Saturday, March 22, 2008

Deccan Gold Mines to begin production by end FY10

Deccan Gold Mines is the only listed gold mining company in India. According to a news report last week, the company expects to begin gold mining by end of 2010 and is looking to clock annual volumes of around 4 tonnes. I've written about Deccan Gold Mines in the past.

Annual gold production of 4 tonnes is significant. Here's a back of the envelope computation -

Assuming average realisation on Gold - Rs.8,500 per 10 gm (equivalent of a 'tola' in India)
1 kg = Rs.8.5 lac
1 tonne = Rs.85 crore
4 tonnes = Rs.340 crore

Most mining make anywhere between 25-30% profit at the net level, be it gold or iron ore or any other mineral. Eg. NMDC, GMDC, ONGC, Sesa Goa, etc.

At a production level of 4 tonnes, Deccan Gold stands to make around Rs.85-102 crore.

At the current market price of Rs.33.8 per share, the stock is quoting at a market capitalization of Rs.198 crore. Discounting the stock by around 10 times, renders it a value equal to Rs.1020 crore, resulting in a five times upside from the current levels.

That, over a period of 3 years !

The risk associated with this would be the following:

- Delay in mining operations
- Less than expected gold deposits
- Regulatory roadblocks

The risks associated with this stock have a significant probability of being realised. However, as I had mentioned in my previous post on Deccan Gold Mines, it should be seen more as a long term call option.

The news report that carried the article on Deccan Gold Mines is as follows:

India's Deccan Gold Mines Ltd expects to start gold production by end-2010 with the new mines policy likely to help the company speed up its exploration activity, a company official said on Wednesday.

"There has been a lack of adequate exploration in India because of regulatory issues," Sandeep Lakhwara, managing director of Deccan Gold, told Reuters in an interview.

"The new policy addresses these concerns and is a confidence building measure."

The company is targeting 4 tonnes of gold production annually, he said.

India's cabinet approved a long-delayed mining policy last week that could ease investment by foreign and domestic companies in the mining sector.

The policy could ease delays in grant of permits, guarantee a hassle-free move from prospecting to mining stage, and give a bigger time frame for exploration activity, Lakhwara said.

Currently, Deccan Gold, along with its associate mining companies, is awaiting the government's nod for 70 prospecting licences, 30 of which are for gold prospecting.

The company has been engaged in preliminary exploration since 2000 under reconnaissance permits from the government, Lakhwara said.

"Not all the 30 locations could have gold deposits. Even if we set up some mines it would be a huge success," he added.

With preliminary exploration focussed on Karnataka, Andhra Pradesh, Kerala and Rajasthan, Deccan Gold believes a target of 4 tonnes of gold production a year would be "feasible," Lakhwara said.

Deccan Gold, listed on the Bombay Stock Exchange, is owned by Rama (Mines) Mauritius Ltd, a company promoted by Australian individuals.

It expects some of its prospecting licences, that allow it to conduct detailed feasibility studies to ascertain gold deposits, within six months of the new mines policy coming into place.

At the next stage, that could take a year or two, the company could set up processing and production facilities, Lakhwara said.

India is believed to have rich deposits of gold, he said.

"Geologically, India is very similar to other countries where gold deposits have been found and on that basis, India should have a large quantum of gold," Lakhwara said naming Australia, Africa and Canada.

India's gold production is just a speck in the world's output of around 2,500 tonnes, the only producer being Hutti Gold Mines in Karnataka with about 3.5 tonnes of gold annually.

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