Thursday, October 15, 2009

Deccan Gold Mines

Deccan Gold Mines is the first private sector gold mining company and rather the only gold mining company listed on the Indian stock exchanges. The company has got blocks spread across four states. The total area of the blocks is more than 10,000 sq kilometers.


Talking of gold mining business gold mining company has to pass through three stages before they can commercially start mining gold. The first stage is called reconnaissance permit where they seek the approval of the authorities to do exploratory activities on say 200-300 sq kilometer of the block. Second stage is prospecting license wherein they short list about 25 sq kilometer or 30 sq kilometer out of the total area where they would like to do the further exploratory studies and the third stage is called mining lease where in they short list about half a sq kilometer or one sq kilometer where they would actually like to drill and take gold out or rather rock out and then refine it and produce gold.


The company has filed application for about six blocks for mining license. As per the management the actually mining of the company is expected to start in the last quarter of FY10-11 which is January to March of FY11 and if you look at the valuations of this company as of now the company has got zero revenues. It has a market cap of Rs 200 crore but going by what the management has been saying that. Management says that they are able to derive about 4 tonne of gold per annum assuming on a conservative basis that they are able to do only 2 tonne and taking a price of about Rs 15,000 per ten grams this would translate into revenues of about Rs 300 crore. Typically internationally the gold exploration cost is about USD 350-400 per ounce which in this case will translate into Rs 5000-5500 per ten grams. Assuming initial expenses to be high we still believe that on a conservative basis the operating profit of the company could be in the region of 40-50% which means on a revenue of about Rs 300 crore the company can do about Rs 120-150 crore of operating profit so as of now there are no profits but market cap is only Rs 200 crore which is less than 2 years of the companies operating profit.


The valuation is low mainly because of two reasons. One is the uncertainties involved in the business and also the uncertainties with regard to the regulatory clearances for this company. The second relates to the psychology of the investor. Most people do not want to buy these companies now when the production is still one, one and a half years away. Everybody thinks that they are going to buy the company as soon as the company is going to start production but people will realize that smart money would already have accumulated the stock at lower levels.


I am not advocating buying the stock just now at upper circuits. I would not advise doing that but I think one can keep an eye on the stock. I would ideally believe that Rs 25-30 levels would be a good level to get into the stock but one can chose to do staggered purchases for this stock. Rather than thinking that they will buy everything when the production starts, start accumulating at this point of time. I would like to say that this is the one for a very high risk investor because of the uncertainties involved in the business and also somebody with a time frame of about 3-5 years.


Courtesy: http://www.moneycontrol.com/news/market-outlook/which-hidden-jewels-will-ashish-chugh-buy-this-diwali_419439.html

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