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 Tue Jul 20, 2021
Tracker: The Upside Implications of Nelligan for Vanstar
    Publisher: Kaiser Research Online
    Author: Copyright 2021 John A. Kaiser

Vanstar Mining Resources Inc (VSR-V: $0.620)


Tracker - July 20, 2021: The Upside Implications of Nelligan for Vanstar

Vanstar Mining Resources Inc is assigned a Fair Spec Value Rating at $0.65 and made a 2021 Favorite effective July 20, 2021 based on its 20% net interest in the 3.2 million ounce Nelligan gold project in which IAMGOLD is vested for 75% and can earn 80% by delivering a feasibility study. Vanstar is primarily an asset play based on the future value of its Nelligan stake which under current outcome visualization assumptions is in the $3.50-$4.50 per share range depending on the discount rate used for the DCF model based valuation. This target will take several years to achieve if IMG embraces a timeline that delivers a feasibility study by 2025. The project has potential to deliver at least a 50% resource expansion, whose plausibility should be evident by the end of 2021, and this would boost the target range to $5.40-$6.90. During this period the price of Vanstar will also track gold price trends, which, if driven higher by factors other than inflation which do not increase capital and operating costs, would, at $3,000 gold for example, boost the current OV target outcome range 158% to $9.03-$11.61. The downside risk is that the destiny of Nelligan is completely under the control of IMG, which for reasons unrelated to Vanstar may not aggressively advance Nelligan. That is why Vanstar is secondarily a play on the new management's capacity to leverage the fundamental value of the 20% Nelligan stake into an asset acquisition-development strategy that is accretive to Vanstar and completely under management's control. Such a strategy needs to be deployed by CEO JC St-Amour during H2 of 2021 before IMG completes a minimum 9,200 m drilling program at Nelligan that began in July 2021.

Nelligan is a new style of disseminated gold deposit in the Abitibi region hosted in sedimentary rocks of the Caopatina Formation (mudrock and quartz-feldspar wackes) that was discovered in 2013 which has potential for at least 50% expansion along strike and unknown underground mineable potential at depth. The property covers the host geology and is bounded by tonalitic intrusions to the north and south. Nelligan shows a greater affinity to intrusion related gold systems than the orogenic systems typical of the Abitibi Greenstone Belt.

Gold is very fine grained and occurs within disseminated pyrite typically running 1%-3% but spiking as high as 10%-30% in silicified zones though gold is not correlated with pyrite abundance. Visible gold is rare but grade over short intervals has spiked as high as 38.5 g/t gold. IMG has established a 92% recovery is possible through flotation and subsequent regrinding of the flotation concentrate and tails before leaching. Further metallurgical studies confirming this flowsheet and recovery are needed.

IMG has been the operator since 2014, delivered the maiden resource estimate in October 2019, and has initiated a minimum 9,200 m drill program for 2021, of which about half will delineate the western extension of the Renard Zone, about 15% will test the eastern extension, and the remainder will infill drill the Renard Zone to upgrade the existing open-pittable inferred resource of 96,990,000 tonnes at 1.02 g/t gold, 93.4% of which resides in the Renard Zone. The 2021 drilling is expected to lead to an updated resource estimate in early H1 of 2022 which is unlikely to include results of the 2021 drilling within the 2,000 m long West Extension. (Note that the pit shell diagram below is looking north while the 3D deposit model above is looking southwest - the tabular bodies strike roughly east-west and dip southwards.)

If the expansion drilling is positive, IMG will likely spend 2022 delineating it to support a further resource update by Q1 of 2023. If the West Extension drilling disappoints, IMG will likely focus on a PEA for Q1 of 2023, followed by work leading to completion of a feasibility study in 2025 and a production decision. H2 of 2021 will thus be pivotal in either showing that a 50% plus gold resource increase is unfolding, or IMG will push Nelligan into the feasibility demonstration track in 2022. Both scenarios are positive for Vanstar; the first will boost the fundamental value of Vanstar's 20% interest while the second will shorten the timeframe for monetization of Vanstar's 20% carried interest. In either case Vanstar's 20% interest will serve as a proxy for the price of gold once the market understands the fundamental value of Nelligan.

