De Grey taps market for $150m at $1 a share

Having rallied during gold’s six-day winning streak (US$1,628), gold producer De Grey Mining’s (ASX: DEG) announced capital raising is likely to be more positively received than had it done so in September when the ASX200 was down -7.3% for the month.

A week is a long time on the share market, and since then the ASX 200 has rallied 5.5% in the last two sessions to an almost three week high.

The details

To advance exploration initiatives, project studies, project funding and pre-development activities, De Grey plans to raise $150m at $1 a share, which represents a lean 8.3% discount to the last traded price and a 3% discount to 5-day volume weighted average price.

The capital raise is being divided between a fully underwritten institutional placement to raise $130m and a non-underwritten share purchase plan (SPP) aiming to raise $20m.

Will it add value?

Recent history suggests capital raisings can and do leave shareholders seriously out of the money, over both the short and longer term and gold stocks are no exception.

As a case in point, in August 2021 Evolution Mining (ASX: EVN) raised $400m to acquire Kundana Gold in WA’s Kalgoorlie region plus numerous associated projects from fellow gold miner Northern Star (ASX: NST).

In fairness, absorbing these sorts of deals takes time, but they do beg a lot of shareholder patience. While Evolution's institutional placement was done at $3.85, the gold miner is currently trading at $2.10.

Meantime, it will be interesting to see whether De Grey’s newest large shareholder, Gold Road Resources (ASX: GOR), which acquired a 19.99% stake in recent months, wants to acquire more stock.

Assuming Gold Road wants to maintain its current stake in De Grey it would need to stump up with an additional $25m.

Expansion

Given De Grey’s market cap of $1.5bn, which makes it an ASX 300 company, the gold miner's plans to raise $150m aren’t a showstopper.

As a non-dividend payer, shareholders should also note that Labor government plans to take a blowtorch to franking credits will not effect the company, at least not right now.

Meantime, De Grey’s management believes equity raisings allow the company to advance expansive exploration initiatives to grow the resource endowment at the company’s Hemi resource within its Mallina gold project in WA.

The broader 10.6Moz Mallina gold project is expected to produce 540,000ozpa in its first decade of life, 550,000ozpa in its first five years and peak production of 637,000oz in its fifth year of operation.

DFS completion

Funds raised will also ensure the company is fully funded to complete its Definitive Feasibility Study in respect of Hemi (currently scheduled for Q2 2023) and take the company through to a final investment decision.

“Furthermore, the equity raising funds will provide De Grey with significant balance sheet strength and flexibility during the company’s project financing phase,” the company noted.

What brokers think

De Grey’s share price has gone nowhere in the last 12 months, up 2.8% but is up from $0.93 26 September to $1.09.

Consensus on De Grey is Strong buy.

Based on Morningstar’s fair value of $1.60 the stock appears to be undervalued.

Based on the two brokers that cover De Grey (as reported on by FN Arena) the stock is currently trading with 30.7% upside to the target price of $1.42.

UBS is positive on the gold sector following recent underperformance and has a Buy rating on De Grey Mining with a price target of $1.20.

Macquarie notes the pre-feasibility study for De Grey’s Mallina project is a material uplift from the scoping study, with total gold production of 6.4m ounces up 49% from previous estimates.

The broker retains an Outperform rating while the target price increases to $1.65 from $1.60.

De Grey Mining share price over 12 months.