Feasibility Report on Australia Gold Project Increases Reserves & Value
Adrian Day of Global Analyst looks at Vista Gold’s long-awaited feasibility study on its Australian gold project, and provides updates on a couple of other companies on his list.
Vista Gold Corp. (VGZ:NYSE.MKT; VGZ:TSX) (VGZ.NY, 0.8184) reported a robust Definitive Feasibility Study (DFS) for its Mt Todd project in Australia, showing a 19% increase in reserves, and a longer-mine life compared with the preliminary study in September 2019. Under the revised plan, the project has a net present value (NPV) of $1.5 billion at $1,800 gold. Vista’s market cap is less than $100 million. But costs, both capex and operating, also increased over the previous study.
The DFS was done using a base case of $1,600 gold price, and using an Australian dollar rate of 71 cents, at which prices, the NPV is just under $1 billion (with a 5% discount rate). This is an increase from $823 million in the earlier study. Among the major changes, Vista now intends to have a third party build, own and operate the power plant, which helps keep the capex increase to 8%, now standing at $892 million. At $1,600 gold, there is a pay-back of just under four years. The mine is projected to operate for 16 years, an increase of three years.
Ongoing costs are good, with a $752/oz cash cost, all-in costs of $860, lower than comparable mines. Nonetheless, the cash costs were far higher than in the earlier study, when they came in at $645/oz, a reflection of ongoing cost inflation, as well as mining additional lower-grade ore. The gold price is already significantly higher than the price used for the feasibility, of course, but so too is the AUD higher. A higher local currency increases costs, both capex and ongoing costs.
More growth ahead as company looks for deal
Although the new study increased reserves, this was all through conversion of former resources. None of the new drilling over the past 18 months has been included in the study. The company is confident it will be able to increase the reserves and resources through exploration as the main pit remains open at depth, while drilling between two known deposits continues to show good mineralization.
The mine could see its first pour in as early as three years. The company said it was looking at a broad range of alternatives to advance the project, including a partnership. It clearly wants to retain an interest in the project rather than a straight sale, but finding a transaction agreeable to a major company putting up the funds to build the mine while Vista retains a meaningful ownership may require some negotiation. The good news is that Australia is opening up just as the feasibility is released, almost on cue, so head-office teams will now be able to visit the property for due diligence. Buy but don’t chase.
Fortuna calm as analysts fulminate
Fortuna Silver Mines Inc. (FSM:NYSE; FVI:TSX; FVI:BVL; F4S:FSE) (FSM.NY, 3.59) seems pretty relaxed about the absurd permitting situation at its San Jose mine in Mexico. It has initiated legal action, but says that if “the worst that happens” is the two-year extension holds, it will reapply at the time for an extension to that. The mine continues to operate. Meanwhile, many analysts are raking Mexico over the coals for the on-again, off-again permit situation. In truth, the south of the country has more problems than the northern part, where there is less opposition to mining. But the action of the central government, including SEMARNAT, the environmental agency headed by a known anti-mining activist, is hurting the country’s reputation. Fortuna, however, at the current price is a buy.
Yet another deal for Wheaton, adding to growth pipeline
Wheaton Precious Metals Corp. (WPM:TSX; WPM:NYSE) (WPM.NY, 41.98) announced a $145 million equity and stream agreement with Sabina Gold on its Goose Project in Nunavut, Canada. First production is expected in early 2025. Once in production, this stream would account for about 1% of Wheaton’s total production. This transaction follows a string of relatively small transactions with development-stage projects. There have been six such transactions over the past year, most in recent months. They increase potential growth in the medium term, and have generally been done on attractive price metrics, but carry increased development risks.
Wheaton also announced its full-year production results, which were solid, with positive guidance for this year. The mine expansion on its largest asset, Vale’s Salobo, is expected to come on stream in the second half of this year, boosting production. Wheaton also reiterated its five-year guidance. Hold and look to buy on weakness.
Barrick increases reserves on drilling success
Barrick Gold Corp. (ABX:TSX; GOLD:NYSE) (GOLD.NY, 20.68) gave a year-end reserve update, showing a minor increase in reserves beyond replacing mined ounces. In the mining industry, even a minor increase is considered a victory! Barrick calculates its reserves using a $1,200 price. The average grade increased as well. Most notably, Barrick increased ounces at its Nevada Gold Mines joint venture with Newmont, as well as in Tanzania, which offset declines elsewhere, particularly at Porgera due to a reduction in Barrick’s ownership interest. Among the seniors, Barrick, along with Agnico, has the highest emphasis on exploration. If you do not own, Barrick is a top buy among the major miners. If you already own, we’d hold after the recent run up.
Drilling success, partner buyout, and new reserves at major gold companies
Agnico Eagle Mines Ltd. (AEM:TSX; AEM:NYSE) (AEM.NY, 49./74), its acquisition of Kirkland Lake complete, gave an update to the exploration program at Detour Lake, showing the potential for significant reserve and resource upside, with opportunities for higher-grade resources. Detour Lake exploration is a major focus for Agnico, with 12 drill rigs operating on site. Agnico is a buy.
Newmont Corp. (NEM:NYSE) (NEM.NY, 63.86) acquired partner Buenaventura’s share in the Yanacocha mine in Peru for $300 million plus contingent payments of up to another $100 million. It now holds 95% of the mine (with Sumitomo holding the other 5%). A go-ahead on the sulphides project is expected in the second half of this year, which will add over 500,000 ounces per year for Newmont and extend the mine life to 2040. The purchase price is attractive, with Buenaventura needing to raise capital to reduce its debt. Hold.
Yamana Gold Inc. (YRI:TSX; AUY:NYSE; YAU:LSE) (AUY.NY, 4.40) replaced its reserves and resources, with minor changes at individual assets. Hold.
TOP BUYS now, in addition to those above, include Midland Exploration Inc. (MD:TSX.V) (MD, To., 0.49) and Lara Exploration Ltd. (LRA:TSX.V) (LRA, To., 0.485–0.52). Other gold stocks can be bought if you are underweight, including Pan American Silver Corp. (PAAS:TSX; PAAS:NASDAQ) (PAAS, Nasdaq, 23.84) and Osisko Gold Royalties Ltd. (OR:TSX; OR:NYSE) (OR.NY, 12.15).
Originally published on Feb. 13, 2022.
Adrian Day, London-born and a graduate of the London School of Economics, is editor of Adrian Day’s Global Analyst. His latest book is “Investing in Resources: How to Profit from the Outsized Potential and Avoid the Risks.”
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