz for the quarter was in line with our expectations. Lower than forecast grade was offset by increased throughput. Grade dilution caused by an intrusion was reflected in higher cash costs of A$389, above our forecast of A$375.

Forecast Impact: --

Recommendation Impact: We increase our valuation 12% to $4.05. Regardless, an incredibly strong share price sees DOM move slightly into our reduce range.

Event Analysis
Challenger Deeps Confirms Confidence in Expanding Reserves
We increase our valuation 12% to $4.20. Regardless, an incredibly strong share price sees DOM move slightly into our reduce range. We now fully credit five years’ mine life at higher production rates of around 140kozpa. A decision to increase production could be made by March 2008. This requires the conversion of a further ~350koz of resources to reserves but seems feasible given successful Challenger Deeps drilling. Our long term assumptions are now US$600oz gold, up from US$500oz and A$/US$ exchange rate of 0.80, up from 0.76. We retain a 10% discount rate and our standard 1.4x NPV gold sector premium. Regional and joint venture exploration is valued at $50m - we note DOM has a promising prospect at the Tropicana project in WA. Management guidance is for production to be maintained at current levels at cash costs of ~A$380oz which includes an A$37/oz royalty. We downgrade FY08 NPAT 20% to $24.5m after pushing out expanded production to the December 2008 quarter. DOM had a busy quarter, spending $2.13m on Challenger and other regional exploration. Challenger Deeps drilling was impressive and confirmed continuity of shoots to 910m vertical depth. An excellent result of 119m @ 18.1g/t Au was the deepest recorded intersection at Challenger and raises our confidence that reserves will increase below the current level. Deep drilling will target the bottom half of this zone pictured in red below in the December quarter. The area currently contains an inferred resource of 544koz, of which 293.5koz is contained in the M1 Shoot at a higher grade of 12.2g/t Au. Increased mining costs could be offset by the higher grade. A reserve upgrade including this area should be forthcoming in the December quarter. High grade results within the current M1 Reserve area continue to be intersected including 13m @ 78g/t, 8m @ 108g/t and 3.5m @ 221g/t. These clearly highlight the quality of the orebody.

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Quarterly Production in line
Production of 27.3koz for the quarter was in line with our expectations. Lower than forecast grade was offset by increased throughput. Grade dilution caused by an intrusion was reflected in higher cash costs of A$389, above our forecast of A$375. Revenue for the quarter was $21m from an average price realised price of A$771/oz. DOM has forward sold 41koz, or 8% of reserves at an average of A$786/oz. Cash stands at $52m after the sale of Deep Yellow shares and payment of the 6cps dividend.

1Q08 Production 1Q07 4Q07 1Q08 % Chg* % Chg^
Ore Processed (kt) 96.4 98.0 108.2 +10.4 +12.2
Head Grade (g/t Au) 9.0 9.3 8.2 -12.3 -9.6
Recovery (%) 91.6 94.2 94.2 0.0 +2.8
Gold Produced (koz) 25.9 27.0 27.3 +1.1 +5.4
Realised price (A$) 689 754 771 +2.3 +11.9
Cash costs (A$) 366 343 389 +13.4 +6.3
* 1Q08/4Q07
^ 1Q08/1Q07