Lupaka Gold Corp (TSXV:LPK) released an updated resource estimate and PEA for its Invicta project in Peru, which was better than we expected after
our recent site visit. As a result of higher than
expected grades, higher than expected overall tonnes, our base case 350 tpd 10% NAVPS has increased to $0.55 (Figure 1 - was $0.34). While this is
only a PEA, Lupaka is funded to production and is already building the mine, which suggests to us that this company is poised to quickly close the
valuation gap to peers (0.44x base case NAV, peers 0.56x). We believe that first production, expected in H2 2018 is going to be the next key re-rating
catalyst for Lupaka.
Higher than expected grades in the early years of the mine plan improved the expected cash flow from operations and makes the project more robust than expected.As
a result of higher than expected grades, higher than expected overall tonnes, our base case 350 tpd 10% NAVPS has increased to $0.55 (Figure 1 - was
$0.34). Having these improved margins in the early years help reduce risk and increase the likelihood that management has the potential to circumnavigate
the treacherous transition from developer to producer. We had been modelling an average grade of 5.5 g/t AuEq in the early years vs the published 8.6
g/t AuEq in the PEA. As a result, the average annual after-tax cash flow increases from US$6.3 mln to US$8.2 mln.
The resource update highlights the potential for a higher production rate. We initially modeled a 1.053 mln tonnes of minable material,
which is well below the updated Indicated resource of 3.0 mln tonnes and an additional Inferred resource of 0.6 mln tonnes. While the PEA conservatively
contemplates only mining 0.67 mln tonnes we believe management is likely to expand the mine plan with future infill drilling. We feel comfortable increasing
our base case minable model to 1.5 mln tonnes from the 1.053 mln tonnes. In addition, it continues to highlight the potential that management is expected
to look to increase the production rate from 350 tpd initially to 500 tpd in year three. Under an expanded production rate scenario, our 10% after-tax
NAVPS increases to $0.91 (Figure 2 - was $0.65).
Valuation does not reflect the PEA nor that the company is funded to production. Lupaka trades at 0.44x our base case NAVPS estimate and
0.26x our expanded case scenario. This is a significant discount to peers which trade at 0.56x NAV. We believe that this PEA, along with the company’s
progress towards first production later this year, should cause it to re-rate, at least in-line with peers based on our base scenario, with further
optionality on the expanded case as the company de-risks the project. We believe that first production, expected in H2 2018 is going to be the next
key re-rating catalyst for Lupaka.
Catalysts to expect over the next two years:
• Assays from underground channel samples
• Completion of the upgraded site access road
• Rehabilitation and stope development
• Toll milling agreement
• Off-take agreement
• Mining commissioning
• Exploration results
• 350 tpd steady state commercial production
• Expand resource
• Expand base-case production rate to reflect expanded resource
• Engineering and initiate permitting for an onsite plant (lower operating costs)
Paolo Lostritto | President
Derek Macpherson | VP Mining Analysis
Alex Pitcher | Associate
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