A Permit, A Permit, My Kingdom for a Permit

As this bull market in precious metals matures, mining houses all over the world will be scrambling to replace reserves. But, what's the point of acquiring a resource if you cannot get it out of the ground?

In a mining environment where permits are so difficult to obtain (costly and time-consuming) even in so-called safe jurisdictions, the very few fully-permitted gold projects should trade at a substantial premium.

However, the opposite is true, and these permitted projects (Western Copper & Gold, Condor Gold and Vista Gold) are strong takeover candidates. 

Tuesday, October 10, 2023

As this bull market in precious metals matures, mining companies will sound like Shakespeare's King Richard III ("My Kingdom for a Permitted Project!") as they scramble to replace reserves. In such situations, permitted gold projects fetch a substantial acquisition premium.

The two-year correction in gold stocks turned on September 30, 2022 - with a low on the VanEck Gold Miners ETF (GDX) of $22.2.

The recent pull back from the May 2023 high at $36.2 seems to have provided another bottom on October 4th at $25.6.

In these still uncertain times, adding to (or establishing a position in) some takeover candidates with permitted projects could be a good risk reward proposition. Indeed, some mergers and acquisition targets have also gone through the full cycle of feasibility studies (PEA, PFS and FS)

In a mining environment where permits are so difficult, expensive and time-consuming to obtain - even in the so-called safe jurisdictions - one might assume that the very few fully permitted gold projects would trade at a substantial premium.

This however is far from the truth. SGL discusses the opportunity in three takeover candidates: Western Copper & Gold, Condor Gold, and Vista Gold. 

Western Copper & Gold (WRN.TO) - $1.73

In our first SGL article on September 18, 2022, suggested that Western Copper & Gold provided a value at $1.62. The stock subsequently revalued by more than 60% and on two occasions reached up to $2.64.

WRN is once again at a compelling price level. 

Rio Tinto,  which acquired its 7.8% position in the company around $2.62, has completed extensive due diligence and remains in the driver's seat as a potential acquiror. However, since our first article, Mitsubishi Materials also made a strategic investment in WRN, entitling it to various key rights including a right of first offtake negotiation.  

The Casino project in the Yukon ranks as the fifth largest undeveloped copper-gold project not controlled by a major. 

At current prices, it is about 34% gold, 46% copper, with the rest being of the resource being silver and molybdenum.

WRN's resources are massive with 10.7 billion pounds of copper (7.6 billion in the measured and indicated category) and 21.1 million ounces of gold - for a total of 41.3 million ounces of gold equivalent.

At the current market capitalization of around CAD $300 million, one pays around CAD$7.30 for an ounce of gold equivalent in the ground, while the silver and the molybdenum is free.

The June 2022 prefeasibility study at today’s spot prices demonstrates a $4.45 billion NPV, 24.8% IRR, strip ratio 0.43:1. Current high molybdenum prices add a lot of value to this property.

This certainly is one of the most economic undeveloped copper-gold mining projects in the world.

Photograph of the Casino Project, by C. Archbould

The company is still trading at a big discount to peers at 0.16 times NPV.  Rio Tinto's key rights expire in November 2023. Large investors have been part of this story for a very long time and may be ready to sell to the highest bidder. Moreover Mike Vitton, a WRN.TO Director and a clever activist, is involved which should help a lot.

At these prices, risk is low and an acquisition could come quickly, but one should not bet for more than a double of the current market price. 

Condor Gold (COG.TO - $0.33) 

In Nicaragua, hard-working and tenacious CEO Mark Child has over the years developed an economic, permitted and shovel ready project in a difficult market. Condor Gold is listed in Toronto (COG.TO) and in London (CNR.L).

Jim Mellon, Condor's Non-Executive Chairman, is the main shareholder, owning approximately 23% of shares. It is believed that he would like to sell the project quickly.

An acquiror could be expected to pay double the current share price.

There is substantial interest from gold producers with five non-binding offers and eight companies under NDA with access to Condor Gold's virtual data room.

Nicaraguan neighbor, Calibre Mining, as well as other companies have been operating very well in the country.

This appears to be a nice high-grade open pit situation. According to the 2021 PEA, the NPV is US$418 million, and a 54%IRR at a gold price of $1700, while producing 150,000 ounces of gold per year.

A bankable feasibility study on a smaller scale operation was completed in September 2022. This showed a capital cost of only US$106 million with initial production of 100,000 ounces of gold per year from three permitted pits.

Total resources show 2.5 million ounces of gold. Exploration on this prolific gold district might possibly double the number of ounces.

Paying gold in the ground under US$25 an ounce for a high-grade, economic, permitted open pit project in a good mining jurisdiction is very cheap.

The only regret is that Jim Mellon appears to want to sell a bit early in this nascent gold bull market. Usually, the number and the value of mergers and acquisitions peak near the end of a bull run!

Vista Gold (VGZ.TO) - $.51

With only 121 million shares outstanding, Vista Gold's market capitalization is a ridiculously low $61 million. (Not even US dollars but Canadian dollars!)

What does one get for this very small amount of money? One of the worlds top-10 most valuable gold mines in development.

The Mt Todd Gold Project has a very strong 2022 feasibility study based on 7.8 million ounces of measured and indicated resources, plus 1.6 million inferred resources. This permitted mine will have an average annual production of 479,000 ounces of gold with a total cost of $860 per ounce.

It has all the infrastructure one could want since it is located in the northern territory in  Australia.

Although the company's burn rate is a bit high for our tastes, it still has $6 million in cash. 

The CEO Frederick H. Earnest and his team have done a huge amount of development work over the last 10 years, including incorporating laser ore sorting processes into its economic studies to increase the recovery of contained gold and metallurgical testing, as well as lower capital expenditure opportunities through staged development.

In our view, this massively undervalued stock represents a very powerful and safe long-term call option on gold.

No wonder the largest shareholder is Sun Valley (16,5%) run by the legendary investor Peter Palmedo.

The stock is down from a 2020 high of CAD$1.9 and 50% from this year’s peak.

Bottom Line: Limited Downside Risk for Potential Take-outs

It is always difficult to anticipate when an acquisition might be imminent. 

Western Copper and Gold, Condor Gold and Vista Gold could be acquired at anytime. At these depressed prices, downside risk may be limited, but the upside potential is well established.

Disclaimer: SGL does not provide investment advice and is not a registered investment advisor.  Always do your own due diligence before making an investment. Investing in securities, especially junior miners, can be risky and never invest money you cannot afford to lose. SGL cannot guarantee the accuracy of the information in this post. SGL and its contributors have attempted to present the information fairly, but it may own shares of the companies mentioned in this article so bias cannot be excluded. SGL and its contributors have no relationship with the companies. SGL or its contributors may buy or sell shares at any time.  

SGL makes no representations, and specifically disclaims all warranties, express, implied, or statutory, regarding the accuracy, timeliness, or completeness of any material on this website. You should seek the advice of a securities professional regarding any stock transactions. SGL cannot guarantee in any way that it is providing all of the information that may be available. Please do your own due diligence before buying or selling any security.

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