Magna Terra Minerals Inc

Hunting for Gold in Argentina

Impact: Mildly Positive

Magna Terra’s second batch of drilling results from its Luna Roja Project show promise and suggest the company may be edging towards discovery. We continue to believe that Magna Terra could see a significant re-rating with positive drilling news from its exploration in Argentina’s prolific Santa Cruz Province.

  • Via Lactea Fault showing promise. While still early days, we are encouraged that the first two holes reported from within the Via Lactea Fault returned gold. Hole LR-DDH002 returned 42m at 1.0 g/t Au within an oxidized tuff horizon, 145m along strike of Hole LR-DDH001 reported previously, which returned 51.4m at 0.26 g/t. Anomalous surface geochemistry along 3km of this fault bodes well for further drilling along the structure.
  • Round Mountain analog to the west? The wide gold mineralization reported in Hole LR-DDH002 is fairly evenly distributed within a flat lying tuff horizon which extends for at least 200m to the west of the Via Lactea fault, under cover. We note that this untested horizon represents a new and promising exploration target at Luna Roja, given its permeability and potential for hosting broad disseminated gold.
  • Encouraged by technical success within dome complex to the east of Via Lactea. Hole LR-DDH003, drilled 280m to the east LR-DDH002 did not return significant gold or silver values, but was consistently anomalous in arsenic and still within the mineralized system. Assays are pending for four more holes, all testing various IP targets within the dome complex to the east of the Via Lactea fault, which we expect to be released in the near-term.
Early signs from Luna Roja are encouraging. With a market cap of only C$3.1M, a significant ore grade intercept should cause Magna Terra to re-rate significantly. Pending results from its drill program should begin to shed more light on the potential of this very early stage project. Upcoming catalysts include 1) Assay results from 4 remaining holes (Q2/19).



Atico Mining Corp

Strong Q1 Interrupted by Soon to be Over Strike

Impact: Positive

Atico announced strong Q1 production results (excluding the strike) and provided an update on the ongoing labour dispute that suggests that the mine should be up and running within two weeks. While the company has adjusted guidance to account for more than a two-month interruption, we expect the strong pace that Atico ended 2018 and started 2019 to resume in May. We continue to believe Atico is a low-cost producer with exploration upside that should generate significant free cash flow upon resumption of operations. 

  • Start of legally mandated arbitration should see operations resume in two weeks. As April 12 marked the 60th day that the mine had been under strike, Colombian law dictates that a legal mechanism to end the strike with an arbitrage process must begin. According to Colombian Labour Code, the process of assembling the arbitrator’s council is anticipated for the 8th working day following April 12, 2019 (~April 26th), after which operations should resume within 3 working days.
  • Solid Q1 start was interrupted by the strike. Results are well behind quarterly norms because of the strike; however, if we were extrapolating the results over a 90-day period, we see that the company was on pace for solid Q1. Mine production and throughput were on the same pace as Q4/18, with slightly lower copper grades offset by higher gold grades (Figure 1). We highlight that during the first part of Q1, Atico was on pace to meet its original 2019 guidance.
  • 2019 guidance to be adjusted. Over the long-term there is little change to the value of this mine/company; however, the company plans to update guidance once operations resume to what is expected to be almost 70 days missed of the planned 345. While there is likely to be a short adjustment period once the operation resumes, we expect the strong pace from the start of Q1 to continue.
Pending restart of operations creates a buying opportunity for a discounted stock. Based on what we expect over the next 12 months from Atico, our preliminary estimates suggest that Atico trades 1.7x-2.1x EBITDA or at an 12-15% FCF yield. When you consider that other base metal producers trade at 4.5x EBTIDA, its strong balance sheet and the exceptional exploration upside Atico appears to have, the resumption of operations and exploration has the potential to drive a significant re-rating. Upcoming Catalysts include 1) Exploration update (Q2/19), 2) 2018 Financial results (April 2019) and 3) Q1 Operating results (Q2/19).



Fission Uranium Corp

Fission Moves a Step Ahead with PFS

Impact: Mildly Positive

Fission Uranium Corp has issued a prefeasibility study (PFS) for its Paterson Lake South (PLS) project in Canada which features lowered operating costs and room for further improvement as the company assesses an underground-only option for their mine plan. This PFS suggests that the PLS project has the potential to be one of the larger and lowest operating cost uranium projects in the world and is well positioned for a potential turn in the uranium market.

  • PFS compares positively to 2015 PEA. Results from the PFS compare well to company’s 2015 PEA with a 45% decrease in operating costs to C$9.03/lb U3O8, slightly offsetting the 37% increase in capital costs. The hybrid open pit and underground operation has after-tax NPV of C$693M and we note this study assumes a lower long-term uranium price (US$50$/lb) than the 2015 PEA (US$65$/lb) incorporating the company’s maiden reserve estimate of 90.5Mlb at 1.42% U3O8 as opposed to the PEA whose estimates were based on the larger resource.
  • Initial PEA on underground only option appears to be the path forward. While the PFS considers an underground and open pit scenario, the company is considering an underground only scenario for a post-tax NPV of C$696M. Although it is still early days, this option would yield a 20% lower capital cost for a slight 6% increase in operating costs.
  • Mine plan expected to grow with more drilling. The updated resource estimate includes 103.8 MlbsU3O8 in the indicated category. This resulted in three zones (R1515W, R840W & R1620E) being excluded from the PFS and underground only PEA. This summers drill program is expected to be focused on infilling these areas, to incorporate them in the mine-plan. Additionally, zone R780E remains open at depth and along plunge to the east, including the high-grade core and likely represents the highest potential to extend the mine plan.
The PFS highlights the projects quality supporting its premium valuation. Fission trades at premium to peers at US$1.32/lb U3O8Eq (peers US$0.66/lb U3O8Eq) which in our view is justified and a further premium is likely warranted given the projects low-costs, premium jurisdiction and scale. Upcoming Catalysts include: 1) Summer 2019 Exploration program and 2) Underground only PFS (H2/19).



