Tuesday, June 21, 2016 Derek Macpherson

3 Themes & 10 Companies for a New Bull Market in Precious Metals

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While we believe that we are in a new bull market for gold equities, it is early days. As such, investors should remain selective and focus on companies that fit three key themes: scarcity, viability and catalysts. In our view AMI, ER, GRR, GQC, IDM, ICG, MLN, NUG, UGD and VIT are ten companies that fit these themes and should outperform peers.

Not all precious metals equities are good investments. Despite our positive outlook for precious metals in general, our experience suggests that not all precious metals companies are good investments. In particular, we are likely at the first part of a new up cycle for precious metal equities and not yet at the point of “irrational exuberance” when both financial and strategic investors may overlook significant project flaws and inflated valuations. Along with quality management and good assets, we believe investors should be focused on companies that fit one or more of the following THREE themes.
Scarcity: The number of quality projects/mines available in top-tier jurisdictions is declining. In the last year M&A activity has seen the likes of Kaminak Gold Corp, Gryphon Minerals Ltd, Lake Shore Gold Corp, Claude Resources Inc, St Andrew Goldfields Ltd, Temex Resources Corp, Niogold Mining Corp, Eagle Hill Exploration Corp, and Adventure Gold Inc (to name a few) have become a smaller part of larger companies. This along with a material decline in exploration spending over the last five years (Figure 1) has created a scarcity of operating mines and development stage projects.


Exploration Spending



Viability: Change in perception can result in a parabolic move. The market appears to categorize companies into two categories: Viable and Not Viable. For viable companies, the market generally ascribes a reasonable valuation reflecting the projects relative potential. Those categorized as non-viable by the market trade at a significant discount. However, not all companies in this latter category deserve to be there, and as they are able to demonstrate viability they can re-rate into the first bucket. Becoming viable in the market’s view can be as simple as a metal price increase above the all-in cost of production or more importantly increased corporate activity (i.e. new drill program, asset acquisition, economic study update) that has the potential to move a company’s projects forward (e.g. Victoria Gold – Figure 2) While many companies have been deemed more viable by the market by the recent run in the gold price there remain a few which have the potential to re-rate.


