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 Mon Mar 31, 2014
Spec Value Hunter Comment: Recommendation Strategy for Midas Gold Corp
    Publisher: Kaiser Research Online
    Author: Copyright 2014 John A. Kaiser

 
Midas Gold Corp (MAX-T: $0.87)
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Spec Value Hunter Comment - March 31, 2014: Recommendation Strategy for Midas Gold Corp

Midas Gold Corp was recommended on January 3, 2014 as a Good Absolute Spec Value Buy at $0.73 based on the assumption that a PFS expected in mid 2014 will confirm that the Golden Meadows gold-antimony project in Idaho remains as robust as indicated by the junior's September 2012 PEA (see SVH Comment: Sept 6, 2013 for a more detailed analysis). Such confirmation would support a new equilibrium price at the $2 level for Midas Gold in a context where gold is bound in a $1,200-$1,400 range and the time to achieve a mine permit takes only 3 rather than 5 more years, followed by a 3 year mine development phase. Midas Gold is thus suitable for Spec Value Hunters who are prepared to endure an interim decline in the price of gold toward the $1,000 level, are making a primary bet on gold being stable above $1,200 for the long run and a side bet that gold will go much higher in real price terms, accelerating a premium priced takeover bid for Midas by a major gold producer, and, that a mine permit for Golden Meadows will happen. The PEA proposed a 20,000 tpd open pit mine with milling, flotation, pressure oxidation and cyanidation to produce gold dore from refrractory ore and an antimony concentrate that could be sold to smelters with a 65% payability. CapEx was estimated at $879 million, sustaining capital at $303 million and OpEx at $29/t for a 15 year mine life that would produce 4.9 million ounces gold and 90.6 million lbs antimony from three deposits with an indicated and inferred resource of 101.3 million tonnes of 1.72 g/t gold, and a smaller internal resource of 17.4 million tonnes of 0.45% antimony.

My updated after-tax discounted cash flow model shows that under the PEA assumptions Golden Meadows would have an after-tax IRR of 23.7% at a $1,284/oz gold price, and an NPV of $527 million at a discount rate of 10% and $933 million at 5%, which translate into valuation targets of $3.24 to $5.74 per share. The $2 price target reflects a discount for the 6 years it would take for cash flow to begin. What makes Midas Gold a Good Absolute Spec Value Buy rather than just a "Relative" Buy is the fact that even at a pessimistic $1,000 gold price Golden Meadows still has a 14.3% IRR and an NPV range of $0.90-$2.47 at 10% and 5%. This makes Midas Gold very special among advanced gold juniors because the viability of the project and management's ability to fund ongoing feasibility demonstration costs leading to an eventual buyout by a major does not hinge on gold rising back above $1,500. Since the initial writeup Midas Gold has increased its fully diluted to 162.6 million through a unit financing at $0.90 that raised $12.8 million in February 2014. Just ahead of the financing Vista Gold Corp halved its equity stake to about 11% through the sale of 16 million Midas shares at $0.80 placed by various agents. Coupled with the Franco-Nevada royalty sale and Teck financing in 2013 after the Gold Smackdown, these events signal strong continuing market and industry support for Midas Gold's efforts to turn Golden Meadows into a modern mine despite the not overly friendly permitting situation in Idaho. Golden Meadows is a major gold system within a historic mining district where antimony and tungsten were mined during World War II, mercury until 1963, and gold until 1997, all effectively before modern mining standards came into place. The Golden Meadows district is a legacy mess that has undergone a fair amount of reclamation effort, and while the Golden Meadows mining plan proposes to create further improvements, the current water quality is relatively clean and stable, so there is a risk that the environmental regulators may prefer to "let a sleeping dog lie". The offset bet against this risk is that the overwhelming American dependency on China for antimony supply will turn into a problem that cuts short the permitting timeline for Golden Meadows. Chinese supply, which peaked at 166,000 tonnes in 2008, dropped to 130,000 tonnes in 2013 where it still represents 79.6% of global supply. Chinese antimony supply is under internal siege thanks to an ongoing crackdown on polluting mines and smelters, and should China shrug off America's "Pivot to Asia" and follow Putin's Crimea lead by annexing Taiwan, and America responds with something more than a shoulder shrug, WTO rulings are unlikely to keep China's antimony flowing to America. Because Golden Meadows potentially makes money down to $1,000, the stock price is sensitive to gold price volatility within its current $1,200-$1,400 range; Spec Value Hunters should be comfortable accumulating Midas Gold below $1 during periodic gold price slumps.

 
 

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