Dundee Precious Metals - I Like This Company

Dundee Precious Metals (DPM.TO) is not a typical precious metals company. Apart from Chelopech, an operating mine in Bulgaria, it runs a smelter called Tsumeb. So the proper analysis of this company is quite complicated. However, without going into technical issues, in this post I will try to present a quick look at the company's business.

Tsumeb

Tsumeb, a smelter located in Namibia, is de facto a chemical plant. Apart from processing the copper concentrate delivered from DPM's Chelopech mine (here are quite nice inter-company synergies), Tsumeb processes copper concentrates for other customers (it is called toll milling) and produces acid and arsenic trioxide (the latter one is particularly an awful thing). 

source: DPM

DPM invested a lot of cash in Tsumeb but now it looks like this investment is paying off:

The chart shows that the company's smelter is a stable part of the entire business - each year it delivers operating cash flow of $400 - $550 per ton of third party concentrate smelted. So if the company is able to find customers, Tsumeb should be delivering more and more cash to DPM. And it looks like the management is able to do it:

The line in red shows that since 2012 the company has been steadily increasing its third party production so Tsumeb looks like the cash provider for the company.

Chelopech

After selling the Kapan mine, DPM has only one operating mine, called Chelopech and located in Bulgaria. It is a gold / copper mine with some marginal amounts of silver. Here the situation is not as bright as in the Tsumeb's case because since 2013 Chelopech has been delivering lower amounts of gold:

To explain it, one has to realize that there are two aspects of Chelopech's operations:

• the mine itself
• copper and pyrite concentrates issues

The mine

Generally Chelopech looks relatively good although the quality of the ore has been deteriorating over time. The problem lies in recovery ratios (metal grades are more or less the same as they were a few years ago). It looks like the ore is more resistant to process but, to be honest, it is not the easy ore (mainly sulfide - rich zones). 

To mitigate the negative effect of lower recovery ratios the company is increasing throughput. For example, in 2010 it processed around 1.1 million tons of ore while in 2015 the throughput was 2.0 million tons. However, since 2013 even the throughput has stacked at around 2 million tons a year - hence lower production of gold.

Fortunately, direct costs of production are stable at Chelopech and in 1Q 2016 the mine economics looked as follows:

How to read this table? Firstly, it is easy to notice that Chelopech is about gold and copper. Now we are encountering a bull market in gold but copper is going nowhere. So at the moment Chelopech is supported only by gold. 

It costs $43.4 to mine and process one ton of ore so after deducting this figure from total metal content the mine should be delivering $72.1 in cash per each ton of ore processed.

Now the tricky part of the story.

Concentrate

The Chelopech mill delivers two final products: copper and pyrite concentrates. The copper concentrate is better - it contains more metals than the pyrite one. For example, one ton of copper concentrate contains around 30 grams of gold while there are only 4.6 grams of gold in one ton of pyrite concentrate. 

What is more, Chelopech delivers much more copper concentrate than the pyrite one. So Chelopech stands mainly on copper concentrate. And it is a good thing because the company owns a smelter, which specializes in smelting complex copper concentrates. Although part of the material delivered by Chelopech is smelted at other smelters, the vast majority of copper concentrate goes to Tsumeb. And...that's all.  

At this point let me close this discussion. I do not have any idea whether it is possible to find at what final cost the company produces its gold - it is an exercise for financial controllers (provided that they have the right figures). I do not have them so the only thing I can do is to look at the entire company. 

And the most important thing, for any company, is cash. The chart below shows cash flows from operations delivered by DPM business, calculated on a per-quarter basis:
. 

The bar in green shows cash flow reported in 1Q 2016. It looks like the company's business is in pretty good shape at the moment. Simply put, Tsumeb and higher prices of gold support the company strongly.

Future

DPM management has very ambitious plans for the future. Let me summarize them shortly:

• Tsumeb - the company plans a number of upgrades at Tsumeb
• Krumovgrad - it is  another gold / silver mine located in Bulgaria; it should go on-line in Q3 2018
• Chelopech - the company plans to increase the annual throughput to 2.5 million tons
• apart from these three topics, the company also owns / controls a number of other mineral properties

Relative valuation

DPM shares are currently trading around $2.7 a piece. At this price the company's enterprise value stands at $575 million (the last C$54.65 million bought deal financing is included into my calculations) so it means that the company's shares are trading at an EV / EBITDA multiple of 10.1, which is one of the lowest valuation multiples in the entire industry at the moment:

Last but not least - investors seem to like DPM:

During the ongoing bull market the company's shares have been stronger than the broad precious metals stock market, represented by GDX (the line in violet on lower panel of the chart). However, since early May DPM shares are stuck - they behave more or less like GDX. 

Summary

I like this company. It is a relatively unknown miner, trading at quite low relative valuations at the moment. Apart from typical mining activity DPM runs a smelter in Namibia. In my opinion, this smelter is a stable leg of the company's business while the growth lies in the mine / mines operated by DPM.