In that regard I have created an Outcome Visualization for a 30,000 tpd open pit mine scenario based on the existing inferred resource. For the cost assumptions I have relied on a PFS First Mining Gold Corp produced in January 2021 for the similar Springpole deposit in Ontario and the pit constraint assumptions used by IMG for Nelligan's maiden resource estimate. At an $1,815/oz gold price this 9 year open pit scenario has an after-tax NPV of USD $867 million using a risk-adjusted 8% discount rate, and $1,085 million at 5% discount rate. At a CAD:USD exchange rate of 1.2759 these NPV figures translate into CAD $1,106.3 million and $1,384.4 million respectively, which, after adjusting for a 20% net interest and 62,065,458 million shares fully diluted, represent a future stock price of $3.56 or $4.46 per Vanstar share. In terms of the rational speculation model, which assigns a fair speculative value of 5%-10% of the future outcome to a project still at the infill-metallurgy stage, the fair value range would be $0.18-$0.36 at the 8% discount rate and $0.22-$0.44 at 5%.

Technically this implies poor speculative value for a stock price in the current $0.60-$0.70 range, but in practical terms such rigid thinking is inappropriate in these circumstances. The Nelligan mining scenario and its location near the established Chibougamau mining district do not pose complex cost discovery obstacles, so what a PEA will look like is not a big mystery. If a PEA is delivered for Nelligan the fair speculative value range jumps to 10%-25% of the target outcome, which becomes $0.36-$0.89 at 8% discount rate and $0.45-$1.12 at 5% discount rate. An additional favorable circumstance is that Vanstar is carried through production, meaning that there is no dilution risk linked to financing a minority stake in a future mine. The deal with IAMGOLD is a strong one for Vanstar. A further favorable circumstance is that several holes previously drilled into the West Extension area offer a strong case that a 50% resource expansion is plausible and would become evident by the time IMG finishes drilling 4,500-5,000 m in this area.

If we boost the resource to 150 million tonnes at the same 1.02 g/t grade, this extends the mine life from 9 to 14 years. The after-tax NPV at 8% surges to USD $1,289 million and at 5% to $1,686 million or CAD $1,645 million and $2,151 million for 4.5 million recoverable gold ounces. The expansion scenario translates into a future Vanstar stock price of $5.43 at 8% and $6.93 at 5% discount rates. If a PEA supports this outcome, the fair speculative value range at 8% discount rate will be $0.54 to $1.36. If IMG immediately proceeds to the PFS stage, where 25%-50% is the fair speculative value range, the fair spec value range becomes $1.36 to $2.72 per Vanstar share. None of this includes the optionality value of a move by gold into the $2,000 plus range. In its pit shell cutoff grade assumptions for the maiden resource estimate IMG used $1,320/oz as the price for gold which resulted in a 0.5 g/t cutoff. Dropping the cutoff grade to 0.3 g/t would boost the gold resource by 22%; depending on how the West Extension drilling turns out, possibly benefiting from the lower cutoff grade, the open-pittable Nelligan resource could grow to 5 million plus ounces which becomes important if gold does secure a repricing into the $2,000-$3,000 range reflecting global uncertainty rather than inflation.

Vanstar Mining Resources Inc has been made a 2021 Favorite for two basic reasons. The first reason is as a bet that the Nelligan project will over the next four years march through the feasibility demonstration stages, during which the fundamental value of Vanstar's 20% stake will increase as the project approaches a production decision, will benefit from any resource expansion exploration success, and will track the economic impact of higher real gold prices. The risk with this strategy is that IAMGOLD proceeds very slowly with Nelligan or loses interest. The second reason relates to the ability of the new management which arrived in H2 of 2020 to leverage the fundamental value of the 20% Nelligan stake into projects whose destiny Vanstar controls. The junior has $5.1 million working capital of which $1.9 million is in the form of flow-through money that must be spent by the end of 2022. Vanstar has four Quebec grassroots exploration plays, Felix in the Abitibi region, and the Amanda, Eva and Frida in the James Bay region. None are overly interesting at this stage. The challenge for Vanstar is to leverage the fundamental value of the Nelligan stake as a foundation to secure access to more advanced projects controlled by distressed or incompetent juniors. Vanstar has a lacklustre history as a junior whose founder Guy Morissette "retired" in August 2020 after which the board was replaced by a new group headed by Victor Cantore, the CEO of Amex Exploration Inc which has had tremendous success turning the tired old Perron gold system into a new high grade discovery. The new group came by way of Vanstar's CFO, Martin Nicoletti, who is also CFO for Amex. In January 2021 Vanstar appointed JC St-Amour as the new CEO and President. St-Amour, who has a geology degree and CFA, has a mining sector background in both investment banking and resource juniors. He will be critical in determining whether Vanstar spends the next few years trading as a valuation proxy for the Nelligan project or also grows into a junior in control of its destiny.

