As spot gold advances to near the $2,000/ounce level, we note that m&a activity will likely increase in the gold sector. This on back of solid operating fundamentals leading to robust FCF, as seen recently during the Q4/2021 financial disclosures from large and mid-cap precious metals producers. Still only in Q1 of 2022, the market has already seen two high profile business combinations with Agnico Eagle’s $13.5B merger of equals with Kirkland Lake Gold and then with Kinross Gold’s $1.4B acquisition of Great Bear Resources. Both deals closed last month. We thought it time to scour the junior mining space in search for what we would deem as the next deposit coming into production, or until then, the next attractive acquisition from a reserve and near-term cash flow standpoint. The only criteria we looked for was a company still in the pre-production phase (ideally development or at the later stage of exploration). Resource size and quality was considered, but even more importantly were the actual development and financing plans needed to begin construction and then eventual production. Other factors such as relatively safer mining jurisdictions were considered, with our analysis only including projects located in the Americas or Europe.
Our pool of junior precious metal companies included the following:
Orla Mining (OLA.TO), advancing the Camino Rojo Project in Mexico
Bluestone Resources (BSR.V) advancing the Cerro Blanco Project in Guatemala
Rupert Resources (RUP.V) advancing the Ikkari Gold discovery in Finland
Marathon Gold (MOZ.TO) advancing the Valentine Gold Project in Newfoundland, Canada
Sabina Gold & Silver (SBB.TO) advancing the Back River Gold Project in Nunavut, Canada
Alexco Resources (AXU.TO) advancing the Keno Hill Project in the Yukon Territory, Canada
Osisko Mining (OSK.TO) advancing several projects in Canada
Probe Metals (PRB.V) advancing several projects largely in Quebec, Canada
Marathon Gold stood out from the group with a very advanced Valentine Gold deposit (located in central Newfoundland) totaling 2.05M ounces in the Proven & Probable category (47.1Mt grading 1.36 g/t gold), 3.14M ounces in the Measured & Indicated category (56.7Mt grading 1.74 g/t gold, inclusive of reserves) and 1.64M ounces in the Inferred category (29.59Mt grading 1.72 g/t gold). With a Environmental Assessment well advanced (the second round of review comments have already been received from Newfoundland EAC), permitting is expected to begin in mid 2022, with construction scheduled to commence shortly after. Note that a March 2021 Feasibility Study for the project outlined a 13 year LOM operation, producing approximately 160,000 gold ounces/year (6,800 tpd) at an AISC of $833/ounce. The project would generate an after-tax NPV5% of $600M and an IRR of 31.5%. Capex is rather modest at $229M. Note as well that in July 2021, the company entered into a $185M credit facility (6.5 year tenor). This follows a $50M common share issuance (at C$2.45) in May 2021. As of year end 2021, the company held $87M in treasury.
We have added confidence in the company having known former President and CEO Phil Walford (retired from Marathon Gold in 2019) who was successful in developing Marathon PGM until its takeout by Stillwater in 2010. We see one of two possible outcomes in the two years ahead – either outright takeover by a larger miner or successful construction and transition to profitable miner. With Marathon Gold, we feel that the current fundamentals and FS economics are the most compelling among peers. Given the near term permitting and construction catalysts, the company will in short time become the next independent gold producer. We believe that as gold prices remain at the current levels, the risk is on the upside at this point.