Dominion Mining 05 Mar 08

Time to take some profits

While many gold producers suffer from downgrades, rising costs and falling production, Dominion Mining continues to perform almost seamlessly. The company has recorded another strong operating and financial result for the first half of 2007/08, which sets it up for another strong annual result. The company has been one of our stand-out gold performers, although we feel comfortable taking some profits off the table at this point.

"Dominion Mining is likely to continue to be a strong performer, however the temptation to take some profits is too great at this point."

Fat Prophets initially recommended buying Dominion Mining at 73 cents in November 2005 (Fat Mining 1). Our last review of this stock was in September in Fat Mining 92.

Following our last review in September, investors gave Dominion Mining a significant re-rating, lifting the stock from less than $3 to a multi-decade high of $6.79 in October. Not surprisingly, prices subsequently paused for consolidation.

As shown on the daily chart, in the months since October, the pause for consolidation has given way to a deeper correction in prices. While it is normal for any upward trend to be interrupted by periodic corrections, the return below $4 is clearly a disappointment. As a result, we cannot rule out a deeper retreat toward $3 in the near-term.

Given the potential for further price weakness in the weeks ahead, we favour minimising the risk of further profit erosion by selling half the position in Dominion Mining.

Dominion Mining has been one of our best performing gold stocks since the inception of the Fat Prophets Mining & Resources Report. The company has remained one of our gold sector favourites because of its operational consistency and reliability. It remains one of Australia's lowest-cost, highest margin gold producers, with a strong balance sheet boasting little debt, lots of cash, and strong exploration upside.

The release of the company's first-half 2007/08 results presents the ideal opportunity to revisit the company.

Dominion reported a $14.0 million interim after-tax profit for the six months to 31 December 2007, which represented a modest 3% fall compared to the $14.4 million profit during the same period a year earlier. The results reflects another solid operational performance at the company's 100%-owned Challenger mine in South Australia.

The results were underpinned by an 11% increase in gold production for the six months to 56,026 ounces, compared to 50,306 ounces a year earlier. Revenue from gold sales increased by 22% over the previous corresponding period to $44.1 million (55,256 ounces sold at an average received price of A$797/ounce), which reflects both increased production and gold price received.

Cash operating costs are still low by Australian standards at A$351 per ounce. Despite the current environment of rising costs in the industry, Dominion has achieved a very healthy cash operating margin of A$446 per ounce over the period.

Operating EBITDA increased by 29% to $22.4 million, compared to $17.3 million a year earlier, and was achieved after exploration costs of $2.6 million, administration costs of $2.0 million and $2.1 million in royalty payments. Depreciation and amortisation charges totalled $5.6 million for the period.

The Challenger mine generated cash flow of $10.7 million after capital expenditure and development which has contributed to an increase in the company's cash and bullion position to $46.8 million. Other than some minor hire purchase commitments, the company remains debt free.

The interim net profit result was achieved despite taking into account a loss on the sale of the company's investment in Deep Yellow Ltd of $2.5 million and a negative mark to market adjustment of the hedge book of $2.9 million.

The solid result has enabled Dominion to declare an interim un-franked dividend of 4 cents per share. The record date for the dividend is the 14 March 2008 and the dividend will be paid on the 31st March 2008.

The Challenger mine continues to deliver outstanding exploration results, with the Company announcing a 23% increase in gold reserves from 512,000 ounces as at 30 June 2007 to 625,940 ounces as at 31 December 2007, after taking into account gold production for the six-month period.

The Challenger mining operation is performing well, although structures associated with a lamprophye on the 660 and 640 levels have required the company to slow high-grade ore production in order to minimise dilution. This will impact production and costs during the current (March) quarter.

The company does not expect this issue to impact on future production at Challenger and underground drilling has continued to demonstrate the continuity of high-grade mineralisation in future mining levels. Production for the year ending 30 June 2008 is still on budget to exceed 100,000 ounces.

As we have previously highlighted, a majority of Australia's gold producers are facing operational challenges of some sort. The rising cost of fuel, supplies and equipment, contractors, labour and capital items, is putting real pressure on the operating margins of most gold miners.

Many emerging gold producers have also experienced difficulties with respect to operational start-up issues and resource confidence: Bendigo Mining, Ballarat Goldfields, Tanami Gold, Gleneagle Gold, Renison Consolidated, BMA Gold and View Resources are unfortunate examples.

Essentially, there have been very few gold operators that have been able to maintain strong operating margins and profitability, despite the strength in the A$ gold price. Those companies that have, like Dominion Mining, have handsomely rewarded their shareholders.

We maintain a positive outlook on the company, but in the circumstances we feel comfortable taking some profits off the table at this point, as we believe near-term upside is somewhat limited.

Accordingly, we recommend that Members Sell half of their current holding in Dominion Mining around $3.80.


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