The price of gold has been under pressure since the beginning of May. The investor who is convinced that the price will go up sooner rather than later will consider the present as a good entry point. Consider the case of exploration company Marathon Gold.
Marathon (MOZ, in Toronto, $0.81) is a Toronto-based exploration company currently building the Valentine gold mine in central Newfoundland. Exploration work is also continuing within a 30 km radius of the future mine.
According to the feasibility study updated in December 2022, the mine would have an annual production of 179,000 ounces at an all-in cost of US$1,046 per ounce. The average grade is estimated at 1.62 g per tonne, an interesting grade for an open pit mine. The mine life spans 14.3 years. The first casting is scheduled for the first quarter of 2025.
Mineral reserves are estimated at 2.7 million ounces and mineral resources at 3.96 million ounces. Additional inferred mineral resources amount to 1.1 million. The mineral reserves are the quantities of the deposit considered economically exploitable at the present time.
Appreciable value
According to the same December study, Valentine has an after-tax net present value (NPV) of 648 million at an average price of US$1,700 per ounce and a discount rate of 5%. The metal sells for around US$1915 these days. The payback period for the investment is estimated at 2.8 years. The project’s internal rate of return is 22%.
According to François Riverin, a journalist specializing in mining, now retired, there is material to like in Valentine. The annual production will generate annual revenues over 300 million US and net cash funds (free cash flow) of 121 million per year. The 14-year mine life serves as a cushion in the event of possible bad years caused by a momentarily depressed price of the precious metal or even by occasional operational problems.
In contrast, the stripping rate is high at 10 to 1, he finds. Which means that you have to take out 10 tons of waste rock to come across a ton of ore. A high rate increases the risk related to the operation, underlines Mr. Riverin.
For his part, Fred Hickey, author of the financial letter The High-Tech Strategistfocuses on the current stock price of Marathon, which is selling at a discount to its NPV, approximately $0.30 in the dollar, according to Desjardins Securities (VMD) calculations released June 19 .
Marathon’s Valentine project is viable at this point and looks very cheap.
Fred Hickey, in his financial letter last May
In the case of Marathon, the market is currently paying for its reserves and resources less than 50% of what it paid earlier in the year when B2Gold acquired junior Sabina for $1.1 billion, which has a profile similar to that of Marathon.
Over the past 12 months, Marathon’s stock has fluctuated between $0.69 and $2.18.
Mr. Hickey, who attended a presentation by President and CEO Matt Manson (ex-Stornoway) at the European Gold Forum last April, points out that the construction of the Newfoundland mine is going well and that she stays on budget. At the same time, the financing has practically been found in its entirety, which limits the risk of dilution of shareholders’ equity.
The investment required to build the mine is 467 million. By the end of the first quarter, 64 million had been spent. As of that date, the project was 27% complete and construction 9% complete, on schedule and on budget.
Financing for the mine consists of a loan of 225 million and cash on hand of 130 million. The balance is financed by a new royalty granted to Franco-Nevada of 1.5% of future revenues in exchange for 45 million US or nearly 60 million Canadian. Franco already held an initial royalty of 1.5%. Franco also buys 6.5 million shares of Marathon at a price of $1.0488.
Operating difficulties
Building and then operating a mine is a daunting task. Bad surprises are legion. During his tenure as head of diamond company Stornoway, Matt Manson delivered the mine on time and on budget. Difficulties arose at the operational stage. Marathon is not immune to such disappointment.
An example: the forest road leading to the Valentine project proved impassable for six weeks during the spring thaw, forcing the operator to have its employees travel by helicopter.
What’s more, analyst John Sclodnick of Desjardins Securities predicts that completing the mine will require an additional investment of 40 million, which would bring the total investment to 507 million rather than 467 million. VMD anticipates an issue of shares worth 70 million to come, without taking any new shares from Franco.
At the same issue price as the most recent shares acquired by Franco-Nevada, ie $1.0488, the issue would add 60.16 million shares to the capital, which would increase to 462.46 million shares issued.
Marathon’s NAV per share would then settle at $1.38, for a potential return of more than 65% compared to the price of the last few days. At a gold price of US$1800, the NPV per share would increase to $1.67. Moreover, 7 analysts following the stock have a target price varying between $1.50 and $1.75. Only VMD ($2.25 per share) and Canaccord ($3.50) have a higher target price.
A more conservative scenario that calculates NPV per share taking as the denominator total shares plus warrants and options issued would arrive at a NPV per share of $1.10 at a gold price of 1700 US$, an increase of 36% compared to the recent price of Marathon.
Is the game worth the candle? It is up to the investor to make the decision based on their investment objectives and risk tolerance. It is always best to consult your financial advisor before investing.