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 Tue Mar 22, 2016
SVH Tracker: Recommendation Strategy for Midas Gold Corp
    Publisher: Kaiser Research Online
    Author: Copyright 2016 John A. Kaiser

 
Midas Gold Corp (MAX-T: $0.38)
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SVH Tracker - March 22, 2016: Recommendation Strategy for Midas Gold Corp

Midas Gold Corp was continued on December 31, 2015 as a Good Relative Spec Value Buy at $0.31 based on its status as an advanced gold project with the capacity to produce over 300,000 ounces annually over a 12 year mine life, a substantial antimony by-product credit that would become domestically critical if Chinese exports got disrupted, and exploration potential that will not just likely double mine life but could yield a world class underground mineable gold resource that blows away the current 4 million ounce resource targeted for open-pit mining. Midas released a PFS on December 15, 2014 that projected an after-tax NPV (5%) of USD $832 million and 19.3% IRR using $1,350 gold and $4/lb antimony for a 20,000 tpd open-pit mine with a pressure oxidation unit to process the refractory ore. The Stibnite Mine will produce 4 million oz gold and 100 million lbs antimony over a 12 year mine life. CAPEX was $970.3 million, Sustaining CAPEX $98.5 million, and OPEX was $27.47/t (the PFS reported in short tons, I have converted to metric tonnes - all USD). The economic numbers were weaker than the 2012 PEA due to lower metal prices and decisions by the PFS consultants to exclude certain parts of the deposits from the mining plan because of reliability concerns about historic drill hole data and portions that could not be converted from inferred to indicated status due to insufficient drill hole density. The latter contributed to the loss of 900,000 oz gold output and half the PEA antimony output, much of which would have been produced during the early years from the Yellow Pine deposit. Much of this "lost" output is likely to make it back into the mining plan as Midas completes a full feasibility study over the next three years estimated to cost $22 million.

Since 2015 Midas has focused on permitting Stibnite which CEO Stephen Quin concedes could take another three years, meaning that production is unlikely to start before 2021. The project area was the subject of tungsten and antimony mining during World War II and gold mining afterwards done in the manner that gave the mining industry a black star in environmental terms, a black star that it continues to earn in parts of the world like China where the downstream victims have no basis to launch an effective protest. The Stibnite mining plan would involve modern mining standards that are a far cry from past practices, and in effect is a reclamation project funded by an attached gold mine because it would restore salmon migration into the blocked upstream watershed. The location being Idaho, the promise to clean up a mess without involving taxpayer funds still has its share of opposition, a key reason Midas Gold Corp represents good optionality on a higher gold price ("they will never get a permit!"). Midas, which was caught in the middle of a struggle between various environmental interest groups and a forest service perceived not up to the task of competently protecting Idaho's environment, achieved a breakthrough in December 2015 when the Nez Perce Tribe and the Idaho Conservation League agreed to withdraw their objections to an Environmental Assessment filed by Midas after Midas came up with certain modifications, following which the US Forest Service gave the nod for further exploration work. This "permit" is not the same thing as a mining permit for Stibnite; it merely allows Midas to continue exploration activities related to the feasibility study. (See SVH Tracker: February 11, 2015 for more background.)

The big deal will be the Environmental Impact Statement (EIS), which is nearly complete, and once filed, kicks off a full-blown permitting cycle. A decision has not been made when to file, but Quin says the EIS will be ready in Q2 of 2016. The decision by the Nez Perce and ICL to stop litigation put Midas at a crossroads with the following options: 1) go into hibernation at a cost of $3-$4 million per year until the gold price is high enough to justify full-blown permitting, which would dissolve the 3 years of environmental baseline data needed to support an EIS filing, 2) go into a holding pattern where environmental baseline data continues to be collected at an annual cost of $7-$8 million until a higher gold price justifies filing an EIS, or, 3) embark on a full-blown permitting cycle which required a $30-$36 million commitment over the next 3 years. The first option would have created a break in the environmental baseline data, and guaranteed a minimum 6 years before a mining permit was ever granted. The second option would have kept alive the opportunity to file the EIS when gold prices finally took off. But both these options would have cost Midas its current management teams who would have moved on to more interesting projects. Also, with only about USD $5 million working capital left Midas would have had to raise additional substantial "holding cost" equity at punitive prices while the gold price remained low. The third option involves filing an EIS during 2016 and pushing hard to be in possession of a mining permit by 2018 when gold hopefully is much higher than the $1,350 base case price, and the $1 billion CAPEX much easier to finance either through the market or a buyout by a major producer.

