Novo Resources Corp

Sorting Results Continue to be Positive

Impact: Mildly Positive

Novo continues to demonstrate the viability of its ore sorting technology which, has the potential of lower processing costs at its Karratha gold project. With much of Novo’s current value underpinned by its Beatons Creek resource, we believe the market undervalues the company’s Karratha, Egina and wider Pilbara projects. 

  • Grades continue to fall within the typical range for bulk samples. Results from ore sorting returned good grades highlighting up to 2.97g/t Au and an overall weighted average grade of 1.76g/t Au. These results are slightly below the weighted average head-grade of previous samples (2.4 g/t Au) but above the minimum grades that we estimated from preliminary results. Moving forward, Novo will aim to improve Au recovery via ore sorting in the sorting process by optimizing crush size.
  • Improving potential economics. While crush size still needs to be optimized, preliminary indications are the ore sorting may work to concentrate the material mined, prior to processing which would reduce costs. It appears that both oversized and undersized unsorted material, would need to be processed in the same way as sorted material. However, we would still expect this in a material costs saving, depending on how well crush size can be controlled. 
  • Plenty of news still expected in 2019. We expect further news to come this year from Karratha as the company refines its ore sorting parameters and gets ready for even larger bulk sampling. The company is also completing 58 2t+ bulk sample at its Beatons Creek project which we expect to be complete in February. Together with recent drill data, we expect a resource update from Beatons Creek beyond the current 4.6 Mt at 2.3 g/t Au (345 koz) in Q1/19.
As Novo continues to prove out its technology and grow its resource base, we expect positive upward momentum. Our preliminary DCF valuation for Beatons Creek alone underpins an estimated value of C$1.10-1.40/sh and a combined value of C$2.40-4.80/sh for Karratha and Beatons Creek. A valuation gap is evident as Novo currently trades at C$2.75/sh and we believe steady newsflow from all projects should drive the stock towards the top-end of our valuation range. Upcoming catalysts include, 1) Filing of the mineralization report for Karratha (Q1/19) 2) Bulk sampling at Karratha (H2/19), 3) Systematic bulk sampling work at Egina (Q1/19) and 4) Beatons Creek resource update (Q1/19).



SolGold Plc

SolGold Targets 100% Interest in Cascabel

Impact: Mildly Positive

SolGold has announced its intention to make an offer to acquire all the outstanding common shares of Cornerstone Capital Resources (TSXV:CGP), the 15% owner of SolGold’s flagship Cascabel Project. We view this all-share transaction as a sensible and logical step forward, as consolidated ownership puts the shareholders of both companies in the best position to optimize the value of the world-class Alpala Deposit as would be suitors come calling.

  • Offer looks attractive; when you investigate the details. SolGold intends to offer 0.55 SolGold shares for every Cornerstone share, representing an 18% premium to yesterday’s close and valuing Cornerstone at ~US$170M. While at first this may appear to undervalue Cornerstone, the details suggest otherwise. Cornerstone’s passive 15% interest is debt-carried, such that the anticipated US$200M in expenditures prior to the completion of a feasibility study is repaid out of project cash flows. Post feasibility, we estimate Cornerstone would need to pay ~US$500M prior to first cash flow, which could be highly dilutive. If Cornerstone elects not to fund its pro-rata share it would eventually dilute to a 0.5% NSR, which SolGold can fully acquire for US$3.5M. We highlight that Cornerstone’s shareholders would also be getting exposure to SolGold’s exploration projects, which we value at US$150M. 
  • Smart strategic move for SolGold. Should the transaction go through as outlined, our NAVPS estimate would increase by ~15%, particularly since SolGold would be purchasing 170M (~9%) of its own shares with the acquisition of Cornerstone. Additionally, the acquisition of Cornerstone eliminates the ability of would be suitors to get a stake in the project via Cornerstone, all would have to come through SolGold, likely increasing competitive tension, resulting in a higher price for the shareholders of the combined company.
  • First steps of what is expected to be a complex process. With two potential outside bidders with demonstrated interest in the project restricted (BHP until Oct-2020 and Newcrest until Oct-2019) and Cornerstone indicating that 50% of its share holders are not interested, it is likely to take several months for a transaction to be completed, if at all.
Estimates unchanged, but SolGold is still cheap. SolGold trades at 0.42x NAV, a discount to peers at 0.50x. Given the world class nature of the Alpala deposit and the interest from majors, we believe a 0.90x NAV multiple applied to our C$1.47 NAVPS estimate would be appropriate implying a value of C$1.32/share. Upcoming catalysts: 1) Ongoing exploration and 2) Maiden PEA for Alpala (Q1/19).



GoviEx Uranium Inc

Going Solar & Improving Economics

Impact: Neutral

GoviEx announced a memorandum of understanding (MOU) with Windiga Energy to evaluate the feasibility of developing a solar-diesel energy power plant to supply the Madaouela project with low-cost renewable energy. While this is likely to only have an incremental impact on project economics, GoviEx remains one of the few late-stage development uranium companies positioned to start production in the next uranium up-cycle.

