Stock that can prove to be El Dorado

Deccan Gold Mines Ltd.
CMP – Rs. 15.60 (As On 20-Nov-2008) BSE Code –512068
Face Value – Re.1
For FY 07-08
Sales - Rs. 0.00
PAT Rs. – (-3.61 mn)
Market Cap. - Rs.75 cr.
For Qtr Sept 08-09
Sales – Rs. 0.00; Other Income – Rs. 2.5 mn (Refer last section – Recent Development)
Profit – 0.35 mn ; EPS – Rs. 0.01
Equity Capital – Rs. 5,84,50,000
No. Of share - 5,84,50,000

Promoter Holding – 51.50 %
Institutions – 13.38%
Public – 48.16% (Including Institutions)

By looking at the above financials for FY 07-08, you may like to give the investment a pass since for a company with zero revenues and making a loss, and with a market cap of Rs. 91 cr., may look to be highly overvalued.

However, taking a closer look at the company and the potential of its business may make you change your mind.

Here’s what Deccan Gold Mines is all about ….

Deccan Gold Mines is the first private sector Gold Exploration company to be listed company on the Indian bourses.

The company has been promoted by Australian Indian Resources Pty. Ltd. (AIR) through its Mauritius subsidiary – Rama Mines (Mauritius) Ltd. The promoters hold roughly 70% in the company. Consequent to the opening of Indian Mining industry to Foreign Direct Investment in 1993, AIR incorporated a 100% subsidiary Geomysore Services (India) Pvt. Ltd., which made an application for mineral exploration. It was only in the year 2000 that Geomysore India was granted Reconnaissance Permit (RP) to undertake exploration activities in the state of Maharashtra.

Geomysore Services now has 26 Reconnaissance Permits for gold and base metal exploration spread through seven states in the country. Indophil Resources Explroration Services Pvt. Ltd., a 100% subsidiary of Deccan Gold Mines has also been granted Reconnaissance Permits to undertake exploration in some prospecting blocks.
Deccan Gold has entered into agreements with its associated companies, Geomysore Services (India) Pvt. Ltd and Indophil Resources Exploration Services Pvt Ltd for the transfer of Prospecting Licences to Deccan Gold in the Karnataka state - Dharwar Shimoga, North and South Hutti, Ramagiri and Mangalur prospecting blocks.

Deccan Gold is currently working on the following projects:-

Mangalur Belt – The Mangalur Belt is 25 km long and 4-5 km wide. It is composed of metamorphosed basalt, gabbro, ultramafic rocks, felsic volcanic rocks and coarse clastic sedimentary units like at Hutti, Kolar and Sonakhan belts. The Mangalur belt has been known for gold mineralization.
North Hutti - The Hutti Greenstone belt is host to the world class gold deposit being mined by The Hutti Gold Mines Ltd (HGML), a Government of Karnataka undertaking. Gold mining activity in the belt has been known since pre-Ashokan time, about 3000 years ago. The company has two Reconnaissance exploration licences (RPs) covering 851sq km area of the most prospective part of the Hutti belt.
South Hutti – The South Hutti project extends into a 315 sq.km block covering the South Hutti greenstone belt. This tract contains several promising prospects. The company has been working on a few prospects in the South Hutti project based on highly encouraging gold values obtained during preliminary geochemical sampling.
Dharwar –Shimoga Belt – The company has 5,329 sq km area under 3 Reconnaissance Permits blocks which cover a major portion of this belt that is 155km long and 100km across.
Ramgiri Gold Field - The Ramagiri RP block comprises the well known 13 km long Ramagiri Gold Field (RGF) that was a scene of intensive underground mining activity by the Britishers in the early part of the last century. Until April 2001, the Government of India owned Bharat Gold Mines Ltd. (BGML) was operating the underground Yeppamana Mine in the RGF.

