Gold Sector Note August 7, 2014
Company Mentioned
Gold Sector Company Rec. Target Bear Creek Spec. Buy $3.50 Belo Sun N/R N/A The Revival of the Takeover 20 (ish) Carlisle Goldfields Spec. Buy $0.27
Castle Mountain Spec. Buy $2.60
Freegold Spec. Buy $0.42
Gryphon Minerals Spec. Buy $0.25 Event Guyana Goldfields Spec. Buy $4.00 We are reviving our “Takeover 20” analysis. After three years of worshipping at the altar Integra Gold Spec. Buy $0.60 of cash-flowing companies, we believe the time is right for gold sector investors to Kaminak Spec. Buy $1.50 consider development-stage projects. In this note, we present the strategic rational, which MAG Silver N/R N/A boils down to scarcity, the value proposition, and then proceed with initiating coverage of Mega Precious Metals Spec. Buy $0.35 Midas Gold Spec. Buy $2.95 seven of the 25 companies. In this update of the Takeover 20, we have gone further than Orbis Gold Spec. Buy A$0.70 previous reports, providing more comprehensive analysis, not to mention expanding our Orezone Gold Spec. Buy $1.15 universe to more than 20 — almost all new names to the Takeover 20. Our goal is to offer Petium Resources N/R N/A insight into the best-of-breed development projects, helping readers tailor their selections Premier Gold N/R N/A to their investment preferences, be it high IRR projects or low entry cost per ounce. We Probe Mines N/R N/A are launching coverage of: Carlisle Goldfields; Castle Mountain Mining; Freegold Ventures; Romarco Spec. Buy $0.95 Integra Gold; Midas Gold; Orbis Gold; and Seabridge Gold. Roxgold N/R N/A Details Rubicon Minerals N/R N/A Producer’s reserves are decreasing in response to lower gold prices. It’s a matter of Sabina Spec. Buy $1.50 Seabridge Spec. Buy $20.00 time before the equity market recognizes that the producers need to replenish by Torex N/R N/A acquiring development-stage projects. Historically, producers have acquired, not True Gold N/R N/A discovered; i.e., 81% of reserve replacement dollars have gone to acquisitions. Victoria Gold Spec. Buy $0.30 Gold is becoming increasingly hard to find, especially in politically stable regions. Yet, investors have punished gold companies making acquisitions in development Research Analysts projects, viewed as cash consumers. While this was also the case in the energy and base metal sectors, some recent acquisitions of development-stage projects indicate Don MacLean, Sr. Analyst 416.360.3459 Don Blyth, Analyst 416.360.3461 the tide is turning. Our philosophy: “The first diners get the best parts of the buffet”. Lauren McConnell, Analyst 416.366.7776 Exploration budgets and discoveries dropping sharply. For a few years, the number Grant Moenting 416.360.1397 and volume of new discoveries was dropping sharply, even while exploration budgets were setting new records. Sharply curtailed producer and explorer budgets can only Sales accelerate the gap between rising production and new discoveries. Gold is scarcer Toronto 416.361.1064 than generally perceived and while it might take years to register in the supply- demand equation, we think the perception of this scarcity is quietly dawning on producers who now feel the squeeze between the pressure to increase production (to improve profits) and declining reserves. Gold Equities are cheap! We believe the gold sector has bottomed, and while prices have started to pick up the values remain excellent. Our Takeover 20 candidates have only regained 20% of their four-year trading range on average. Consider the recent Osisko transaction, purchased for ~$3.5B — a 60% premium to the opening bid by Goldcorp, yet it was still ~20% below Osisko’s market cap of four years ago ($4.4B)! Conclusion It seems fitting to bring back the Takeover 20 now — the beginning of what we believe is a new mining cycle. We have focused on the developers because we see a unique investment opportunity, caused by the following inconsistency: the market values developer equities on par with cabbage soup, yet falling discovery rates and producer reserves are sending a strong signal that Mother Nature is telling us gold is scarce. We know who we think will change — the market, not Mother Nature. The 25 companies in our Takeover 20 each have a good investment proposition. We have selected seven to initiate coverage on in this report, in addition to the nine that we already cover.
