Snapshot - Deccan Gold Mines Ltd.

I have already written about this stock sometime in Dec-08, you can get more details about the companies from that posting. (Also read Stock that can prove to be El Dorado ; India - Gold Rich Country - El dorado )

Snapshot:

Deccan Gold Mines Limited 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. 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.
*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 actual 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.

The management has been saying that they are able to derive about 4 tonne of gold per annum, even assuming on a conservative basis that they are able to derive only 2 tonne and taking a price of about Rs.15,000 per ten grams, this would translate into revenues of about Rs.300Cr.

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 (1/3 of the sale price). 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%. This means, on a revenue of about Rs.300Cr, the company can generate operating profit of Rs.120-150Cr, whereas the market-cap is only Rs.200Cr.

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 would advise to start accumulating this stock at this point of time. But I would like to say that this stock is 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.