Dominion MiningWhile many gold producers suffer from downgrades,...

Dominion Mining

While many gold producers suffer from downgrades, rising costs and falling production, Dominion Mining continues to perform seamlessly. Its December quarter production report shows strong, low cost gold production, rising gold reserves and minimal hedging and no debt. Its share price reflects this exceptional performance. We think that this may be one of the last opportunities to get aboard this stock under the $2 mark.



Fat Prophets initially recommended buying Dominion Mining around 73 cents in November 2005 (Fat Mining 1). Our last review of this stock was during October (Fat Mining 46).



During the past four months, there has been a firm revival of upward momentum in Dominion. Since the October low of 97 cents, prices have more than doubled to reach $1.995. This is the highest level achieved by the stock in more than 15 years.



While the upward trend of any stock would be at risk of pausing after such firm gains, we believe that the near term downside risks for Dominion are limited. Initial support lies between $1.68 and $1.60. Below here, the January low of $1.34 underpins the shares in our opinion.



As can be seen on the monthly chart, the recent gains in Dominion have seen the stock rallying away from a decade long base. Given the duration of consolidation at the lows and the momentum of the rally since 2005, we believe the outlook for Dominion remains positive. In the months ahead, we anticipate an extension of the rally above $1.995 toward $2.50 and beyond.



The vast bulk of Australia's gold producers are facing operational challenges at the present time. The rising cost of fuel, supplies and equipment, contractors, labour and capital items, is putting pressure on the operating margins of most gold miners.



There are very few operators that have been able to maintain their margins and profitability. Those that can have handsomely rewarded their shareholders, with strong share price performances. Dominion Mining is part of this elite and relatively small group.



Let us re-examine its financial performance during financial year 2006. It recorded a strong full year operating result, with a $17.7 million turnaround in its financial performance. From an $8.7 million in 2005, Dominion recorded a $9 million full year profit.



Before adjustments, the underlying performance was even better, with an operating profit of $12.5 million accompanied by strong increases in underlying earnings and sales revenue due to the first full year of underground gold production from the Challenger mine in South Australia.



The bottom line performance translated into EPS (Earnings per Share) of 9.1 cents, compared to a loss of 10.5 cents a year ago. Given the strong financial performance, the company declared a final unfranked dividend of 4 cents a share.



The financial performance was underpinned by a 150% jump in gold production from the Challenger gold mine to 108,080 ounces (2005: 43,547 ounces) at a significantly lower average cash operating cost of $280 per ounce (2005: $510 per ounce). Dominion achieved gold sales of 107,084 ounces during the year (2005: 43,777 ounces) at an average received price of $633 per ounce.



Let us now examine the December quarter operating result. The company produced 24,394 ounces of gold at a cash operating cost of $335 per ounce. The gold head grade remains outstanding at 9.29g/t Au and is the key to the company's low cost operation.



Revenue for the quarter was $18.9 million, generated from the sale of 25,734 ounces of gold at an average price of $734 per ounce.



Production for the first half of 2007 to December 31 was 50,306 ounces at a cash operating cost of $332 per ounce. First half revenue was $35.6 million from the sale of 50,521 ounces at an average sale price of $721 per ounce.



We anticipate full year gold production to be comfortably in excess of 100,000 ounces at a cash operating cost of $340 per ounce.



Forecast costs are slightly higher due to the increased depth of mining, but are nevertheless outstanding and will generate strong margins for the company. Dominion is continuing the rollout of new underground equipment, which should help maintain high productivity and low equipment maintenance costs.



The strong operating margins have led to a surge in cash, with Dominion holding cash and bullion worth $24.7 million at the end of 2006. This excludes the payment of the 4 cent a share final dividend in October.



The Resource & Reserves position at Challenger continues to grow. Current gold Reserves are now 293,500 ounces after accounting for 50,306 ounces of production since June 30 2006 and over 300,000 ounces to date. Meanwhile, Resources total 686,300 ounces, an increase of 312,000 ounces over the June 30 2006 published figure.



Dominion has a stated goal of boosting its reserves position to the 500,000-ounce mark by the middle of 2007. How will it do this? The company will continue to test the resource potential of the main M1 and M2 gold lodes at Challenger.



At M1 during the December quarter, which currently is the source of all production, Dominion encountered spectacular drilling results such as 11.4 metres @ 54.15g/t Au, 6.0 metres @ 33.24g/t Au and 12.75 metres @ 49.31g/t Au. Meanwhile, high-grade M2 intercepts include 6.0 metres @ 64.03g/t Au, 3.0 metres @ 205.5g/t Au and 10.5 metres @ 41.14g/t Au. These are truly spectacular results unparalleled anywhere else in Australia.



There is also exciting regional gold exploration potential, with drilling at a target known as Challenger West, 150 metres northwest of the M1 shoot, returning 3 metres @ 23g/t Au and 3 metres @ 12.5g/t Au.



With respect to hedging, Dominion's position is modest and therefore attractive. At the end of 2006, the company has 49,500 ounces (representing 17% of remaining reserves) forward sold at an average price of A$688 per ounce. Of these flat forward contracts, 20,800 ounces are for delivery by June 30 2007, with the balance by December 31 2008.



For 2006/06, we anticipate EPS of 20 cents in 2006/07, putting Dominion on a modest P/E (Price/Earnings) ratio of around 10x. We anticipate payment of a 6 cents a share final dividend.



Dominion remains a low-cost gold producer, with a modest P/E ratio and tremendous exploration upside. It remains one of our gold sector favourites, because of its operational consistency. We expect big things from the company's exploration program this year, including a sizeable boost in its Resources/Reserves position.



Dominion Mining will remain held within the Fat Prophets Mining & Resources portfolio, but for Members with no current exposure we recommend the stock as a Buy around $1.92.