Gold Exploration –An International Perspective & Potential in India:
Gold has been historically mined internationally in countries such as Australia, Canada & South Africa.
Production of Gold:
Australia - about 300 tonnes per annum of which three quarters come from Western Australia.
Total world production - about 2400 tonnes
India - average production of 3 tonnes per annum

India is a country rich in mineral resources. More than 20 million tonnes of proven, probable and possible gold ore reserves have now been identified (Source: World Gold Council) Yet, India’s annual gold mine output is only around 3 tonnes and 6 tonnes as a by-product of copper mining.

India’s gold mining history dates back to some 8000 years with more than 900 gold mining and innumerable gold panning locations. The land of the world famous Kolar Gold Fields and the largest consumer of gold on earth, India has however suffered in developing it’s gold mining potential due to lack of adequate exploration expenditure and the policies of the governments.
The liberalized policies and strong economic growth outlook, is reviving the mineral exploration and mining sector through foreign and Indian private investment. Deccan Gold with some of the best gold prospects in the country, geologically similar to areas that have been home to major world gold discoveries, is playing a leading role in this revival. The Indian terrain is easily accessible but under explored. The potential for gold discoveries in India is substantial.

Deccan Gold Mines has been undertaking Systematic exploration and Drilling programs at the various prospects in the projects being undertaken by it. The drilling results in the Hutti Fields and Dharwar –Shimoga belt have been particularly very encouraging.

Other Developments:
Deccan Gold Mines has entered into an Agreement with De-Beers India Pvt. Ltd., Indian subsidiary of De-Beers, world’s largest diamond mining company, whereby Deccan Gold has granted De-Beers the right to explore for diamonds in all its exploration areas. In return Deccan Gold will obtain the right to explore for Gold and other minerals in De- Beers exploration areas in India. The agreement also involves exchange of exploration data between the two companies.
Recently, the company has allotted 70 lakh shares and 1.10 crores Warrants with an option to convert into shares at Rs.15.10 per share to Sun Mining & Exploration Ltd., a company incorporated in Cyprus.

Conclusion:
Deccan Gold has made applications and/or acquired control over a very large portfolio of exploration blocks covering an area of 10,403 sq kms spread in the states of Andhra Pradesh, Karnataka, Kerala and Rajasthan. Moreover, the exploration activities on Dharwar Shimoga block and North Hutti block have provided highly encouraging results.

The probability of success in these fields is high, which can catapult the stock into a different orbit.
Deccan Gold is not a trading stock – the stock is suitable for long term investor with an appetite for HIGH RISK. Gold Exploration is a capital intensive industry where the rewards may not be immediate – they may come after years of perseverance and hard work and then too are uncertain. The advantage Deccan Gold has is that the company being one of the first private sector players in the industry is sitting on some of the most prospective blocks. The company has been working on these blocks for years and substantial capital & human resource has gone into the exploration process. The other factor which inspires confidence in the business is the fact that Gold Exploration is still in its infancy in India. Even though India has a geology and metallogeny very similar to Western Australia and Africa and India’s pre-cambrain auriferous greenstone belts are geologically comparable with those of Western Australia and Southern African gold bearing greenstone belts, the country’s share in Gold production is minuscule compared to countries like Australia and Africa. With very few private players, there is a Huge Unexplored potential.

Long Term Investors can accumulate the stock at the current price and on declines.

RECENT DEVELOPMENT:
Deccan Gold has Concluded MoU with JB. Details are given below.
Announcement:
Deccan Gold Mines Ltd has informed BSE that the Company has concluded a Memorandum of Understanding (MoU) with JB Mining Holdings Ltd, Hongkong (JB)."DGML", announces the signing of a Memorandum of Understanding (MoU) with 38 whereby DGML shall carry out the entire gold exploration, resource estimation and planning for feasibility studies to facilitate mining activities for Projects held by 38 in the Republic of Djibouti, North East Africa.

