Vista Gold Corp. (VGZ:NYSE.MKT; VGZ:TSX, US$0.59) has published an updated prefeasibility study (PFS) on its Mt Todd project in the Northern Territories in Australia, the largest undeveloped gold project in that country. The revisions to the old PFS include updating both the gold price (upward to $1,350/ounce) and the Australian dollar (downward to US$0.70). Both of these revisions help boost the returns on the project, as did other improvements, including on gold recoveries. Using the sensitivity table for today's prices, the project has a net present value (NPV, with 5% discount) of $1.15 billion and an international rate of return (IRR) of over 30%.
Mind the gap
These are very strong numbers. It should be noted, though, that any strengthening in the Australian dollar—and the Aussie dollar, as other "commodity currencies," usually appreciates in a resource bull market—would affect costs negatively. For a company with a market capitalization of under $60 million and no debt, this is an enormous gap.
The question is, how do shareholders realize at least some of that value. Now that the updated PFS and metallurgical testing have been completed, the company is continuing to derisk the project and seek a development partner. Vista has made clear that the project is too big for a company its size to develop independently. Obviously, one does not want to give away a project such as this too cheaply. On the other hand, one cannot seek too high a price that others will not pay in the current market.
How much dilution?
If Vista is patient—or stubborn—in waiting for a better gold market and a great deal, then the second major question flowing from this is how much dilution Vista shareholders will have to take while we wait. Right now, following a $1.5 million installment payment for the de Los Reyes property, Vista has about $5.5 million in cash. Its corporate expenses for the next 12 months will run around $4 million, plus another $1–2 million in programs at Mt Todd. (The property expenditures will drop significantly following the completion of the updated PFS.) That means Vista has cash for just one year's expenditures.
The next payment on the sale of de Los Reyes will be in October 2021. Vista also has used mill equipment for sale, on the books for $5 million; and shares in Midas Gold, currently valued at about $7 million. So Vista has options to extend the time when it will have to raise additional funds, but will likely need to do so at some point over the next year.
The potential for an additional raise, as well as tax-loss selling (fatigue), has caused the stock price to drop from highs over $1 per share in August to the current $0.59/share. Hold for now.
Lots of Smoke but No Fire. . .Yet
Midland Exploration Inc. (MD:TSX.V, 0.72 x 0.75) has provided several updates on its exploration activities recently, including at James Bay and the Abitibi, as well as specifically on the copper/molybdenum Mythril project. In sum, one can say that the company continues to see mineralization and develop new targets on multiple properties, but the truth is that there have been no spectacular results. At Mythril, specifically, there is lots of smoke but, as yet, no fire.
Mythril is a large and complex system. I am not sure there is a good understanding of the ore body yet, and it will take a lot of drilling to explore. Shareholder BHP Billiton Ltd. (BHP:NYSE; BHPLF:OTCPK) is providing assistance, such as with age-testing the rocks, and Midland is moving ahead with a new drill program on the 100%-owned property.
Elsewhere, Midland is putting a renewed focus on generating new partnerships, which had slipped somewhat over the past year or more. The company has multiple projects available for partnerships, in gold and base metals. It has a strong technical team, operates in one of the best mining jurisdictions in the world (Quebec), and has a solid balance sheet, with around $12 million in cash.
It has already been hit by disappointment on initial drilling at Mythril—though there were rather unrealistic expectations for a quick discovery—followed by tax-loss selling (aggravated by some fatigue). The stock has dropped from over $1.20/share in the spring to the current level in the low-$0.70s. Though there could be further tax-loss selling, we would now look to buy on any weakness.
Another Roadblock for Almaden
Almaden Minerals Ltd. (AMM:TSX; AAU:NYSE, US$0.47) has hit yet another roadblock in its permitting for its Ixtaca project. The Mexican environmental authority that issues mining permits (SEMARNAT) has put the approval process for Almaden's environmental impact statement (EIS) on hold, pending outcome of a lawsuit in which the company is named.
The lawsuit, filed by a U.S.-based non-governmental organization (NGO), is primarily against the Mexican government and relates to a permit for land that Almaden subsequently abandoned. (We have discussed this previously.) Moreover, SEMARNAT's mandate is to review the EIS on its technical merits, and, equally importantly, the agency has a time limit on when a decision must be reached; it should have been delivered by very early in the new year.
The decision to suspend consideration of the permit could simply be related to the confusion in Mexico following the election. Ixtaca would be the first new project to receive final go-ahead and there may be some political hesitation. Others has suggested that the decision could simply be a protest by SEMARNAT against cuts in the agency's budget.
Not good for Mexico
Either way, Almaden is a political football and has said it is "considering its options." And either way, this sort of things is not improving Mexico's reputation as an attractive mining destination. Following the change in administration, Mexico is under scrutiny already.
This latest blow in a series of setbacks, as well as overall fatigue means Almaden is experiencing tax-loss selling. The stock was trading at $0.75 in August, and over $0.65 immediately prior to this latest news. I suspect we may see even more selling waiting for Almaden's response, so we are holding waiting for clarification on the environmental decision, or when tax-loss selling appears to have played out before looking to buy again.
Preparing for Tax-Loss Buying
Based on some of the comments above, it is clear that junior gold stocks are being hit by tax-loss selling. Indeed, other than some of the erstwhile high-flying social media stocks, and oil service companies, there are few areas as ripe for tax-loss selling as the junior resource sector. In general, we suspect there is more to come. But we are now on alert for good buys that have been hard hit by such selling and that may experience a bounce in the New Year.
Among best buys now: Altius Minerals Corp. (ALS:TSX.V, 10.69 x 10.83) ; Fortuna Silver Mines Inc. (FSM:NYSE; FVI:TSX; FVI:BVL; F4S:FSE, US$3.02); Lara Exploration Ltd. (LRA:TSX.V, 0.455 x 0.50), Evrim Resources Corp. (EVM:TSX.V, 0.26 x 0.295), and Kingsmen Creatives Ltd. (KMEN:SI, 0.455). Midland, above, can be bought now if you do not already own it. We expect several companies to reach buying levels in coming weeks.
Adrian Day, London-born and a graduate of the London School of Economics, heads the money management firm Adrian Day Asset Management, where he manages discretionary accounts in both global and resource areas. Day is also sub-adviser to the EuroPacific Gold Fund (EPGFX). His latest book is "Investing in Resources: How to Profit from the Outsized Potential and Avoid the Risks."[NLINSERT]
1) Adrian Day: I, or members of my immediate household or family, own shares of the following companies mentioned in this article: Evrim Resources, Midland Exploration, Altius Minerals and Lara Exploration. I personally am, or members of my immediate household or family are, paid by the following companies mentioned in this article: None. My company has a financial relationship with the following companies mentioned in this article: None. Funds controlled by Adrian Day Asset Management hold shares of the following companies mentioned in this article: Midland Exploration, Vista Gold, Almaden Minerals, Altius Minerals, Fortuna Silver Mines, Lara Exploration, Evrim Resources, Kingsmen Creatives. I determined which companies would be included in this article based on my research and understanding of the sector.
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