Paradigm Capital Inc, IIROC/TSX member 1 August 7, 2014
Gold Sector Note
Reviving the Takeover 20 In late 2005, we published an analysis dubbed The Takeover 20, which became a popular periodical. It attempted to highlight, using fairly simple valuation techniques, 20-ish companies that either we or our clients felt were takeover candidates. There wasn’t much call for it after mid-2012, but now is a good time to launch a new Takeover 20 focused on development and advanced exploration companies. It was too hard to narrow the list down to just 20, so readers will note 20-ish is more accurate. Quite a bit more detail is provided in the new platform and it seemed a good opportunity to use this to initiate coverage of a six favourite companies. We can’t promise that it will offer any better track record, the old one was reasonably good, but the new, more comprehensive analysis should help readers tailor their selections to their investment preferences, whether it is to find high IRR projects or low entry cost per ounce of resource.
The Takeover 20 has had a reasonably good track record, but the timeframe can be years, not months. For example, Osisko was included back in 2006 and was taken over in 2014. The results over the past nine years are displayed on Figure 1.
Figure 1: Takeover 20 Report Card
Date Successful In Existence Bankrupt December 2005 13 4 3 May 2011 5 14 - June 2012 6 18 - Source: Paradigm Capital Inc.
New Initiations Despite now having detailed models for each of the companies in this report, and liking almost all of them, it just didn’t make sense to initiate coverage on them all. We have identified six that offer excellent upside, in our opinion. They span the spectrum in size, from Carlisle’s ~$14M market cap to Seabridge’s ~$458M. Each new initiation has a unique investment thesis. Carlisle Goldfields (CGJ‐T, C$0.05, Speculative Buy, C$0.27 Target) is a small cap (C$14M) explorer-developer with two neighbouring projects in Manitoba hosting 1.9Moz of estimated mineable resources. The overall project has one of the best IRRs at 28% after tax, one of the best IRRs to a potential acquirer (22%) and lowest P/NAVs (0.08x), plus exploration upside. Castle Mountain Mining (CMM‐V, C$0.69, Speculative Buy, C$2.60 Target): If there is one company that has a project that should be developed by the company itself it is Castle Mountain’s. While one of the best in our valuation criteria it also has one of the lowest execution risks, with the key mining permit in hand and past experience from the predecessor mine. Freegold Ventures (FVL, C$0.20, Speculative Buy, C$0.42 Target): An arctic heap leach candidate located next door to the very successful, very low-grade Fort Knox mine in Alaska, FVL has identified 6.5Moz to date for >$2/oz with heaps (sorry) of exploration upside, valued at just $3/oz. Integra Gold (ICG‐V, C$0.21, Speculative Buy, C$0.60 Target): Currently hosts a 0.8Moz at 10.8 gpT underground deposit known as Lamaque just outside the town of Val D'or, Quebec and just south of the historic Lamaque and Sigma Mines that produced +4.5Moz over their respective life times. Although Lamaque's current resource is small, we believe it is only a snap shot into time and that its
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Gold Sector Note
development plan is an intelligent market friendly (low capex, low risk, low cost) option. Midas Gold (MAX‐T, C$0.73, Speculative Buy, C$2.95 Target): The company’s 7Moz Golden Meadow project in Idaho is one of the largest and best undeveloped gold deposits in the USA and is trading at one sixth the market cap of its closest analogue, Romarco. This is because Midas is about to enter the 3-5 year permitting process that Romarco is just finishing. The prize is well worth the wait, we believe. Orbis Gold (OBS‐ASX, A$0.38, Speculative Buy, A$0.70 Target): Orbis’ 2.0Moz Natougou project is relatively small relative to many of the peers in this study, but the 3.4 gpT average grade is amongst the best for open-pittable deposits. We believe it is one of the top three undeveloped projects in Burkina Faso, a country that has backed up the talk of being “mining-friendly and open for business” with the opening of 7 new gold mines in 7 years, and remarkably responsive turnaround on permitting applications. Seabridge Gold (SEA‐T, C$10.38, Speculative Buy, C$20.00 Target): The KSM project stands out as a giant among the world’s largest undeveloped copper gold deposits and is valued at just $15/oz. A neighbour to Pretium in B.C., the two share an extraordinarily endowed copper-gold camp. While our 8.5% IRR is not quite viable, Seabridge provides investors with exceptional leverage to rising prices.
