Limited downside in Deccan Gold: Chugh

Ashish Chugh, investment analyst and author-Hidden Gems is of the view that there is limited downside in Deccan Gold Mines.

Chugh told CNBC-TV18, "Deccan Gold is the only listed company and it is the only first private sector company involved in gold exploration, this company has been promoted by Australian investors, who are involved in similar business in Australia. This company has got a large portfolio of exploration blocks, which are located mainly in four states and these blocks are located in the states of Andhra Pradesh, Kerala, Karnataka and Rajasthan. The total area of the block is an excess of 10,000 sq km. This company has got one of the most prospective blocks in the country in gold exploration."

He further added, "As of now the company has got no revenues because of the fact that they have applied for mining license for few blocks, but they are yet to get the approval from the Central Government and State Government for mining these blocks. The management expects to get the approvals and start producing in the third quarter or fourth quarter of FY10. They expect to do about 4 tonnes of gold every year and 4 tonnes of gold, if multiplied with the gold price of Rs10, 000 per 10 grams this translates into the revenue of Rs 400 crore. If we try to be conservative and say that they are able to do only 50% of what they are talking about, this would translate into Rs 200 crore revenues."

"Gold exploration it is a high margin business, something like oil exploration, where initial expenses may be high but the margins can be pretty good once they are able to start mining gold. So at a marketcap of Rs 80 crore, I think the downside from these levels looks to be very less. Even though I would recommend that the current price is about Rs 14-15, investors can choose to make a staggered purchase, which could be spread over the next 3-6 months at the price of between Rs 10-15."

"In the case of the unusual movement in the stock like the one we saw last year, when the stock went up from Rs 15 to Rs 150. Risk management is very important because this is a high risk stock, high risk because the uncertainty, which is attached with the kind of business it is involved in. But at the same time the returns in case every thing goes well for the company can also be very good."

Disclosure: Analyst has investment in Deccan Gold Mine and VBC Ferro Alloy.

Source: Moneycontrol