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Adrian Day: Three Undervalued Resource Companies
Contributed Opinion


Adrian Day Money manager Adrian Day reviews developments at three gold and silver companies in his portfolio.

Vista Gold Corp. (VGZ:NYSE.MKT; VGZ:TSX, US$0.807) continues to advance the Mt. Todd project in Northern Territories, Australia, as it monetizes non-core assets to maintain a healthy balance sheet without dilution. As it awaits its final permit, the improvements at Mt. Todd are now incremental, with the most significant boost coming from the gold price itself; the project, one of the largest undeveloped gold projects in the world, is highly sensitive to the gold price.

To illustrate that sensitivity, the project's NPV at a $1,700 gold price (and a 5% discount rate) has virtually doubled to $1.6 billion from last year's pre-feasibility which used $1,350, and the internal rate of return jumped from 23.4% to 30%. An independent benchmarking study completed in March confirmed Vista's numbers and assumptions in its pre-feasibility.

Vista sells non-core assets to focus on Mt. Todd

The latest sale is half its royalty on the Awak Mas project in Indonesia, being advanced by an Australia company. This put $2.4 million into the treasury, bringing total cash and cash equivalents to $5.6 million. The company has the right to buy the remainder of the royalty a year from now; if they do not, then Vista can look to sell it elsewhere. Vista also holds 6.2 million shares of Midas Gold, worth approximately $2.8 million today, and it continues to seek a buyer for a used mine it owns. The company says it has sufficient cash for to cover all expenses for the next year. At present, company executives are unable to travel to the project, though senior staff was already onsite before the travel restrictions were introduced.

Looking to realize value from project

Vista is extremely undervalued. The two main risks are whether they will be able to continue monetizing assets to avoid a dilutive equity raise, and whether they will be able to negotiate a successful transaction for the project, obtaining value for long-time shareholders without scuppering a deal by asking too much. It's a delicate line to walk, but one that a higher gold price perhaps makes easier.

The gap between value and market price ($81 million) is so great that Vista is a buy. It tends to be a volatile stock, however, so there is no need to chase it. The stock has recovered all its March loss when it hit a 37 cents low.

Fortuna nearly there on new project, but at lower output

Fortuna Silver Mines Inc. (FSM:NYSE; FVI:TSX; FVI:BVL; F4S:FSE, US$3.96) is to commence production at Lindero on a reduced operating plan, given the travel restrictions in place in Argentina. The new plan will get cash flow starting sooner than waiting to complete the original plan, but at the cost of lower recoveries. Recoveries are estimated at about 50% initially (down from a planned 80%), with the ore placed on the leach pad to generate more gold over the life of the mine. It is estimated that ultimately 10–20% of the gold could be lost. Cash cost will be under $700. The circuit for the revised operational plan is fully installed and ore can now be placed on the leach pad by July.

To proceed now a difficult decision

The equipment required for the tertiary phase of the original plan, already on site, are sensitive and require vendor personnel on site in the initial phase to make adjustments and fix problems. Without these key personnel on site—normal in the start-up phase of a major new operation—it was considered too risky to put the ore through the entire circuit. Once the restrictions are lifted, however, Lindero will be able to move to the full three-part circuit and move back to the original mine plan. It is a shame to lose some of the gold, but we appreciate the difficult decision, particularly given that the country's travel ban is currently extended to September.

Mining has been named an essential activity in Argentina and allowed to resume with an approved health plan in place. Lindero has the go-ahead. But an international travel ban remains in force. Fortunately, the mine's Australian operations manager was on site when the travel ban was imposed, but other key personnel from both the company and from vendors were not.

Existing mines continue, with their own challenges

Both of the company's other mines continue to operate, though at San Jose in Mexico there is mining but currently no ore processing; and at Caylloma new health restrictions reduce the amount of activity.

With the additional delays to production, Fortuna decided to raise additional equity. Although cash on hand ($88 million as of end-March) would likely have been sufficient until Lindero was cash-flow positive, the company has always taken a conservative approach to cash, and wanted a cushion. Total remaining funding including working capital is estimated at $75 million to $80 million. The $60 million raised removes any lingering doubts about the financial ability to complete Lindero.

Fortuna remains significantly undervalued relative to other silver companies, and remains one of our top holdings. But given the current difficulties at both existing mines (including lower grades at San Jose, and lower silver recovery and low base metals prices at Caylloma), as well as the ever-present risks of operating in Argentina, we are holding.