Paradigm Capital Inc, IIROC/TSX member 3 August 7, 2014
Gold Sector Note
Figure 2: Takeover 20 Summary Page Assumptions Gold Price: $1,300 Copper Price: $3.00 SUMMARY Silver Price: $20.80 C$ Exchange: $0.94 "TAKEOVER TWENTY" LOM Other Investor Share of Price Capital Shares Net Mkt Reserves Paradigm LOM Total IRR to Market Construction Resources Process Net Mkt Sustaining Total Annual Production to Long Project IRR Efficiency Last Economic Outstanding Cap Moz Au Estimate of Construction Cash Acquirer P/NAV Stock Price Company Ticker Cap Capex Moz Au Recov Cap/ Au Capex/oz Cost/oz Country Production Start Year Term From Start of (NAV/ Study Completed (millions) US$M Equiv Recoverable Capex/oz Cost/oz (w/ 30% (unfinanced) US$M Remaining Est Equiv % Equiv oz Au Equiv Au Koz Au (Assumed) Cash Construction Construction FDITM ** (Co Share) Moz Au Equiv Au Equiv Premium) US$M (Co Share) Equiv*** Equiv Flow Capex) Cdn$
$3.46 Bear Creek Mining BCM-V Feasiblity 99.4 $314 $230 $690 4.3 4.0 4.3 64% $83 $249 $125 $87 $543 Peru 146 2017 6.3 20% 9% 0.52 0.91
$0.24 Belo Sun Mining BSX-T PEA 265.9 $57 $46 $632 0.0 7.6 4.4 94% $11 $151 $852 $86 $1,100 Brazil 171 2017 11.2 12% 7% 0.30 0.42
$0.05 Carlisle Goldfields CGJ-T PEA 303.9 $12 $12 $285 0.0 2.6 2.0 88% $7 $165 $685 $133 $990 Canada 143 2019 4.3 28% 22% 0.08 0.68
$0.69 Castle Mountain Mining CMM-V PEA 77.1 $49 $42 $123 0.0 3.4 3.6 74% $16 $46 $988 $97 $1,147 USA 122 2016 6.6 24% 14% 0.26 1.39
$0.20 Freegold Ventures FVL-T Resource 78.2 $14 $14 $185 0.0 6.5 1.1 80% $16 $217 $763 $76 $1,071 USA 95 2018 4.5 23% 17% 0.16 0.45
A$0.17 Gryphon Minerals GRY-ASX Feasibility 401.3 $63 $28 $105 0.7 2.5 0.7 78% $49 $182 $825 $90 $1,145 Burkina F. 65 2016 6.7 21% 7% 0.59 0.56
$3.12 Guyana Goldfields GUY-T Feasibility 158.1 $450 $361 $441 3.5 3.3 3.5 94% $110 $135 $619 $168 $1,031 Guyana 203 2015 8.6 24% 5% 0.70 1.10
$0.21 Integra Gold ICG-V PEA 185.6 $36 $24 $106 0.0 0.8 0.8 90% $32 $138 $675 $175 $1,020 Canada 118 2017 2.7 27% 15% 0.32 1.05
$0.92 Kaminak Gold KAM-V PEA 125.1 $105 $75 $360 0.0 3.4 2.7 83% $34 $162 $698 $89 $983 Canada 176 2018 5.2 18% 9% 0.44 0.70
$9.79 MAG Silver MAG-T PEA 70.7 $632 $522 $132 0.0 2.6 1.6 85% $372 $94 $372 $181 $1,020 Mexico 239 2017 4.3 41% 1% 1.02 4.63
$0.12 Mega Precious Metals MGP-V Resource 173.2 $18 $13 $320 0.0 3.6 4.6 88% $3 $80 $929 $87 $1,100 Canada 86 2018 13.9 12% 10% 0.17 0.42
$0.73 Midas Gold MAX-T PEA 144.4 $96 $79 $880 0.0 7.1 5.1 89% $18 $196 $580 $97 $890 USA 354 2020 4.4 20% 15% 0.14 0.85
A$0.38 Orbis Gold OBS-ASX Scoping Study 249.9 $88 $76 $279 0.0 2.4 1.4 93% $61 $222 $709 $89 $1,082 Burkina F. 169 2017 4.3 31% 11% 0.42 0.74
$0.80 Orezone Gold ORE-V PEA 100.9 $74 $60 $225 0.0 2.4 1.4 87% $49 $184 $691 $53 $977 Burkina F. 120 2017 4.5 23% 13% 0.31 0.90
$2.96 Premier Gold Mines PG-T PEA 157.2 $425 $362 $705 0.0 7.6 4.5 89% $91 $176 $719 $89 $1,074 Canada 286 2018 8.0 24% 4% 0.80 0.55
$7.38 Pretium Resources PVG-T Feasibility 118.0 $795 $623 $787 7.6 5.9 7.6 97% $85 $108 $369 $200 $762 Canada 308 2017 7.0 24% 6% 0.56 1.63
$2.35 Probe Mines PRB-V Resource 86.9 $186 $143 $340 0.0 3.4 2.0 94% $77 $182 $485 $200 $944 Canada 157 2018 5.5 24% 7% 0.49 1.03
$0.90 Romarco Minerals R-T Feasibility 689.5 $566 $518 $650 2.0 2.8 5.1 83% $122 $152 $694 $95 $1,063 USA 230 2016 10.3 18% 3% 0.91 0.74
$0.89 Roxgold ROG-V Feasibility 243.8 $198 $164 $117 0.7 0.3 0.7 95% $234 $167 $560 $207 $1,168 Burkina F. 84 2016 7.0 39% -1% 1.09 1.19
