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 Mon Jul 27, 2020
Tracker: What is Midas Gold worth at current gold prices?
    Publisher: Kaiser Research Online
    Author: Copyright 2020 John A. Kaiser

 
Midas Gold Corp (MAX-T: $1.300)
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Tracker - July 27, 2020: What is Midas Gold worth at current gold prices?

Midas Gold Corp expects to release its Draft Environmental Impact Statement in August 2020 which will kick off a 45 day plus public comment period, following which Midas plans to publish its long awaited feasibility study. The Final EIS and Draft Record of Decision is expected to be published in Q2 of 2021 which should result in a Final Record of Decision in Q3 of 2021. Since raising CAD $55.2 million from John Paulson in early 2016 to start permitting the Stibnite gold project in Idaho, Midas has spent USD $53 million to the end of 2019 on permitting out of a total of $210 million spent since 2011 on the project. Much of the delay and expense was due to having to deal with multiple agencies and a Forest Service that simply lacked the skill set needed to permit a 20,000 tpd open-pit mine within an environmental disaster zone created by two mining cycles, World War II when Stibnite supplied America's war effort with antimony, and post-war gold mining by operators who had no environmental regulations to follow and who did not survive to reclaim the mine site. The Stibnite mining plan is in effect a giant reclamation plan funded by a gold mine which will restore salmon migration into the upstream watershed. The Stibnite gold deposits also have a significant antimony credit totaling 204 million lbs according to the 2018 M+I resource estimate, of which 178 million will be recoverable over the 15 year life of the resource. Furthermore, during exploration Midas discovered a very high grade antimony zone separate from the gold zones whose resource is apparently bigger than that within the gold zones, and which will be accessible as an underground mineable zone thanks to the river diversion tunnel Midas must build which comes very close to the antimony zone. Stibnite will be of critical strategic importance to the United States if the New Cold War with China escalates to the point where China ceases to supply antimony whose main uses are as a flame retardant and in lead acid batteries. China's own 75% control of global supply is mainly from a single deposit that is approaching depletion, with much of the rest of the world's supply coming from countries who are not on the "We Love America" list.

Midas published a PFS in December 2014 using $1,350 gold as a base case price which yielded a weaker economic outcome than indicated by an earlier PEA. The after-tax NPV at a 5% discount rate was USD $832 million relative to CapEx at $970 million and an IRR of 23.4%. Until mid 2019 gold spent most of its time below $1,300 since the PFS was released, which contributed to Midas financing heavily first at $0.355 in early 2016 and again this year at $0.44 in the middle of the Covid-19 market meltdown, both in the form of a zero coupon convertible loan whose conversion now pushes fully diluted to 505 million shares. The PFS was weaker than the PEA because certain parts of the deposits lacked the drill density needed for inclusion in a PFS, which caused Stibnite to lose half its antimony resource and suppressed the ability to front load the ore schedule with high grade ore. Infill drilling has overcome this problem, with a new resource estimate published in February 2018. But a big question has been how the cost structure has changed since the PFS as Midas did feasibility study engineering and incorporated changes generated by the permitting process. With gold threatening to challenge $2,000 everybody wants to know what is Stibnite worth at today's gold price.

The diagram above depicts the after tax NPV at 5% and 10% at different gold prices. It is based on a spreadsheet cash flow model which mimics the model presented in the PFS technical report. This includes the grades provided in the ore schedule. The diagram below is the same thing except it depicts the stock price when you divide the after tax NPV figure by the 505 million fully diluted shares of Midas. The results are similar to the PFS DCF except that I have used the new 21% federal tax rate instead of 35% which results in an effective 29.4% tax rate when you apply the federal rate after deducting state taxes. Note that at the base case price of $1,350 gold the range we could expect for Midas is $1.39-$2.40 depending on which discount rate you prefer. At the current gold price if $1,936 that range jumps to $3.86-$5.71, implying that despite the stock's dramatic move since mid July there is plenty of upside left, especially if you dare to believe $3,000 gold without significant inflation is possible.

When asked how costs have changed CEO Stephen Quin has suggested that hardware intensive CapEx has risen while OpEx has dropped somewhat. But he has not indicated by how much. We will find out when Midas releases its feasibility study in Q4 of 2020.

The Speculative DCF diagrams above and below reflect my effort to "update" the PFS. I have boosted CapEx 34% to USD $1.3 billion while dropping OpEx 9.4%. These are simply guesses based on my belief that Quin would have given us a stronger warning about CapEx if Stibnite was suffering a capital cost blowout. I have used the measured and indicated resource of 104,912,000 tonnes at 1.66 g/t gold, 2.53 g/t silver and 0.09% antimony in place of the PFS resource of 89 million tonnes at 1.61 g/t gold, 2.43 g/t silver and 0.07% antimony. This has allowed me to extend the mine from 12 to 15 years. I have also reinstated the ore schedule grades for gold and silver from the PEA while letting antimony be mined at the 0.09% life of mine average (including the 4 later years when the West End deposit is mined for which no antimony credit has been reported). These changes do boost the after tax NPV but not outlandishly so.

If the feasibility study delivers changes along the lines I suggest, the outcome will not be significantly different from that of the PFS. What is very different is today's $1,936 gold price and both my models show what happens at different gold prices. I keep silver constant at $24/oz, which is not important because the silver grade is quite low and recovery is only about 14%. I am probably under-estimating the economic impact of antimony because I am using the current weak price of $2.31/lb. I am using only a 68% payability to reflect the fact that Midas plans to sell the antimony concentrate to a refiner. Midas Gold is moving up because we have some clarity about the Idaho permitting timeline and because the gold price is threatening to break past $2,000. My DCF modeling makes clear the leveraged impact a modest percentage gold price increase has on the value of the Stibnite project. The last financing round takes care of Midas Gold's needs through the end of 2021 by which point we expect Stibnite will be permitted to become a mine. The current mining plan includes an expensive pressure oxidation stage which deals with the refractory nature of Stibnite's sulphide ore. It may not be necessary. In May 2018 Barrick invested USD $38 million at CAD $1.06, which it has supplemented through pro-rata participation in subsequent financings so that today it owns 10.5% on a fully diluted basis. John Paulson whose hedge fund has become a family office fund owns 40.7%. If Barrick or Newmont were to buy out Midas Gold they could arrange to have the Stibnite concentrates trucked to Nevada where the Nevada Gold JV has roasting capacity. Barrick and Newmont are unlikely to make a bid until Stibnite is permitted, and it is doubtful another producer will launch a hostile bid before then. Midas Gold thus represents the perfect trading proxy for the leveraged upside generated by higher gold prices for a single project, pre-production junior. Midas Gold has been a Good Spec Value rated Favorite since December 31, 2019 when I upgraded the company from a Fair Spec Value rating. I am maintaining the Good Spec Value rating because the stock is still under-valued despite the recent move to the current level. If you believe gold can establish a new price level in the $2,000-$3,000 range, that the feasibility study will not deliver a CapEx blowout well beyond $1.3 billion, and the permitting timeline is no longer a moving target, Midas Gold Corp is the best advanced gold junior as a leveraged bet on gold with a price target in the $5-$10 range. There is no other junior this advanced with the capacity to produce about 350,000 ounces gold per year.

 
 

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