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
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