Evrim loses partner but advances elsewhere

Evrim Resources Corp. (EVM:TSX.V, 0.325) announced that its partner Newmont had given up its joint venture on the Astro project and relinquished the regional alliance it had with Evrim in the Northwest Territories of Canada. This was not a shock; Newmont's acquisition of Goldcorp last year has given it plenty to chew on and seen the company relinquish many joint ventures.

Although it would have been good if Newmont had continued, it is part of business for prospect generators that joint venture partners come and go. The positive from this is that Newmont did not abandon the venture for any lack of success, and the property, which includes a 10-kilometer structural corridor with outcropping gold, discovered in a greenfield exploration—plus the results of $3.2 million in exploration work reverts to Evrim, which will seek another partner. Given the challenges of the location, it is probably suitable only for a very large company.

Royalty project advances towards cash flow

Meanwhile, First Majestic continues to advance the Ermitaño project on which Evrim holds a 2% royalty with an increased drill activity and larger resource delineated. In the last announcement in April, grade had increased 15% and contained ounces by 345%. It is expected to commence production in the first quarter of 2021. And work continues on other joint ventures, including Evrim's review of Yamana's Western U.S. database, which is beginning to yield fruit.

Cash in the bank is well over C$7 million. That plus the value of the Ermitaño royalty means that most of Evrim's market cap is backed by hard assets. Thus, the downside is very limited, while there remain plenty of opportunities for upside. Evrim is a buy.

TOP BUYS at current prices include, in addition to above, Midland Exploration Inc. (MD:TSX.V, 0.80) and Kingsmen Creatives Ltd. (KMEN:SI, 0.22), 0.22), and for new buyers Altius Minerals Corp. (ALS:TSX.V, 9.41) and Lara Exploration Ltd. (LRA:TSX.V, 0.73).

Originally posted on May 16, 2020.

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."


1) Adrian Day: I, or members of my immediate household or family, own securities of the following companies mentioned in this article: Evrim Resources, Altius Minerals, Lara Exploration and Midland 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: All. I determined which companies would be included in this article based on my research and understanding of the sector.
2) The following companies mentioned in this article are billboard sponsors of Streetwise Reports: None. Click here for important disclosures about sponsor fees. The information provided above is for informational purposes only and is not a recommendation to buy or sell any security.
3) Statements and opinions expressed are the opinions of the author and not of Streetwise Reports or its officers. The author is wholly responsible for the validity of the statements. The author was not paid by Streetwise Reports for this article. Streetwise Reports was not paid by the author to publish or syndicate this article. Streetwise Reports requires contributing authors to disclose any shareholdings in, or economic relationships with, companies that they write about. Streetwise Reports relies upon the authors to accurately provide this information and Streetwise Reports has no means of verifying its accuracy.
4) This article does not constitute investment advice. Each reader is encouraged to consult with his or her individual financial professional and any action a reader takes as a result of information presented here is his or her own responsibility. By opening this page, each reader accepts and agrees to Streetwise Reports' terms of use and full legal disclaimer. This article is not a solicitation for investment. Streetwise Reports does not render general or specific investment advice and the information on Streetwise Reports should not be considered a recommendation to buy or sell any security. Streetwise Reports does not endorse or recommend the business, products, services or securities of any company mentioned on Streetwise Reports.
5) From time to time, Streetwise Reports and its directors, officers, employees or members of their families, as well as persons interviewed for articles and interviews on the site, may have a long or short position in securities mentioned. Directors, officers, employees or members of their immediate families are prohibited from making purchases and/or sales of those securities in the open market or otherwise from the time of the interview or the decision to write an article until three business days after the publication of the interview or article. The foregoing prohibition does not apply to articles that in substance only restate previously published company releases. As of the date of this article, officers and/or employees of Streetwise Reports LLC (including members of their household) own securities of Vista Gold, Evrim Resources, Midland Exploration, Altius Minerals, Newmont Goldcorp and Lara Exploration, companies mentioned in this article.

Adrian Day's Global Analyst disclosures: Staff may have positions in securities discussed herein. Adrian Day is also President of Global Strategic Management (GSM), a registered investment advisor, and a separate company from this service. In his capacity as GSM president, Adrian Day may be buying or selling for clients securities recommended herein concurrently, before or after recommendations herein, and may be acting for clients in a manner contrary to recommendations herein. This is not a solicitation for GSM. Views herein are the editor's opinion and not fact. All information is believed to be correct, but its accuracy cannot be guaranteed. The owner and editor are not responsible for errors and omissions. © 2020.

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