Life plan, page-2

I tend to only worry about declines in a stock's price. When the individual stock is falling, and other stocks in the sector are rising or at worst in a trading range.

At present sentiment on gold, and gold miners is the worst I have seen it.

The stocks in the gold sector coming under the most pressure, have exclusively Western Australia based production centres, eg DCN, SLR, RMS etc. There is concern about a labour shortage, due to WA border restrictions preventing many FIFO workers. This was exacerbated by the WA Premier's reluctance to open up to interstate travel, in particular NSW.

The labour shortage has not been helped by the surge in the price of iron ore.

So there are definite, not company specific reasons for DCN's share price decline.

For the June quarter 2021, DCN received 27.8m in funds from a capital raise (15.9 million was received after June 30).
DCN repaid 5.2 million in debt, and the cash and gold on hand was up 13.8 million.
So for the June quarter we had a reduction in funds of 8.8 million.

Gold sold for the June quarter was 24,542 oz at $2177. During the June quarter 25,558 oz were produced. If all the gold produced in the quarter was sold in the quarter, DCN would have banked an extra 2.2 million. This would have led to a reduction of funds of 6.6million. And of note this deficit of 6.6 million, includes 6.4 million spent on exploration and 12.9 million on development.

So if DCN misses guidance, and only produces as much gold as the June quarter, to erase the 6.6 million deficit they need to receive an extra $258 Aus per oz ie $2435 per oz. They have hedged half of the next 2 quarter's production at $2238 and the other half will be sold at spot at present $2505. So at a spot price average for the next 6 months of $2635, if DCN misses guidance and produces the equivalent produced in the June quarter. DCN will be cashflow flat, even if they spend a total of 19.3 million on exploration and development.

And this is even without accessing Hub and the other previously NTM resources at Redcliffe. If DCN is able to fund a fair chunk of exploration and development from operational cashflow. They will be well placed to cash in on the high grade formerly NTM resources.

So in summary, gold sector sentiment is awful. Western Australian gold miners are in the dog box, due to border restrictions, exacerbating a labour shortage. The labour shortage will end, already iron ore prices are selling off. And Western Australia will fully open their border with time. The gold in the ground is not going to evaporate. For the June quarter cashflow movements show that DCN funded two thirds of explorations and development from operational cashflow, even though they only received $2177 Aus per oz. The spot gold price is up, DCN's hedging is rolling off. And they have the former NTM high grade resources to mine. As well as a less than 5 year old processing plant that cost $197 million to construct (I would not be surprised if you were pushing $300 million to construct the same plant today).

DCN market cap is $220 million Aus. If I had the funds, I would be happy to buy this business for $220 million. Too many investors get caught up in the sentiment and angst, and look a gift horse in the mouth. I drive a 2016 Mazda 6, and have enough funds invested in DCN to purchase a late model Ferrari. Despite this large punt, I sleep well at night.