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Tuesday, August 30, 2016 Derek Macpherson

AMI Site Visit: Kemess Worth More than Valuation Suggests


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Last week we visited AuRico Metals Inc.’s (TSX:AMI) Kemess project in Northern British Columbia and were impressed by the existing infrastructure and the management team's technical expertise. In our opinion, once management completes the project’s environmental assessments (expected early 2017) it should be positioned to unlock the value of Kemess. In our view the market appears to ascribe Kemess zero value, providing investors an opportunity for a viability re-rating as management de-risks this project.


Management has block-cave experience. Underground block-cave mines are somewhat rare in North America and consequently reduced understanding by the investment community. However, John Fitzgerald, AuRico’s COO, has built and operated block-cave mines previously, providing the company exceptional expertise. In our view, this positions AuRico to credibly build Kemess if the financing is available and provides a potential acquirer comfort with respect to project economics.

Existing infrastructure is in good condition and appears ready to re-start. One of the key value drivers of Kemess, is the existing infrastructure, including the 25,000 tpd mill (Figure 1), the 380km power line, the 400km road to site, the Kemess South pit which is planned to be used as a tailings facility (Figure 2) along with the existing camp, administration buildings, workshop and warehouse. In particular, we were impressed with the mill condition which has remained heated and energized (mills turned regularly) since shutting down in 2011. It is worth noting that without this infrastructure the Kemess Underground project would not be viable.

AMI - Kemess Mill
Kemess South Pit
Permitting key to unlocking Kemess’s value. Previous versions of this next stage of development for Kemess, envisioned a large open-pit, that would have seen waste rock and tailings dumped into a natural lake. This version did not make it out of the environmental assessment stage, and after visiting the site, we understand why. However, the planned block-cave which utilizes the Kemess South pit for tailings and waste rock storage is expected to be lower impact, and appears permitable. As well, the company is working with the local First Nations to finalize an impact benefits agreement. We expect the company to complete its Environmental Assessment in early 2017, which should allow it to unlock the value of this asset.

Exploration upside exists. The current feasibility study excludes approximately half of the known resource because of tailings capacity. As well, the company’s recent drilling success suggests Kemess East (Figure 3) could further extend the mine-life or provide a higher-grade sweetener earlier in the planned mine-life. While there are longer-term tailings options, neither of these additions are likely to be a game changer for current project economics (already a 12 year mine-life); however, it does provide for a future expansion option and provides upside to potential acquirers.

AMI - Kemess East
Current valuation suggests Kemess has no value; our site visit suggests otherwise. Taking into account the end of Q2 cash balance and the company’s recent financing AuRico’s Enterprise Value (EV) is sitting at ~C$124 million, which implies an EV/EBITDA for royalties only (excludes Kemess costs) of ~23.0x. This is roughly in-line with royalty peers at 21.9x and implies that the Kemess Underground project has no value. While projects IRR (15.4% base case) is impacted by the long timeline to production; the projects long-life (12 years), +200k oz AuEq LOM average annual production and first quartile cash costs (US$718/oz AuEq AISC LOM) make it a high-potential asset. Similar stage development peer’s trade at 0.84x NAV or C$63/oz which suggests Kemess could easily be ascribed a value above C$150 million. In our view, once permits are in-hand AuRico should be positioned to unlock this value, providing investors the potential for meaningful medium-term upside through a viability re-rating as discussed in our 3 THEMES & 10 COMPANIES FOR A NEW BULL MARKET IN PRECIOUS METALS post earlier this year.

Company description: AuRico Metals Inc.’s (TSX:AMI) is the unique combination of a precious metals royalty company and a late-stage development company. AuRico has five producing royalties in stable jurisdictions and 100% ownership the advanced Kemess Gold-Copper Project in British Columbia, Canada.


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