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Friday, September 01, 2017 Derek Macpherson

ANX Site Visits: A Stable Base with Significant Growth Potential


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This week we visited Anaconda Mining Inc.’s (TSX:ANX) Goldboro (Nova Scotia) and Point Rousse (Newfoundland) projects. Overall, we were impressed and believe the current valuation ascribed by the market does not adequately reflect both projects as they currently sit or the upside potential that they have. At Goldboro, we believe the current resource (830k oz at 4.95 g/t Au) has room to grow and does not properly account for the starter-pit potential that likely exists. We note that the company needs to increase its understanding of the mineralization prior to mining; however, the contemplated bulk sample would certainly help. Point Rousse provides a stable production base, generating enough cash flow to fund small exploration programs. We expect Point Rousse to operate well beyond the existing reserve life with the Stog’er Tight pits coming on later this year, likely to be followed by the recently discovered Argyle deposit. We note that the Point Rousse project hosts many other targets; however, a shortage of time and money has limited the company’s ability to advance them. Based on our site visit, and preliminary estimates, we believe that at its current market cap (C$26.7 million), investors are either paying for Point Rousse (~C$30-50 million based on our preliminary DCF) or Goldboro (C$41.5 million based on C$50/oz) suggesting good value at current levels.


Goldboro represents significant medium-term growth potential. The Goldboro deposit is a series of saddles that repeat (Figure 1) along an east-west strike. The current 830k oz at 4.95 g/t Au resource is hosted over a 1.6 km strike length; however, mineralization has been intersected over 3.1 km and remains open. As well, the orebody is open at depth with the resource ending at only 350m. In our view, the resource has room to grow both along strike and depth and certainly has the potential to exceed a million ounces. We also highlight, that the current resource is based on an underground operating scenario; however, the potential exists for a starter-pit and then go underground, which might increase the number of mineable ounces.


Processing scenarios for Goldboro. The company is currently completing a number of trade-off studies on how best to mine and process this deposit. Options range from a stand-alone to whole ore being shipped to Pine Cove (both Pine Cove and Goldboro have access to tidewater – Figure 2), including a range of options in-between and the potential for a combination of the options described. The final outcome is likely to depend on the going development work and exploration success at both Goldboro and Pine Cove. In our view, it is likely to be a combination with ore initially being processed at Pine Cove while a stand-alone processing facility is permitted and built at Goldboro. The company plans on releasing a PEA for Goldboro later this year, which we view as an important catalyst, as it will provide the market clarity on future development scenarios.


For development, going underground is an important next step at Goldboro. Because of past production and bulk sampling, this project benefits from significant existing infrastructure, including a powerline to site and a modern decline (Figure 3) that cross cuts the orebody. Based on the previous challenges seen mining other similar deposits in the area, underground drilling and a bulk sample are going to be important for Anaconda to properly understand the orebody, and eventually be successful when it comes to mining. Gaining underground access is expected to be relatively inexpensive and should provide the company access to complete a bulk sample, along with lower cost underground drilling. This may be a logical next step for the company after the planned PEA.


Stable base at Point Rousse; production and cash flow likely to ramp-up in late F2018 (year-end May 31).
While small (15,562 oz Au in F2017), operations are cash flow positive (Operating CF of C$4.8 million in F2017) and able to fund the company’s current growth activities at Goldboro and Pine Cove, but at a much slower than preferred pace. Our visit suggests that the Pine Cove mine and mill are very well-run operations which is why this small scale mine is financially viable. Anaconda is in the process of transitioning from the Pine Cove pit (last production expected in early 2018), and over to the higher grade Stog’er Tight (Figure 4). We expect this to result in increased gold production (~50%) and cash flow in late F2018 and continuing into F2019. This should provide the company with additional financial flexibility as it works on advancing its development projects.

 
Point Rousse exploration needs time and money; neither of which have been historically plentiful. The greater Point Rousse project is a target rich environment, with a significant number of targets that need further exploration to determine potential. However, over Anaconda’s tenure the company has had neither the time nor money to meaningfully advance the project. With respect to time, Point Rousse has historically had a short mine-life, causing exploration dollars to be focused on developing the next deposit, not advancing prospective targets. As well, the company never really had significant capital to commit to exploration, resulting in exploration money being spent on resource development. While this approach has yielded success (Argyle deposit discovered last year), it has resulted in priority targets being under invested in. As a result, we expect Point Rousse’s mine-life to extend beyond both the Stog’er Tight and Argyle deposits, should sufficient exploration dollars be allocated in a timely manner.
 
Exceptional employee engagement. A key aspect of any site visit for us is the attitude of employees and in the case of Anaconda we were impressed. Site management, down to the hourly workforce were all very engaged and focused on lowering costs and improving operations while fostering a culture of innovation. This innovative spirit has made Anaconda an early adopter of mining/processing technology and resulted in unique cost saving measures like the ongoing gravel project. We believe this is one of the key factors that make the Point Rousse project cash flow positive, despite its small scale.

Current valuation suggests you are paying for Goldboro or Point Rousse, but not both. Based on our site visit, and preliminary estimates, we believe that at its current market cap (C$26.7 million), investors are either paying for Point Rousse (~value of C$30-50 million based on our preliminary DCF) or Goldboro (~ value of C$41.5 million based on C$50/oz) suggesting good value at current levels. In our view, the upcoming PEA for Goldboro, is likely to be an important catalyst for Anaconda as it should allow investors to better understand the potential of this asset. Following that, operations later in F2018 (year-end May 31) should see production and cash flow increase as mining at Point Rousse moves to the higher-grade Stog’er Tight deposit. In our view, both these catalysts have the ability to cause the market to ascribe a fair value to both projects.


Derek Macpherson | VP Mining Analysis
Victoria Ellis Hayes | Associate
 
Red Cloud Klondike Strike Inc.
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