Here’s one for lazy investors looking for leveraged exposure to near-record Australian gold prices – DGO Gold (DGO).
Led by Ed Eshuys of Plutonic, Bronzewing and Jundee gold deposits discovery fame, and Bruce Parncutt of analyst/investment banker fame with McIntosh Securities and Merrill Lynch, DGO has a somewhat unique strategy for a junior.
The strategy combines strategic equity investments in WA brownfield gold discoveries along with exploration in its own right, with the latter having an emphasis on largely-ignored sediment-hosted gold opportunities capable of forcing a re-think on where to find big WA gold.
The call that DGO could be one for lazy investors in the junior space goes to how DGO, drawing on the decades of geological and market-smartz Eshuys and Parncutt (they are both geologists) bring to the table, went about finding its initial brownfields equity investments.
Recognising that much of the best land for gold exploration in WA was locked up inside the ASX-listed juniors, DGO screened more than 90 projects held by juniors against three criteria.
They were projects where the finding cost is assessed to below the brownfield average of $25/oz, they have a resource potential of more than three million ounces and they come with upside.
About 10 juniors made it on to a short list, with DGO able to act on two of them to date – Pilbara gold explorer De Grey Mining (DEG), where it has a 10.7% stake, and Leonora gold explorer NTM Gold (NTM), where it has a 12.1% stake.
DGO now has board representation at both and has been supportive of their capital raisings to allow them to get cracking on the upside it believes are inherent in both. Significantly, both have sizeable gold resources under their belt, with the potential for much more, on DGO’s assessment.
That gives the strategy its brownfields foundation. Industry data suggests it is a smart strategy given the cost of finding an ounce of gold in the resource category is about $25 an ounce. Juniors with a resource generally get valued at about $50 an ounce and can expect $250-$400 an ounce when they have a mine development on their hands.
So adding ounces to a known discovery with assessed upside can be a low-cost way to create value. Compelling, some might say.
There can be a disconnect between DGO’s assessment of the chosen junior’s upside and their current market values. That’s OK, DGO is simply backing its seasoned assessment against a market that flits all around the place when it comes to picking the best of the juniors.
DGO itself is trading at 96c for a market cap of about $34m. It is a very thinly traded stock with 85% of the stock held by 12 investors, including Regal Funds and a bunch of notable ex-stockbroker types around Melbourne.
It is so tight that some think of it as a private syndicate within a public company structure. The upside to that is its shares can move sharply to positive news events while being sluggish to the downside.
Aside from progress by De Grey and NTM, the other driver in DGO’s valuation is its own exploration effort. On the company’s current market cap, it can be said about two-thirds of its value rests with its own exploration portfolio.
An interesting portfolio it is too, curated by Eshuys over time from studies of open file data on what had become vacant ground, with a focus on sediment hosted criteria in a broad sense.
There are too many to give them all a mention here, suffice to say if there is a cashed-up gold producer out there looking for a walk up start to drilling a bunch of technically interesting project areas, DGO’s portfolio could be the answer.
DGO’s recent success at its Black Flag project, 20km north of Kalgoorlie, demonstrates the point. Drilling there last quarter hit 4m at 7.5g/t gold from 116m.
It is an area never drilled before, remembering it is all of 20km from Kalgoorlie. The reason why? It is covered by sand and lake cover. Another one to watch is Pernatty Lagoon on the Stuart Shelf in South Australia – a Zambian copper belt-style play if you don’t mind.