Victoria Gold (VIT) Chart with Significant Events 



Catalysts: Good news is once again good for stocks. Over the last four years, good news (good drill results, improved project economics, etc.) has not always been good for mining equities. In fact, often stocks would go down, as the increased volume associated with these positive events would provide holders an opportunity to liquidate positions. With the start of a new bull market, we believe that has changed and companies that have the financial and technical ability to add value to their projects and operations, should see share prices benefit from good news as highlighted in Figure 2.
We have identified TEN companies that we believe fit these criteria, we provide a brief description of them and why we think they fit the above themes.
AuRico Metals (TSX:AMI) – Scarcity and Viability
Aurico represents a unique combination of a cash flowing royalty company and late stage development company. The company’s quality gold royalties provide steady cash flow, while the companies Kemess project in British Columbia provides additional optionality. The company trades at steep discount to royalty peers at 0.98x NAV while peers are at 2.04x. This suggests the market ascribes a limited or negative value to Kemess. Based on the most recent feasibility study, Kemess has the potential to produce over 200K ounces of gold equivalent production at All-in Sustaining Costs of US$244/oz over a 12 year mine-life for pre-commercial production capital of C$603M. While the post-tax project IRR of 12.6% is not exceptional, this size of asset (both resource and production), in a premium jurisdiction is rare. We believe that once environmental permits are received and AuRico details a plan for Kemess, the stock should re-rate. The receipt of environmental permits (Q4 2016/Q1 2017) is the key catalyst for Aurico.
Eastmain Resources (TSX:ER) – Upcoming Catalysts and Scarcity
After a management and board overhaul along with recent financings Eastmain is poised to advance all three of its Northern Quebec projects in 2016. Active exploration programs should provide a number of catalysts for the company, along with plans to update the resource estimate and optimize the PEA for the Eau Claire deposit. The Eau Claire deposit is rare, as it has both size and grade with almost 1 million ounces at 3.9 g/t (M&I+I) that could be mined as an open-pit. Eastmain trades at 0.79x NAV or C$60/oz versus similar stage Canadian peers at 0.74x NAV or C$53/oz. Upcoming catalysts that should provide continued momentum for the stock include: 1) Ongoing Exploration results – H2 2016, 2) Updated resource Estimate for Eau Claire – Q1 2017, and 3) Updated PEA for Eau Claire – Q2 2017.
Golden Reign Resources (TSXV:GRR) – Upcoming Catalysts and Scarcity
Golden Reign is advancing its San Albino project in Nicaragua towards production after releasing a robust PEA last year. The project’s very-high open-pit grades are expected to result in exceptionally low AISC of US$464/oz for the life of the project, even after factoring in Marlin Gold’s (TSXV:MLN) gold stream. It is worth noting that the majority of this projects initial capital of US$13.9M is expected to be funded from the stream, leaving only a small portion to be funded by equity. Importantly, the stream only covers a small portion of the overall property, allowing the company to make a new unencumbered discovery from cash flow generated by the mine. We consider the combination of a very economic small scale project, coupled with significant exploration upside to be unique. Golden Reign trades at C$55/oz versus peers at C$49/oz, partially reflecting its mostly funded status. Upcoming catalysts that should benefit the stock include: 1) Ongoing drill results - H2 2016 and 2) Start of mine construction – H2 2016.
Goldquest Mining Corp (TSXV:GQC) – Upcoming Catalysts, Scarcity and Viability
Goldquest provides exposure to a viable development project, Romero, and the potential for a new discovery. Over the course of this year, we expect continued development updates on Romero along with exploration results as the company explores its district-scale land package in the Dominican Republic. Based on consensus estimates Goldquest currently trades at 0.66x NAV or C$27/oz versus peers at 0.96x NAV and C$51/oz. We believe that as the company advances the project, demonstrating its viability, it should re-rate towards peers. As well, Goldquest is the rare combination of a development stage 3.2 million gold-equivalent resource, new discovery potential and a management team that have brought a mine into production in the Dominican Republic before. Upcoming catalysts that should provide continued momentum for the stock include: 1) Prefeasibility study – mid 2016, 2) Exploration results – H2 2016 and 3) Feasibility Study – Q1 2017.
IDM Mining (TSXV:IDM) – Scarcity, Viability and Near-term Catalysts
IDM is earning a 100% interest in the Red Mountain project in British Columbia. We expect the earn-in to be completed later this year. The company’s July 2014 PEA outlined average annual production of 55.5K ounces of gold at US$455/ounce over a five year mine-life for pre-production capital of C$76.1M. However, IDM’s recent resource update and announced project optimizations suggest the project is likely to have a longer life and higher average annual production. An updated PEA is expected near-term which is likely to demonstrate improved viability. This project, which is located in a mining friendly jurisdiction, is near infrastructure (roads, power, etc.), has exploration upside and the potential for near-term development, is certainly the type that strategic investors are looking for. Based on consensus estimates IDM currently trades at 0.46x NAV and C$46/oz a discount when compared to peers at 0.74x NAV and C$56/oz. IDM has near-term catalysts that may provide continued momentum for the stock including: 1) Updated PEA – Q2 2016 (key catalyst), 2) Infill and Step-out Drilling – Q3 2016, 3) Publish Feasibility Study – Q1 2017 and 4) Environmental Permits – mid-2017.
