De Grey Mining Ltd (ASX:DEG)
Added to watch list: 8th Dec 2023 | Valuation $2.00
8th December 2023
I’m looking to add some gold to my current holdings and like the looks of De Grey Mining (ASX:DEG). I have done a bit of research and have a valuation of $2.00 per share. Here are the key takeaways form my research:
- Based on their DFS they will be a low-cost gold producer with all in sustaining cost (AISC) of $1,295 per oz.
- Have a large but lower grade resource 278mt @ 1.5 g/t when compared to the other mining companies I looked at.
- Mine is based in WA Australia.
- Of the gold stocks I looked at they will be the third largest gold producer at 540koz pa.
- Upside as their DFS is based on 6moz reserve and DEG have 12moz classified as mineral resource estimate, and
- DEG are expecting first gold production in the second half of CY26.
Table 1:
| Company | Market Cap (m) | Resource | Metric | JORC | GRADE | Commodity | Mk Cap/Resource Ratio | AISC | status |
|---|---|---|---|---|---|---|---|---|---|
| RSG | 819 | 156 | mt | IIM | 2.0g/t | Gold | 5.3 | 2242 | Producing |
| NST | 13600 | 891 | mt | MII | 2.1g/t | Gold | 15.3 | 1759 | Producing |
| RED | 1000 | 106 | mt | IIM | 1.4g/t | Gold | 9.5 | 1696 | Producing |
| EVN | 6300 | 277 | mt | IIM | 1.1g/t | Gold | 22.7 | 1450 | Producing |
| DEG | 2200 | 415 | mt | II | 1.5g/t | Gold | 7.9 | 1295 | Exploration |
Looking at Table 1, I have calculated a Market cap / Resources multiple. Which is indicating gold stocks that are producing gold are priced at a premium (as they have a higher multiple) compared to DEG and other factors like a higher AISC, mine locations, and grade can negatively impact the multiple and of the gold stocks I looked at it appears gold miners with all or majority of their mining operations based in Australia trade on a higher multiple.
Table 2:
| Share Price | Shares | Markt Cap | Resource | Ratio |
| 1.22 | 1800 | 2200 | 278 | 7.9 |
| 1.39 | 1800 | 2500 | 278 | 9.0 |
| 1.67 | 1800 | 3000 | 278 | 10.8 |
| 1.94 | 1800 | 3500 | 278 | 12.6 |
| 2.22 | 1800 | 4000 | 278 | 14.4 |
| 2.78 | 1800 | 5000 | 278 | 18.0 |
| 3.33 | 1800 | 6000 | 278 | 21.6 |
| 3.89 | 1800 | 7000 | 278 | 25.2 |
Using this information, and once DEG start producing gold in the second half of CY26 and given the favourable economics of their operation. It is not farfetched that DEG would be trading on a Market cap / Resources multiple of 10-12 (table 2). Giving them a share price of between $1.60 – 2.00, based on current financial information and if DEG can produce, process, and recover gold as forecast in their FY23 DFS.
Table 3:
| Company | FY23 Revenue ($m) | Operating % | FY23 Profit ($m) | Profit % | 2024 Production Forecast | Mine Locations |
| NST | 4131 | 20.4 | 584 | 14 | Gold sales of 1.6-1.75moz | AUS & Alaska |
| RED | 423 | 3.06 | 0 | 0 | 195-215koz | AUS |
| EVN | 2227 | 10.5 | 164 | 7 | 770koz (+/- 5%) | AUS & CAN |
| RSG | 663 | 14.1 | 64 | 10 | 335-375koz | Africa |
| Forecast | ||||||
| DEG | 1400 | 15 | 168 | 12 | 540koz pa | AUS |
Table 3 contains revenue, profits, and margins plus FY24 production forecast of the gold miners I looked at. Once again, I have used this information to conduct a basic valuation for DEG. Using DEG’s forecast ASIC per oz of $1,295, their 540koz gold production, and an AU$ gold spot price of $2,700oz. DEG could expect revenue of $1.4bn per year once in production. Applying a profit margin of 12% on the forecast revenue would give DEG a profit of $168m and based on current shares outstanding will result in EPS of 8.4c. Most larger producing gold miners on the ASX are trading on a PE in the mind 20-30s. Using a PE multiple of 28 results in a share price of $2.35.
Some things to consider are, DEG still has a lot of construction and development to be done at their mine which they will have to either borrow money, raise capital or do both to fund this, before production starts in CY26. Depending on DEG’s approach here this may result in more shares being issued potentially diluting existing shareholder or the addition of debt, which may impact the returns available to shareholders. Also, DEG are stating they will be a low-cost gold producer, and this will result in favourable economics and profits for shareholders. If DEG cannot produce, process, and recover gold at the rates forecast in their DFS. They will not achieve the favourable economics required to be a low-cost gold producer which will either make the mine less profitable or even uneconomical. Either outcome would result in a poor outcome for investors.
Disclaimer: Rational Share Investing With Ratios does not hold an AFSL and information on this site should not be considered financial advice, personal or general, and represents the views of the author.
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