De Grey relies on upside story to solve Hemi resource estimate...

De Grey relies on upside story to solve Hemi resource estimate dilemma
Hotly anticipated maiden resource is not without its dangers, writes Barry Fitzgerald.
MNN 2 June 2021




De Grey's shares are now back at April's all-time high of A$1.60 a share thanks to the latest flow of Hemi exploration results, and the gold price returning to US$1900/oz or thereabouts.

The looming maiden resource estimate for the Pilbara discovery is also a factor, with some taking De Grey's recent recommitment to release the estimate mid-year as a sign of its confidence that the estimate - and the upside story De Grey sells - will make the switch from explorer to explorer/developer a rewarding one.

Still, the decision to push the button on the mid-year release of the maiden resource estimate - it will weigh in at somewhere between 4-7 million ounces depending on who's making the guess - will have been hotly debated in the boardroom.


That's because a maiden resource is a major step towards a development and all that entails. It is not without its dangers. Disappoint ever fickle market expectations and stocks can be severely punished, with the way back to a prime rating often a long road.

The alternative facing the board was to avoid that risk by continuing on with the exploration story at Hemi rather than having to frame a development timetable around the maiden resource.

After all, De Grey has been doing very nicely as an exploration story since the intrusion-related "aircore discovery at Hemi'' was first announced in December 2019.

What was a $40 million company has become a $2 billion company without a formal maiden resource estimate being made for Hemi (although there is an existing 2.2Moz shear-hosted resource elsewhere at the Mallina project).

Convincing the market that Hemi will long remain a growth-by-exploration story in the wake of the maiden resource estimate will be just as important as the resource estimate itself.

So, the release of the maiden numbers will be combined with a big push on selling the upside story to continue the value momentum achieved since the discovery was first made.

A key component of the story De Grey will push hard on was trotted out at the investor tour of Hemi the company hosted on Monday: a reference to the explorer remaining on track to achieve a resource discovery cost of less than A$20/oz at Hemi (some suggest it could be as low as $15/oz, if not lower).

De Grey is spending about $5 million each month on exploration. At a $20/oz finding cost, that delivers another 250,000/oz per month. Make it $15/oz, and it represents an additional 330,000/oz a month. Annualise the figures, and the addition is 3-4Moz respectively.

Is it realistic? The key Hemi orebodies remain open. And then there are the greater Hemi area targets, and the regional targets to chase along 150km of strike.

So, the suggestion is that whatever the mid-year maiden resource estimate is, it will be very much the start of a bigger story.

Assume a 6Moz maiden resource estimate, and Hemi and its surrounds could be knocking on the door of 10Moz in quick fashion.

It is a level that the gold mining heavyweights will find hard to ignore. That goes to the other concern around going too early with a maiden resource estimate: any potential bidders will use it as a benchmark for a bid, arguing they are paying for the known, not the unknown.

As the market values resource ounces at anywhere between $100-200/oz, the potential for another 3-4Moz being added to the resource base inside of 12 months represents a $300-800 million value add opportunity for De Grey's market cap.

Will a predator seek out that opportunity for itself by using the mid-year maiden resource estimate as its base case for a low-ball bid?

Time will tell on that score. What is more certain is that Ed Eshuys at DGO Gold is the kingmaker in any takeover scenarios.

DGO owns 15.8% of De Grey. Acquired at a cost of $43 million, the stake is now worth $326 million, which is more than DGO's market cap of $264 million.

Add in DGO's stakes in Dacian Gold and Yandal Resources, and its own exploration portfolio that's valued independently at $27 million, and the discount between DGO's market cap and the value of its investments and its exploration portfolio grows to $120 million.

Eshuys got tongues wagging last week when he highlighted the discount in an exploration webinar hosted by Arlington Group Asset Management.

"There is a discount, and if you think that we are spending a lot of time thinking about it, we are," he said.

"And we as a management team, and the board, are directing a lot of attention to this discount that applies to our shares today," Eshuys said.

That got some wondering if the comments meant DGO was thinking about auctioning off its De Grey stake to the highest bidder.

But that would be totally off beam, certainly in relation to any cash bids because of the capital gains tax implications for DGO.

More to the point is that DGO's core investment strategy (while its pursues its own exploration near Hemi and elsewhere) is based on the compelling proposition that gold resources found for $20/oz in the right brownfields locations get valued by the market at $100-$200/oz.

It is what led it to invest in De Grey in the first place five years ago.

And with De Grey's work in the Pilbara likely to continue to find $20/oz resources for the foreseeable future to create major value uplift in the company's market cap, why would it sell now?

Finds like Hemi don't come along very often. Eshuys knows that, so closing the discount in the DGO share price will involve more marketing of its "discounted'' stock, and exploration success at its own exploration properties in Western Australia and South Australia, rather than any action with the De Grey stake.

Eshuys said as much on the Arlington webinar: "Our (exploration) land is wide open for discovery to dramatically change the value of the company.''

And, as for De Grey and Hemi: "We think that there is a lot more to go there".