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Monday, February 20, 2017 Derek Macpherson

Dominican Republic Creates Uncertainty for UGD


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Unigold Inc. (TSXV:UGD) provided an update that suggests there is uncertainty around its ability to renew its Neita exploration concession when the current one expires on March 7, 2017. While this is likely to negatively impact the stock, we highlight that no official decision has been made, as the letter received from the Dominican government was from the General Mines Director, not the Minister of Mines and Energy who makes the final decision with respect to granting the concession. A decision to not re-grant the exploration concession would differ from historical precedent, as other companies operating in the Dominican typically have been re-granted their concessions in similar circumstances. In our view, the most likely outcome is that Unigold is re-granted the exploration concession; however, until there is new information from the government this outcome has elevated risk. As well, this news, at least temporarily, elevates the political risk for the Dominican Republic as a mining jurisdiction and we expect other explorers and developers’ share prices to be negatively impacted by the news, including: GoldQuest (TSXV:GQC), Precipitate Gold (TSXV:PRG) and Everton Resources (TSXV:EVR).


What has happened to date? Unigold has held the Neita Exploration concession for almost ten years. Our understanding is that an exploration concession is initially granted in the Dominican for three years, with the potential for two, one-year renewals. All renewals have to be applied for by the company and approved by the government in an effort to ensure the projects are still being advanced. At the end of a five-year period, the company can re-apply to start a new five-year period and our understanding is that the holder has the right to do so before anyone else can apply for the concession. Unigold is just about to complete a second five-year period at Neita, and is in the process of applying to start a third. The letter issued by the General Mines Director is unusual for two reasons. First, other exploration and development companies in the Dominican have been granted a third, five-year term for exploration concessions and secondly, the General Mines Director’s role is to provide technical evaluation of the application, with the final decision residing with the Minister of Energy and Mines. Although the company has not received a formal decision from the Minister of Energy and Mines, it was required to disclose the letter from General Mines Director which suggests the company’s application may not be granted.

Most likely outcome is that Neita concession is granted eventually but there are other possibilities:
1. Neita exploration concession is granted by March 7, 2017: While this is the best outcome, we highlight that new three year applications have historically taken as much as a year to be granted after expiry.
2. Neita exploration concession is granted eventually: We view this as the most likely outcome; however, the longer the time from expiry to re-granting the larger the impact on the share price of Unigold and other companies operating in the Dominican.
3. Neita exploration concession is not granted, but Unigold acquires it with a new application: This possibility is unlikely to impact the long-term value of Unigold but is likely to result in the market applying increased risk for projects operating in the Dominican.
4. Neita exploration concession is not granted, Unigold does not re-acquire: This would be a worst case scenario for Unigold but we view it as the least likely outcome.

In our view, the longer the period of time that passes after the expiry date, the more likely the market is to price in outcome number four but as noted, we expect outcome number two to be the most likely.

Others companies with Dominican projects likely to be impacted. As well, this news, at least temporarily, elevates the political risk for the Dominican Republic as a jurisdiction for exploration and development companies because of the uncertainty it creates around land tenure. Because of the time it takes to move a project from early exploration to production, typically over 10 years, investors and operators need to have some certainty that they can maintain control of the project over that period. While a quick resolution in this case is likely to mitigate the long-term impact, in the near-term we expect elevated political risk to be priced into all Dominican explorers and developers including: GoldQuest (TSXV:GQC), Precipitate Gold (TSXV:PRG) and Everton Resources (TSXV:EVR).

Unigold’s share price likely to be negatively impacted. Based on Friday’s close Unigold was trading at C$5/oz, a steep discount to peers at C$64/oz. We expect that gap to widen when the stock resumes trading. We note that the cash value of Unigold is ~$0.065/share, depending on spending since the end of Q3; however, this represents a worst-case scenario and we expect the share price to remain well above this level. Moving forward, the key driver for the stock is expected to be subsequent updates on the status of the Neita exploration concession.


Derek Macpherson | VP Mining Analysis
Sunneva Bernhardsdottir | Associate, Mining Analysis
Victoria Ellis Hayes | Associate
 
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Priced as of prior trading day's market close, EST (unless otherwise noted).
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Company Specific Disclosure Details
Unigold Inc. - TSXV:UGD - 1,2,4
GoldQuest Mining Corp. - TSXV:GQC - 1,2,4
Precipitate Gold Corp. - TSXV:PRG - 3,4
Everton Resources Inc. - TSXV:EVR - None

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