The first option was preferred by a certain financier who takes gleeful pleasure in watching the value of his investment shrivel because he has bags of money in the closet he can deploy to buy more stock at ever cheaper prices, and when the turn eventually happens, is quick to dump into the pump as he parrots the lines of somebody "who made all his money selling too soon". Because nobody else thinks he or she is smarter than this individual, and not overly excited about taking profits at the first sign of an uptick after a long wait, nobody else backed option one. Nobody was particularly interested in the second option because it required putting up a lot of money with a payout likely limited by a modest buyout premium offered by a mineral bank or a bottom-fishing producer just when gold started showing some upside legs. The third option required even more money, but fortunately Stibnite had come to the attention of Victor Flores, a former brokerage analyst now working for Paulson & Company Inc, the hedge fund headed by John Paulson. The fund scored big with its short bet against the real estate malfeasance of Wall Street, and then managed to lose a lot of money by catching the gold bug and plunging into physical gold and "optionality" gold plays like Novagold which to be feasible require a much higher gold price not caused by "fiat currency debasement" and "hyper-inflation". One has to wonder to what extent the Goldman Sachs smack-down of gold in 2013 and persistent predictions of sub $1000 gold is schoolyard payback for Paulson's Big Short triumph. On February 22, 2016 Midas announced a $55.2 million financing in the form of an unsecured debenture convertible into stock at $0.3541 per share of which 62.5% was taken down by Paulson while the rest was by existing Midas shareholders. The debenture pays only 0.05% annually. So why was it structured as a convertible debenture rather than a straight equity financing? Apparently a debenture does not have to be marked to market, which has had to be done with Paulson's gold stock positions since 2011. I suppose it is a bullish sign that a hedge fund has chosen now to adopt measures that keep it from looking stupid thanks to a lower stock price arising from a weak gold price.

Although this financing bloats fully diluted to 372,431,686 shares, it eliminates all financing risk until a permit is received and a construction decision is made. Midas Gold Corp is a tier one 2016 SVH Portfolio recommendation because it offers excellent optionality on higher real gold prices over the next 3-5 years, has an excellent management team committed to push the project through the permitting cycle and adapt the feasibility study to any required changes, is fully funded to achieve this task, and is not averse to drilling certain deep "geological" holes to help academic geologists better understand what makes the Stibnite gold system tick.

To help Spec Value Hunters understand the "optionality" on gold that Midas Gold's Stibnite project represents I have created an after-tax NPV sensitivity analysis that utilizes the detailed ore schedule outlined in the technical report. The chart above shows that at the current $1,249 gold price Stibnite has an after-tax 18.9% IRR with an NPV ranging from US $320 million to $626 million for 5% and 10% discount rates. Stibnite is not going into production if gold stays at this level. I am not a big fan of using 5% for a mine whose revenue relies on something so fickle as the price of gold, but the company chose 5% and $1,350 gold as the base case because the NPV comes close to matching CAPEX which is generally regarded as a development decision threshold (the IRR in excess of 15% is fine for larger CAPEX projects). Using this metric the Stibnite project becomes ripe for development at a gold price above $1,400. At $1,600 gold the NPV ranges from $793 million at 10% to $1.3 billion at 5%. The chart below, which plots the NPV in Canadian dollars per share against the price of gold using a 1.35 CAD:USD exchange rate, indicates a price target of $2.87 to $4.86 for Midas Gold if it does not have to incur any further dilution and gold hits $1,600. That is not as exciting as the $6.43-$10.09 price range my model projected at $1,600 in February 2015 when fully diluted was only 163.2 million shares. But with financing risk out of the way, the lower range is much more attractive to Spec Value Hunters who simply want a leveraged bet on a fairly modest 28% increase in the price of gold from the current level. Even at the current $1,249 gold price the target ranges $1.16 to $2.27, half the price range in which Midas Gold traded when it came to market in late 2011 after being spun out by Vista Gold.

In terms of exit strategy the capacity for over 300,000 ounces annual output makes Stibnite potentially interesting to million ounce plus producers such as Agnico-Eagle and Goldcorp, both of whom have been on the acquisition trail. Other potential buyers are the bigger producers Barrick and Newmont which have under-utilized autoclave capacity in Nevada. The Stibnite ore is refractory and the mining plan includes a flow-sheet of flotation followed by pressure oxidation in an autoclave which will be located on the minesite. Trucking the sulphide concentrate 400 miles to Nevada would add to the operating cost, but there would be an economy of scale cost offset. Furthermore, the trucking option would eliminate the POX portion of the $336 million processing plant CAPEX. But Barrick and Newmont are still sorting out problems incurred during gold's run toward $2,000 and are not likely to look at acquiring Midas until a year or two from now, provided gold prices have strengthened. The rest of Midas Gold's shareholders are unlikely to tender to a predatory bid from Goldcorp or Agnico-Eagle unless the price is well above $1, and smaller producers are simply not viable candidates to take on a big CAPEX project like Stibnite. While existing shareholders who have supported Midas during the past couple years are probably a resigned lot who might tender to a "liquidity event" bid, Paulson & Co Inc is a newcomer which has placed a big bet that Stibnite will get permitted within three years during which gold will rise well above $1,400 per oz and turn Midas Gold Corp into a 5-10 bagger buyout from the current price of $0.38. As an optionality style gold play Midas Gold Corp is not going to create much direct excitement, which will all come from gold price action. But if management starts drilling some deep holes, whose results will not change the mining plan, but could alter the long term strategic value of Stibnite to a major gold producer, that could prove a pleasant distraction. Midas Gold also has the potential to attract a market premium because it is the biggest advanced gold project in the United States controlled by a junior with a realistic chance of production by 2021.

 
 

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