De Grey Mining Ltd

Big Hole Points to Big Resource Growth

Impact: Positive

De Grey’s drilling at Toweranna has delivered strong results and based on this success, we have increased our estimates. We have increased our fair value estimate to A$0.35/sh (was A$0.30) and believe that the company is poised to re-rate as it continues to deliver exploration success. 

  • Results suggest exploration target could be conservative. De Grey has exceeded our expectations with results highlighted by 136m at 2.0 g/t AU (9TRC138) outside the current resource of 143.9koz at 2.2 g/t Au. Overall, the 12 holes returned a weighted average grade of ~3.1 g/t Au over an average width of ~4.6m suggesting that resource is poised to grow at higher grades. The company’s current exploration target for Toweranna is 680-800koz at 2.1-2.3 g/t Au (excludes existing resource) down to 800m. If the grades and widths witnessed in this hole persist, this target is likely to be conservative.
  • A growing Toweranna, grows our estimates. We are increasing our modelled resource estimate for Toweranna by 100% to 424koz (6M tonnes at 2.2 g/t, was 212koz, 3M tonnes at 2.2 g/t), our NAVPS estimate to $0.50/sh (was A$0.44) and fair value. We highlight that we have only expanded our resource, but grades could also increase, with a 25% increase in grade potentially adding a further 16% to our NAVPS estimate (Figure 1). The addition of further high-grade tonnes to our model has improved our estimates for mine-life, grade, costs, etc, (Figure 2).
  • 2Moz in sight, more results to come. De Grey has set a corporate goal to finish 2019 with a global resource of 2Moz, which given the recent exploration success at Toweranna, Withnell, and Malina appears to be easily achievable. We expect this potential to be demonstrated with pending drill results from all 3 deposits.
Market is focused on pending payment, missing out on exploration success. We have increased our fair value to A$0.35/sh (A$0.30) based on 0.70x our NAVPS8% estimate of A$0.50 (was A$0.44). The company trades at a substantial discount to peers (0.19x vs. peers 0.69x) as the market appears focused on the A$9.7M payment that is due to the property vendors in July 2019. We believe the company is able to finance this and expect a substantial re-rating when this happens as the market should then price in the recent exploration success. Upcoming catalysts: 1) Ongoing exploration results, 2) Project development updates and 3) Final project payment (July 2019).

Lion One Metals Ltd

Unleashing the Lion

Lion One recently announced aggressive plans to explore its recently consolidated property, with the aim of demonstrating its potential to host an expansive alkaline epithermal gold system, analogous to the nearby Vatukoula (7Moz Au) deposit. The company is back-stopped by the robust, high grade (739Koz at 9.5 g/t Au) Tuvatu gold project in Fiji, which steadily continues to be advanced to production. We are revising our valuation to better reflect the significant potential we think could be revealed as drilling ramps-up.

  • Build and explore. The company intends to run an aggressive drilling program designed to demonstrate the district-scale exploration upside of the high-grade Tuvatu gold system. In the meantime, the company continues to steadily advance its fully permitted high-grade Tuvatu underground gold project.
  • Potential exists to deliver a major deposit. Epithermal alkaline gold systems form some of the largest gold deposits on earth and include Vatukoula (7Moz Au) just 40km to the northeast, Lihir (10Moz Au) operated by Newcrest Mining and Porgera (20Moz Au) operated by Barrick. Work done to date suggests Tuvatu sits within a major alkaline gold system and has potential to grow materially.
  • Next steps expected to deliver growth. Plans this year include geophysics to better define structures as well as property wide geochemistry to prioritize target areas. We expect an ambitious drilling program that is planned to include step-outs within 500m of Tuvatu and scout-drilling on more distal targets. As the program advances through 2019, the market should begin to appreciate the multi-million-ounce gold potential of the Tuvatu gold project.
In our view the market is undervaluing Lion One. Lion One currently trades at 0.38x (peers 0.52x). This valuation is easily underpinned by the high-grade Tuvatu gold project, currently under development. Lion One could re-rate as it continues to move Tuvatu towards production and as it begins to demonstrate the project’s significant exploration potential. We believe Lion One is worth C$1.35/sh (new fair value est.), based on 0.70x our NAVPS8% estimate of $1.93 (was $1.86 using a 5% discount rate). We believe the company’s renewed focus on drilling could surface significant value and have revised our estimates to reflect this exploration upside. This was partially offset by other model updates (page 6). Upcoming catalysts include: 1) Exploration updates (Ongoing) and 2) Project development updates (Ongoing).

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