Background: High Entry bariers, Strong margins, Unique Business (for scarcity premium) and strong upside revenue potential are some of the traits that make an investment lucrative and rewarding. Today I am going to present something which has all these and specially now, after the recent developments. Deccan Gold Mines is the only listed Gold Mining Company in India. For almost a decade the promise in DGML was just a promise. The license was awaited for such a long time, without which they could not have started the process of production. Now, that on Friday they have officially received the license, the story has become very promising.
The Company: DGML is country’s only listed Gold Mining company. It has been in the business of exploration and mining since its inception. As with any exploration and mining company, the gestation periods are high and this was further aggravated by inordinate delay in granting the mining license. The company in the last few years had applied for various licenses (around 40) in the states of Kerala, Chhattisgarh, AP, and Karnataka which are at various stages. After years of delay, DGML has finally been granted a mining license by MoM for their Ganajur Gold Project. Ganajur has one of the country’s most prolific gold deposits. It is estimated, that that on a full year of operations, the site could generate around 350-375cr per yr of revenue with around 33% margins. The company has indicated that it would take 18 months from the grant of license to start generating revenues. The next steps for the company is to get the Letter of intent from the state government along with Environment and forest clearance. These should come in next few months and should not be a problem given the importance the government is assigning to fast track clearances (even the present clearance was given a priority by the government apparently). The company has indicated that it would need around 100m USD for its capex and it would be funded by 70% debt and 30% equity. Debt is expected to be raised by specialized (in gold financing) financial institutions and equity by a combination of rights issue (very attractive option for investors) and possible preferential allotment. The promoters holding is 41.5%. This is not just the story. Read the blow section carefully.
- The biggest trigger is already in place. Ganajur mining license is a game changer for the company’s fortune and start the revenue generation.
- The reserves estimated for Ganajur is on lower side and company strongly expects the reserves to be much higher. The current estimates were arrived with limited exploration.
- DGML is also in talks with Geomysore Service India Pvt Ltd to buy them out. GMSI has recently been granted a gold mining license for Jonnagiri. Interestingly, its GMSI who approached DGML for a possible takeover of GMSI. Currently, DGML has asked GMSI to do more drilling at jonnagiri to get a better idea of gold deposit and therefore, possible valuations of GMSI. Whenever this happens, it could be a massive trigger for the stock.
- In next couple of months we should get some update on their Hutti Belt project.
- There are so many PL (pending license) pending that any further grants could improve the prospects of the company even further.
Valuations: The Company presently does not have any revenues for obvious reasons and is valued at around 380cr market cap. These kind of companies normally trade at astronomical valuations. On a full year working and with impending equity dilution its quite possible to have a 5-6 rs EPS. As we have seen the markets normally give such companies high double digit PEs. Also, let’s not forget the earnings estimates are based on current estimates, which could be revised upwards once the actual mining starts. Also, the possible earnings growth if GMSI is taken over is not accounted here, along with substantial earnings upgrade that could come if the company was to get any further Mining license, which is obviously a very strong possibility given the 40 PLs that are applied (most of them are at advanced stages of consideration).
Technicals: Stock broke out of more than 8 yrs of consolidation and is looking very strong. From the current levels the stock has its downside protected but upside is just opening up and quite likely would challenge its all time highs of 142 and should break it and go higher given enough time and space.
This looks to be a great story in making that now it has a Mining license to one of the most prolific gold deposits of the country. The downside in the counter is limited and the upside has just began. Even though the start of the mining operations is around 18 months away, the stock price would start discounting it much ahead. Now every new update should excite the stock. Remember this is a seed that we are sowing so don’t expect fruits overnight. Looking at the business opportunities and visibility the stock should go up multi-fold in the years to come and thus patience here would be suitably rewarded. The company conducts its analyst call regularly which are hosted on their website. Also go through the company’s AR which are very well documented. Also, listed below is the link to various interviews that would help a potential investor take an informed decision.
God Bless !!!
Disclaimer: No vested interest in the company.