Dundee Precious Metals: Is There More Upside?

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source: http://www.flickr.com/photos/ahorcado/

Source: http://www.flickr.com/photos/ahorcado/

Last Friday, shares of Dundee Precious Metals (MKTS:DPMLF.PK) soared more than 13 percent after reporting its fourth-quarter and 2013 earnings figures. The bottom line number was in-line with analyst expectations. The company earned $19.2 million in the fourth-quarter and $22.5 million for the full-year.

The reason for the sharp price increase was likely the fact that the company didn’t disappoint. The company had reported that it was anticipating weak production figures coming out of its Kapan poly-metalic mine in Armenia. The Kapan mine saw a decrease in the amount of ore mined from 138,000 tonnes to just 96,000 tonnes, and this resulted in a decline in the amount of gold sold from 7,000 ounces to 5,500 ounces.

While this is seemingly not a large decline for a company that produces over 100,000 ounces of gold on an annual basis (thanks to production at its Chelopech mine in Bulgaria) the result was that production costs soared for the quarter. Cash-costs at Kapan net of copper, silver, and zinc by-products ran up to $1,255/ounce of gold produced compared to just $778/ounce a year earlier. This means that the mine could barely turn an operating profit in the fourth-quarter, and given other expenses such as exploration and SG&A, the mine probably lost money.

Nevertheless, the quarter showed a lot of promising signs. First, the weakness we saw at Kapan means that there is substantial room for improvement. Not only can the company process more ore, but it can mine higher grade ore. The ore mined at Kapan in the fourth-quarter contained 2 grams of gold per tonne. Meanwhile, the resource has an average of 2.4 grams of gold per tonne. This suggests that the mine can be up to 20 percent more efficient, excluding whatever the company does on an operational basis.

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