The probability of an early buyout by IAMGOLD is low. IMG is a mid-tier gold producer specializing in open pit mines which operates the Rosebel and Essakane mines in Suriname and Burkina-Faso, is building the Cote open-pit mine in Ontario, and studying the feasibility of developing the Boto deposit in Senegal. Nelligan thus fits well as a future mine for IMG, but the producer currently has its hands full and has not so far demonstrated any urgency with regard to advancing the Nelligan project. Vanstar is carried through production, which means there is no dilution required to maintain its stake in Nelligan. Once IMG has vested for 80% it has the right to purchase Vanstar's 20% interest at fair market value established by a mutually chosen independent party; the purchase price will likely be a modest discount from the after-tax net present value established by the feasibility study. However, because Vanstar will also receive a 1.5% NSR over the entire property, and already holds a 1% NSR on claims which cover about 20% of the current resource, a likelier outcome will be that IMG makes a bid for the entire company using its stock as currency. The OV shows that a 1% NSR has an NPV of USD $39 million at 5% for the USD $52 million revenue Nelligan's current resource would generate over a 9 year mine life. The 1.5% NSR would be worth USD $60 million or CAD $77 million, equivalent to CAD $1.24 per share on top of what IMG would pay to acquire the 20% net interest.

Since peaking at $23.79 in 2011 IMG has struggled during the past decade to regain the market's respect, and its stock price has not really tracked gold's 2020 move into the $1,700-$2,000 range. If gold remains at current levels or trends higher, and Cote performs as expected when commissioned in 2024, IMG will be a much stronger company in a few years and ready to move forcefully on Nelligan. IMG also now owns 100% of the nearby Monster Lake high grade gold deposit (433,000 oz at 12.1 g/t gold) which is too small to develop as a standalone underground mine but whose ore could be blended with a larger Nelligan operation.

Vanstar went public in May 2010 by IPO as a Quebec focused exploration junior founded by Guy Morrisette which optioned the original Nelligan claims in September 2010 from a pair of prospectors on easy terms. Located 60 km southwest of the copper mining town of Chibougamau, the Nelligan property was first explored in 1951 when the Joe Mann deposit (4,754,375 t @ 8.26 g/t gold and 0.3% copper mined 1956-2003 - 1,080,000 oz gold 22.5 million lb copper) was discovered 18 km to the northeast. The property is covered with 10-50 m of overburden with very little outcrop. After a lull in 1967-1977 the area received fresh attention from various groups including SOQUEM until 1996, after which there was no work until Vanstar optioned the property. Prior to Vanstar's involvement 59 holes were drilled within the current Nelligan property, largely on a variety of geophysical targets.

Vanstar first drilled in 2012 in an area explored in 1994, but it was not until a magnetic survey completed during the summer of 2013 which revealed a magnetic corridor projecting to the west that the Nelligan story began to take shape. Although drilling in 2014 generated interesting results there was no market reaction, but in November 2014 IAMGOLD optioned the property in a deal that was amended in 2018. Under the current deal IMG has vested for 75% by delivering a maiden resource estimate and paying Vanstar $2,750,000. IMG can increase to 80% by completing a feasibility study though there is no deadline for this milestone. That does not matter because Vanstar is fully carried through the commencement of production, and would pay back its 20% share of CapEx from 80% of Nelligan cash flow. Once IMG has completed a feasibility study it will have the right to purchase Vanstar's 20% at fair market value based on an independent valuation, which would likely be some discount from the after-tax NPV generated by the feasibility study to reflect the time needed to permit and construct a mine. While the main exploration focus in 2021 is expansion of the Renard Zone to the east and west, IMG did do property wide sampling and stripping in 2020 which has identified several target areas to the north and south of the Renard Zone that will be followed up on in 2021.

As far as area play potential is concerned, in May 2020 IMG optioned up to 80% of the Anik project to the east of the Renard Zone from Kintavar Exploration Inc in a deal that is considerably weaker than the one Vanstar has with IMG. Northern Superior Resources Inc owns the Lac Surprise project which adjoins to the west of the Renard trend where Northern Superior believes it has found the continuation of the same mineralized geology. There is still an apparently unexplored 1 km gap between the Lac Surprise boundary and the western limit of the West Extension grid IMG has targeted for expansion drilling in 2021. While Northern Superior has attracted attention by presenting Lac Surprise as a potential repeat of the Nelligan story, none of the other surrounding juniors have gained any market traction from Nelligan. As far as Vanstar is concerned it would benefit from any area play excitement generated by "bigger and better" results at Nelligan; its key story is the 20% carried interest in Nelligan itself.


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