The salient features of the MoU are as under;

a) JB has entered Into a Joint Venture (JV) with the Government of Republic of Djibouti to undertake gold exploration activities in certain mineral prospects in Djibouti.
b) The mineral prospects proposed to be explored are the blocks of Hesdaba, Asaleyta, Garrabayis and V.GPS41 respectively The area covered by each one of these 4 prospect blocks is 100 sq., kms
c) The exploration strategy for the aforesaid gold prospects would include remote sensing studies, geological mapping, systematic channel sampling followed by planning of boreholes and core drilling, core logging and analysis of cores and fire assay for gold and silver.

d) 38 has appointed DGML as the Project Manager to carry out the entire exploration work and ascertain feasibility of the Projects to commence commercial production.

e) 38 proposes to execute the Projects through an SPV (JV Co.,) to be incorporated in an off shore jurisdiction. The JV Co. shall be primarily responsible for execution of the Projects in Djibouti.

f) DGML shall be entitled to a Professional Fee, equivalent to 10% of the total operational & management cost of the Project over and above getting reimbursed for all its direct and indirect costs in under-taking its role as Project Manager.

g) Further, DGML would get free carried equity in the JV Co equivalent to 5% of JB's equity stake in the iv. Further, DGML has the right to take up an additional equity stake in the JV Co., equivalent to 20% of is stake in the JV at a 50% discount to the Market Value of the Project. DGML plans to exercise this right should exploration activities result in the successful discovery of mineable deposits.

CASH WILL BE THE KING

World over money is chasing stocks.

In the case of 2000–03 bear markets, studies show that most highly leveraged stocks fell by 87.7% and stocks with least leverage fell by 15%.

Here is a report of the high cash and high leverage stocks for investors to take a decision.
Most metal companies have manageable debt levels while the balance sheet position of pharmaceutical companies is mixed. The liquidity position is very weak for the real estate sector and that for telecom is moderate; it is strong for the oil and gas sector.

1) Metal companies’ debt manageable:
Most metal companies have manageable debt levels, though high leverage remains a concern for Tata Steel, Hindalco and JSW Steel, which made huge acquisitions in the recent past.
Steel companies had embarked on major expansion plans, but given the current slowdown in demand, they may go slow or defer their expansion plans until situation improves.
In the metal companies, SAIL stands out in the ferrous space with attractive debt equity and interest coverage ratio. Nalco, Hindustan Zinc and Sesa Goa are debt-free companies, thus insulated from refinancing and liquidity risk.
Across the sector, interest coverage is strong to moderate in FY 2008 and likely to sustain in FY 2009.

2) Pharma companies to continue acquisitions
The balance sheet position of pharmaceutical companies is mixed. Sun Pharma has a strong balance sheet with high cash balance of over Rs 1,300 crore. GSK Pharma also stands out, with almost zero debt.
Wockhardt has a total debt of USD 730 million and a debt equity ratio of 2.34 in FY08. The financials of Aurobindo are week, with high debt and thus high interest expenses. The company has capex plans of Rs 250 crore in FY09.
Ranbaxy too has high debts but a cash infusion of USD 750 million by Daiichi Sankyo would reduce the leverage. Cipla has a capex plan of Rs 2,000 crore over the next two years.
Capacity expansions for most other pharmaceutical companies have already happened. Acquisition in this space still remains the buzz word. Companies like Sun Pharma, Ranbaxy, Glenmark and Lupin will continue to pursue their acquisitions.

3) Tech cos see increasing trend of cash burn
Indian IT companies have always been given thumbs up for their cash positions, but are the trend set to change? Indian technology companies are best placed in terms of cash in balance sheet. Most of the balance sheets carry low debt except 3i Infotech and Wipro. HCL will also raise debt for Axon acquisition and will make it first top Tier-I company to have net debt (more debt than cash position). But, the trend is all set to change. TCS payout for citi BPO, Tech Mahindra upfront payment, Satyam buyout of caterpillar market research unit all are pointing to an increasing trend of cash burn. Cash positions could be used to support clients for getting preferential treatment in other contracts. Extended credit periods to clients could have an immediate impact on the working capital efficiency. In H1CY09, working capital has already shown an uptick for some Tier-I companies.
Cash per share Cash/mktcap Debt-equity
Infosys 192 16% 0
TCS 61 12% 0.04
Satyam 89 36% 0.02
Wipro 66 28% 0.34
HCL Tech 38 27% Debt for Axon
Patni 101 70% 0
3i Infotech 25 63% 1.6
Tech Mahindra 74 27% 0.02