  • MOU potentially provides a low-cost green energy option. The recently signed MOU to study the feasibility of a 20MW hybrid solar-diesel power plant at the company’s Madaouela project that would offer an environmentally sound and lower-cost power to supply for this project. Upon the completion of a feasibility study by Windiga, the two companies will discuss a potential 21-year power purchase agreement with optional renewal by GoviEx. 
  • Incremental improvement to operating costs expected. The collaboration could incrementally improve operating costs by supplying power that is roughly 25% less expensive than its coal fire alternative. Power costs currently represent 4% of the expected operating costs of US$24.49/lb U3O8, suggesting the improvement would be minor. The company acquired its extraction rights for the Madaouela project 2016 and with 60.54 Mlbs of U3O8 of probable mineral reserves, we expect this it to transition quickly from development in to production once the uranium price should the long-term uranium price makes sustained move above US$60/lb U3O8. 
  • Leverage to an improving uranium price environment. We believe GoviEx
    has strong leverage to the uranium price and is well positioned to transitioning into production during the next uranium price up-cycle. In our view, we believe the uranium price has bottomed, but a significant move-up is dependent on utilities starting to sign new long-term supply agreements.  
GoviEx currently trades at a substantial discount to peers, that is unwarranted given its short path to production in the next cycle. GoviEx trades at US$0.19/lb U3O 8Eq relative to peer developers at US$0.81/lb U3 O8Eq. In our view, GoviEx has meaningful leverage to rising uranium price, and we believe the stock is likely to outperform during the coming up-cycle. As well, during the next up-cycle we believe GoviEx is well positioned to become a significant African producer with its permitted Madaouela project in Niger and other African projects.



Atico Mining Corp

Guidance Suggests More than the Market Cap Implies

Impact: Positive

Atico reported production results for Q4/18 setting records for both the quarter and the full-year 2018. We expect the steady ramp-up at El Roble to continue with 2019 guidance suggesting the company is poised to have another record year. We view Atico as an undervalued low-cost copper-gold producer, with significant exploration upside that we expect to generate significant free cash flow in 2019.
  • Record Q4, the result of a progressive ramp-up. The company produced 5.81 Mlbs Cu and 2.913 koz Au. Copper production was up 8% QoQ, and 9% YoY, while gold production was down 3% QoQ, and 2% YoY (Figure 1). The company’s continuous operating improvements have lead to a strengthened balance sheet allowing the for aggressively exploration of its very prospective land package in 2019 (Figure 2).
  • 2019 guidance points to the potential for another record year. With throughput steadily improving, the company finished 2018 strong. While corporate guidance suggests production is likely to be roughly flat in 2019 (20-21M lbs Cu, 10.-10.7koz Au) as compared to 2018 (21.9M lbs Cu, 11.3koz Au), we expect this historically conservative management team to at the very least hit the top end of guidance and likely beat.
  • 2019 guidance suggests the company is going to out perform its current valuation. Based on 2019 guidance, our preliminary estimates suggest the company should generate US$12-15M in EBITDA and US$4-5M in free cash flow at current copper prices. This is substantial when you consider the company’s current market cap (C$33.5M) and enterprise value (C$34.3M).
Atico currently trades at a steep discount to peers. Based on our preliminary estimates, Atico trades 1.7x-2.1x EBITDA or at an 12-15% FCF yield. When you consider that other base metal producers trade at 6.3x EBTIDA, Atico appears to be severely discounted. In addition, we believe this property has significant exploration upside and the company’s solid balance sheet (US$4.4M in cash and growing) has it well position to test the numerous targets that have developed over the years. Upcoming Catalysts include 1) Exploration update (Q1/19), 2) 2018 Financial results (April 2019) and 3) Q1 Operating results (Q2/19).

Standard Lithium Ltd

Adding Tonnes in Arkansas

Impact: Mildly Positive

With the announcement of a second maiden resource at its South-West Arkansas Project, Standard Lithium now has a sizeable aggregated resource providing a future growth opportunity while driving its flagship South-Central Arkansas Project towards production. With the added tonnes from the second maiden resource the company trades at a further discount to peers despite being a low-risk lithium developer in North America.

    • Better grades at the South-West Arkansas Project. Using a combination of historical results, and pump tests on existing wells, Standard Lithium has assembled an inferred maiden resource of 802kt of LCE at an average concentration of 199 mg/L Li. We highlight this project represents future growth for the company, as it is focused on its South-Central Arkansas Project. This update increases the company’s total resource tonnage and grade across to 3.88Mt of LCE at a weighted average concentration of 172 mg/L.
    • Approaching production South-Central Arkansas Project. We expect important near-term progress to come from the company’s flagship South-Central Arkansas Project where a potential JV with Lanxess should allow the company to implement its lithium extraction and crystallization technology on Lanxess’ existing bromine operations. Standard Lithium is mobilized to begin construction of its crystallization Pilot Plant on the property by late Q1/19 which following commissioning and testing, should be fully permitted and ready for production.
    • Strong share performance since the beginning of year expected to continue with coming updates. We expect coming updates from the company to continue creating positive momentum for the stock. This includes commissioning of the pilot plant in Q2/19 and a PEA on the South-Central Arkansas Project in H1/19, demonstrating what we think could be very robust economics.
Discounted valuation does not reflect Standard Lithiums lower risk path to production. Standard Lithium trades at US$16/t LCE a steep discount to peers at US$38/t  LCE. In our view, this discount is unwarranted, since the company has virtually no permitting risk, significant existing infrastructure, and a large partner ready to fund the project to production. Upcoming Catalysts include 1) Further results from ongoing test-work (Q1/19), 2) Completion of definitive agreement with LANXESS (H1/19), 3) Pilot plant commissioning (mid-2019) and 4) PEA expected in H1 2019.

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