RCKS talk

Monday, May 29, 2017 Derek Macpherson

Could AMI's Kemess have a +20-year Mine-Life or Produce >400k AuEq per Year?


Download Report

AuRico Metals Inc. (TSX:AMI) released promising results of a preliminary economic assessment (PEA) completed at its Kemess East project (KE), located ~1km east of its Kemess Underground project (KUG) in British Columbia. On a stand-alone basis, the KE PEA depicts an annual production averaging 222k oz AuEq/year, over a 12-year mine life with economics similar to the KUG project. Because the PEA is solely for KE, it does not account for what the combined project could be. In our view, the combined project is likely to have a greater than 20-year mine-life or a production profile in excess of 400k oz AuEq per year starting in year 3. While it is early days and many combinations are possible, we believe this PEA highlights the strategic and option value of Kemess. However, we also believe, the market continues to ascribe Kemess a negligible value providing investors an opportunity.


PEA suggests either a much longer mine-life or doubling the production profile for KUG. The KE PEA, does not consider how the two 12 year mine-life projects fit together. In a case, where the KUG (207k AuEq oz/year – Figure 1) and KE (222k oz AuEq/year – Figure 2) are developed sequentially, the overall mine-life at Kemess would be over 20 years, approaching 25. In the case the projects are developed concurrently, with a mill expansion, we would expect average annual production to be above 400k oz AuEq per year starting in year 3 for the combined project. We highlight that any combination of scenario’s is possible, including a deferred expansion. We note that it is early days, and there are a number of details to be worked out for a combined operating scenario, including tailings management; however, this PEA highlights the strategic scale and optionality that Kemess has.



Positive PEA results make for a busy year to come. As noted, the KE PEA suggests a 12 year mine-life with average annual production of 222k oz AuEq per year. AISC are US$744/oz Au or US$1.79/lb Cu on a co-product basis with pre-production capital costs (including 15%-30% contingency) estimated to be US$245 million (C$327 million), returning an after-tax NPV (5%) of C$375 million and an IRR of 16.7%. In 2018, the company plans to release a combined feasibility study for KUG and KE, which will also include results from an upcoming drill program (Q3 2017), metallurgical work (2018) and a resource update (early 2018) from KE.

We continue to believe that the market significantly undervalues Kemess. Using AuRico’s guidance the company trades at ~15.5-17.5x royalty EBITDA, versus peers at 16.6x (2017e EBITDA). This implies the market is ascribing Kemess negligible value, which in our view should be worth ~C$100-125 million as compared to stand alone development stage peers. We note that this estimate only accounts for KUG. We expect the upcoming drill program and resource estimate from KE to be important catalysts for the company as it looks to develop the projects. In addition, the anticipated combined feasibility study should highlight the value of the property.


Derek Macpherson | VP Mining Analysis
Victoria Ellis Hayes | Associate
 
Red Cloud Klondike Strike Inc.
105 King Street East, 2nd Floor
Toronto ON, M5C 1G6

Priced as of prior trading day's market close, EST (unless otherwise noted).
All values in USD unless otherwise noted.

Disclaimer
Red Cloud Klondike Strike Inc. is registered as an Exempt Market Dealer in British Columbia, Alberta, Saskatchewan, Manitoba, Ontario, Quebec, New Brunswick, Nova Scotia, Prince Edward Island, Newfoundland & Labrador, and the Yukon. Part of Red Cloud Klondike Strike Inc.'s business is to connect mining companies with suitable investors that qualify under available regulatory exemptions (the "Red Cloud KS Business"). Red Cloud Klondike Strike Inc., its affiliates and associates, and their respective officers, directors, representatives, researchers and members of their families (collectively, "Red Cloud KS") may hold positions in the companies mentioned in this publication and may buy or sell, or buy and sell their securities or securities of the same class on the market or otherwise. Additionally, Red Cloud KS may have provided in the past, and may provide in the future, certain advisory or corporate finance services and receive financial and other incentives from issuers as consideration for the provision of such services.
Red Cloud KS has prepared this publication for general information purposes only, NOT as part of the Red Cloud KS Business. This document should not be considered a solicitation to purchase or sell securities or a recommendation to buy or sell securities. The information provided by Red Cloud KS for the purposes of this publication has been derived from sources believed to be accurate, but cannot be guaranteed. Opinions or analysis contained in this publication may be subject to change and Red Cloud KS does not undertake to advise the reader of such changes. This publication does NOT take into account the particular investment objectives, financial situations, or needs of individual recipients and other issues (e.g. prohibitions to investments due to law, jurisdiction issues, etc.) which may exist for certain persons. Recipients should rely on their own investigations and take their own professional advice before investment. Red Cloud KS will not treat recipients of this publication as customers or clients by virtue of having viewed this report.

Company Specific Disclosure Details
AuRico Metals Inc. - TSX:AMI - 1, 2

1) A member of Red Cloud KS team has visited/viewed material operations of the issuer.
2) In the last 12 months, Red Cloud KS has been retained under a service or advisory agreement by the subject issuer.
3) In the last 12 months, Red Cloud KS has received compensation for investment banking services.
4) Red Cloud KS or a member of the Red Cloud KS team or household, has a long position in the shares and/or the options of the subject issuer.
5) Red Cloud KS or a member of the Red Cloud KS team or household, has a short position in the shares and/or the options of the subject issuer.
6) Red Cloud KS or a member of the Red Cloud KS team own more than 1% of any class of common equity of the subject issuer.
7) A member of Red Cloud KS team or a member’s household serves as a Director or Officer or Advisory Board Member of the subject issuer.





 

SUBSCRIBE TO HEAR FROM US

Gain access to exclusive mining industry research reports as well as additional mining industry information, promotional materials, press releases and news.

RCKS Talk Daily Analysis
RCKS News
LATEST POST
CATEGORIES
RELATED TAGS
ARCHIVES

 

RISK WARNING:

Red Cloud Klondike Strike Inc. is registered as an Exempt Market Dealer (EMD) in British Columbia, Alberta, Saskatchewan, Manitoba, Ontario, Quebec, New Brunswick, Nova Scotia, Prince Edward Island, Newfoundland & Labrador, and Yukon.

 

By accessing this website you agree to be bound by our Terms of Use and Privacy Policy.

 

Red Cloud Klondike Strike Inc. connects mining companies with suitable investors that qualify under available regulatory exemptions. For example, in Canada, according to National Instrument 45-106, Prospectus and Registration Exemptions. Similar laws and regulations apply in other jurisdictions. Companies presented on this website are considered to be highly speculative and, as such, are suitable only for purchasers who can tolerate the highest level of risk including the loss of their entire investment.

© Copyright 2017 Red Cloud Klondike Strike Inc. All rights reserved.