Integra Gold (TSXV:ICG) – Scarcity
Integra continues to advance its high-grade Lamaque project in Quebec. The company is funded to start underground exploration at the Triangle zone this summer. As well, following a recent financing the company continues to have one of the largest ongoing surface exploration programs in North America. A high-grade underground project, at this stage of development, with exploration upside is rare. Integra currently trades at 1.05x NAV or C$129/oz versus similar stage Canadian peers at 0.68x NAV or C$40/oz. This elevated valuation partially reflects the scarcity of Lamaque, its stage of development and production potential beyond the most recent PEA and its attractiveness as a target to mid-tier or nearby major gold producer. Integra has a number of near-term catalysts that may also support the stock: 1) Ongoing surface exploration at Triangle and other targets, 2) Initial underground exploration results – H2 2016, 3) Initial Lamaque deep exploration results – Q1 2017, and 4) Updated PEA – H2 2016
Marlin Gold (TSXV:MLN) – Upcoming Catalysts, Viability and Scarcity
Marlin owns the producing La Trinidad mine in Sinaloa, Mexico. Operations were uneconomic during the first few years; however, with the support of its significant shareholder, Wexford, La Trinidad is entering a period of exceptional free cash flow, as grades improve and the strip ratio declines. This increased cash flow may allow the company to fund both the development of its Commonwealth project in Arizona and its stream on Golden Reign’s San Albino project in Nicaragua. While the company's projects are not that unique, the scarcity comes from the fact that Marlin has a deep-pocketed backer, Wexford, that has demonstrated a willingness to support the company and could fund the next stage of growth. As well, the company has a small scale normal course issuer bid underway, which we expect to provide support for this illiquid stock. With operations expected to significantly improve, the key catalyst to demonstrate viability is likely to be when results are reported. Upcoming catalysts include: 1) Q2 operating and financial results – Q3 2016 (key catalyst), 2) Q3 operating and financial results – Q4 2016, 3) Ongoing development of the Commonwealth project.
Nulegacy Gold Corp. (TSXV:NUG) – Upcoming Catalysts, Viability and Scarcity
Nulegacy recently acquired 100% of the Iceberg Gold Deposit in Nevada. Following a strategic investment by OceanaGold Corp (TSX:OGC), Nulegacy is positioned to materially advance Iceberg in 2016. NuLegacy’s Iceberg project is located in the Cortez trend, adjacent to Barrick Gold’s (TSX:ABX, NYSE:ABX) Goldrush project. It is rare for a junior to acquire such an attractive land package in such a prolific gold trend. Despite completing an impressive deal with Barrick to acquire 100% of Iceberg, while adding them as a shareholder and adding another strategic investor the company continues to fly under the radar of many investors, particularly when considering Iceberg’s potential. We believe that as the company releases exploration results from its 10,000m program and completes a maiden resource on the project later this year it should re-rate. Upcoming catalysts that should provide continued momentum for the stock include: 1) Ongoing exploration results –2016 and 2) Maiden resource – H2 2016.
Unigold Inc (TSXV:UGD) – Upcoming Catalysts and Viability
Unigold is exploring its Neita project, in the Dominican Republic. The company has already defined a deposit of just over two million ounces at 1.59 g/t gold. However, following some geologic reinterpretation, Unigold is working to define the higher-grade core of its Candelones deposit, which is likely amenable to a smaller scale, less capital intense mining operation which could make the project more viable in the current market. Following its recent financing, the company is positioned to continue drilling which should provide positive momentum and close the valuation gap to peers, which trade at C$54/oz versus Unigold at C$8/oz, by demonstrating the higher grade potential of the Candelones deposit. Ongoing exploration results are likely to be a key driver of Unigold’s share price.
Victoria Gold Corp. (TSXV:VIT) – Upcoming Catalysts and Scarcity
As demonstrated above in Figure 2, Victoria has already gone through its viability re-rating. However, the company’s fully permitted, feasibility stage Eagle Gold project in Yukon, which has the potential to produce more than 150,000 ounces per year for 10 years, for initial capex of C$400M at cash costs of US$615/oz should be considered very scarce and an attractive target for mid-tier and major producers looking for a ready to build project. The company plans to update its feasibility study later this year, and recent drilling success at the Olive-Shamrock zone, suggests economics should improve with the inclusion of this zone along with updated operating costs, capital cost and metal price assumptions. Victoria currently trades at 0.91x NAV or C$33/oz versus similar stage Canadian peers at 0.71x NAV or C$58/oz, partially reflecting improved project economics. Upcoming catalysts include: 1) Ongoing exploration results from Olive-Shamrock – H2 2016 and 2) Updated Feasibility Study – H2 2016.



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