4) Realty sector declined over 87%; has weak balance sheet
Realty index declined by more that 87% from its January 2008 highs and the balance sheet/liquidity position is very weak for this sector. It is a highly levered sector with net gearing at 60% for FY08 and FY09; its gross debt/EBITDA is at approximately two times.
A lot of gross debt is repayable in the next 6–12 months. Servicing of bullet repayments is falling due within FY09 which remains a key challenge. Analyst expect delinquencies from small real estate companies and Q2 results do not reflect higher interest outgo, as most companies are capitalizing substantial amount of interest expenditure.

The strongest position is held by Indiabulls Real Estate (IBREL) as its balance sheet is fully funded for FY09 and FY10. IBREL had a gross cash of Rs 36 billion and a gross debt of Rs 10.5 billion. The weakest players are Unitech, Sobha and Puravankara. IBREL’s net debt/equity ratio is at -0.5 times while DLF’s is at 0.6 times. Unitech and Sobha have net debt/equity ratio of 1.8 times. If one includes land cost outstanding the gearing jumps to over 2.5 times

5) Telecom sector balances its liquidity moderately
The balance sheet position for the telecom sector is moderate. Bharti is most comfortable with a leverage of 0.3 times. It has started generating free cash flow from Q2. Leverage for Idea and RComm are at 1.3 times and 1.6 times, respectively. Idea’s leverage will reduce due equity infusion by TMI.

Bharti is likely to comfortably meet the redemption requirements buffered by strong cashflows. RComm has strong cashflows but the position on repayments is not clear. Upcoming 3G spectrum auction in January 2009 could however put pressure on balance sheets in case of overbidding. Analysts feel 3G Licence Fees will involve cash outgo of USD 1–1.5 billion in the next six months.

6) Oil and gas sector emerge strong
The balance sheet position for the oil sector is strong. The energy sector, overall, has low net debt/equity at approximately 17% for FY08 which is expected to slip even further in FY10. Upstream companies have lower gearing, but could come under stress in the coming years. Strong companies are ONGC and Cairn India. ONGC’s net cash is expected at Rs 27,544 crore in FY09. RIL has 40% net debt/equity in FY08 and it is likely fall to 10% by FY10e. The weakest balance sheets are those of HPCL and Aban Offshore. HPCL faces significant refinances risk and ABAN’s debt/equity ratio is expected at 11.3 times in FY09. Its operating EBITDA/interest expense is also at 1.6 times.

Few months back realty sector was the darling of the investors & traders. Comapnies like DLF & Unitech were hailed by everyone. And see the condition today. Now it's really bad time for the markets. One can't say which company will wind up the business.

I would advise investors not to hurry to buy. Cause sooner or later Nifty will come down to around 2000, sensex at around 6500 till the election time.

One should watch out for pre-poll sentiments. If 3rd front emerges to be the winner, then the time will be more difficult.

Mkts will see more pains

Productions are slowed down across the sector, in some cases like Textiles, Realty & metals, there is no clear earnings visibility. Elections next year have made Infra, Power & mining industries cautious, as we don't know if regional politics starts. Besides, there is huge supply overhang, which can not be absorbed so easily.

Many companies took loans from foreign banks when the dollar was around Rs. 40. Now these companies have to service the loans at around Rs. 48 per dollar. I think this will definitely impact the companies' profitability.

Sensex levels today

We had positive global cues for today, but we could not follow the trend. The question comes to the mind, is this just a correction? is there some serious risk to our economy? are we highly dependent on Foriegn money?