Dominion Mining Limited 24 Feb 10

High grade and down deep but no cash

Although the Challenger mine generates a strong operating cash flow, after capital and development expenditures cash flow has turned negative and the mine is destroying shareholder value. Dividends of 14 cents were paid in respect to FY2009 but nothing is likely going forward. Since 2008 the company’s cash balance has been whittled away from $A49.9M to $A22.1M at the end of 4Q09. With respect to exploration there are lot of irons in the fire but none are red hot.

Poor financial performance is weighing heavily on the company’s share price. The Challenger mine is getting deeper and the costs will keep rising. Now is the time to exit, while the company still has significant value.


SHARE PRICE CHARTS AND COMMENTS:

Fat Prophets initially recommended buying Dominion Mining at 73 cents in November 2005 (Fat Mining 1). Our last review of this stock was in November (Fat Mining 200).

Turning to the charts, after rallying strongly to a high of $5.69 in March 2009, prices have spent the past 11 months correcting a large portion of the strong advance. Focusing on the closer picture, the most recent low experienced was $2.74 on February 19.





In our opinion, the bearish moving average cross which occurred in mid December 2009, coupled with the strong downtrend in place, bodes for further downside risk. Should Dominion Mining continue lower, the November 2008 low of $2.11 is potentially on the cards.




STATE OF PLAY

Dominion’s Challenger Mine is a good example of how tough the gold industry is when mines get deep and where ounces per vertical meeting are low requiring substantial development expenditures which are capitalised on the balance sheet.

The Challenger Mine produced 20,082 oz of gold in 4Q09 at an average price of $A627 per ounce. Production for 1HFY10 was 37,687 oz at $A653 per ounce. Challenger is not a low cost mine and as it gets deeper costs will keep rising. These cash costs do not include capital and development expenditures which increase the real cost to over $A900 per ounce.

In 4Q09 the cash outflow at Challenger was $A3.5M, and $A7M for 1HFY10. The Challenger Mine generated an operating cash flow of $A61.2M and after investment expenditures the mine generated a cash surplus of $A6.5M.

To generate a strong net cash flow Challenger needs either a much higher gold price or a head grade over an ounce per tonne.

The company is trying to address the issue by taking resources from higher grade stopes to focus on development to expand the number of accesses to generate a higher turnover of future stopes and increase production. Targeted production from February 2010 is 120,000 ounces per annum, but it remains to be seen if the mine will generate surplus cash.

In FY2009 the company paid an interim dividend of 6 cents and a final dividend of 8 cents, all unfranked. The cash payout was over $A14M and in hindsight was not in the best interest of shareholders. Payment of the dividend was instrumental to the fall in cash and bullion reserves to $A22.1M at 31 December 2009. There is no dividend policy other than that the company will pay a dividend if it’s prudent to do so.

With the Challenger mine currently losing cash, and with exploration expenditure which has been around $A5M for the past two financial years, it would not be prudent to announce an interim dividend for FY2010. To do so would also send a signal that payment of a dividend was a better use of shareholders funds rather than plough money back into exploration.

Dominion Mining is an active explorer and has reported good drilling results at the Challenger Mine delineating the SEZ target and proving the continuity of the M3 shoot.

At the Northling Project the company is earning a 70% interest in a project focused on a significant magnetic feature where a drill hole intercepted shallow copper mineralisation of 4m grading 2.43% copper from 58m. The Northling Project is off-trend from Sandfire Resources’ DeGrussa copper discovery which is 200km to the southwest.

Dominion is involved in 10 exploration projects in the Yilgarn and Tropicana belts. But at this point in time the company does not have any exploration results supportive of a market capitalisation of nearly $300M.

The Challenger Mine is going to struggle and with the prospect of no dividends being paid in the foreseeable future, the time to cash in on Dominion is now. The potential for the share price to keep sliding is very high. A mine that generates no cash is near worthless.

Accordingly, we are changing our recommendation from HOLD to SELL and the stock will no longer be held in the Fat Prophets Portfolio.

DISCLAIMER

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