$1.64 Rubicon Minerals RMX-T PEA 371.7 $556 $424 $200 0.0 3.3 3.6 93% $127 $60 $641 $190 $1,018 Canada 153 2015 10.6 10% 2% 1.00 0.52
$0.87 Sabina Gold & Silver SBB-T Pre. Feas 194.0 $154 $75 $710 2.7 4.5 4.3 94% $19 $177 $698 $162 $1,056 Canada 240 2018 8.2 14% 7% 0.48 0.52
$10.38 Seabridge Gold* SEA-T Pre. Feas. 48.4 $458 $396 $5,450 38.2 69.9 38.2 70% $15 $203 $378 $172 $768 Canada 487 2021 16.2 9% 8% 0.35 0.26
$1.52 Torex Gold Resources TXG-T Feasibility 805.9 $1,118 $709 $877 4.1 4.7 6.7 86% $124 $153 $383 $155 $814 Mexico 417 2015 6.3 22% 6% 0.61 1.19
$0.41 True Gold Mining TGM-V Feasibility 406.5 $150 $88 $132 0.9 0.4 1.6 83% $67 $100 $839 $88 $1,094 Burkina F. 88 2016 8.6 21% 4% 0.74 0.98
$0.14 Victoria Gold VIT-V Feasibility 348.3 $44 $9 $435 2.3 4.0 3.7 70% $4 $170 $798 $112 $1,083 Canada 193 2017 6.4 14% 11% 0.19 0.39
Intermediate Average or Median $4,700 $903 18.8 17.4 22.9 81% $253 $49 $678 $129 $1,108 824 7.9 Junior Average or Median $536 $177 2.0 3.7 3.8 72% $195 $65 $660 $164 $1,084 162 5.7 "Takeover Twenty" Average $204 $607 2.7 6.4 4.6 86% $73 $155 $643 $127 $998 194 7.3 22% 8% 0.51 0.95 "Takeover Twenty" Median $79 $340 0.0 3.4 3.6 88% $49 $165 $691 $97 $1,031 169 6.6 22% 7% 0.48 0.74
*Seabridge reserves and resources only use Mineable gold resources; operating costs are net of copper and other metal credits **Market cap less other assets, investments, work ing capital and proceeds from ITM options/warrants, plus debt ***ITC = Investor Total Cost = Mark et Cap/oz + Construction Capex/oz + AISC/oz Highlighted companies are new initiations Bolded companies are existing coverage (All $ ratios are in US$ (eg. Market Cap/oz) except NAV/sh, which is C$/sh) (Per ounce ratios use PCI Mineable resource estimate) (IRR and NAVs are based on 100% equity, no leverage. NAVs are at 5% discount except with Copper at 8%.)
Paradigm Capital Inc, IIROC/TSX member 4 August 7, 2014
Gold Sector Note
Just a Matter of Time Why launch a new Takeover 20 now? We believe it is just a matter of time before the gold equity market recognizes that producing companies need to acquire development-stage projects. Developer-explorer share prices are barely off their historic lows (Figure 3 and Appendix 1 for data). The average developer-explorer has only appreciated 20% off of its four-year bottom as a percentage of its trading range. A re-kindling of investor interest in development and late exploration-stage equities is capable of generating order-of- magnitude returns, albeit at much higher risk. Often their resources are selling for less than replacement costs. Why are we so sure? Producers are acquirer, not explorers. They face a dual challenge: accelerating depletion of their reserves and industry-wide discovery rates that have been falling for years and are set to fall even faster. For the past few years, gold producers have spent most of their money and effort almost exclusively acquiring producing assets. Shareholders have discouraged acquisitions that require capital. Acquiring producing assets rarely creates value for shareholders. Buying undeveloped properties for just their finding cost (or less) is more likely to, and acquisitions of development-stage projects are already taking place now in oil & gas and base metals — without the buyer being penalized by investors. We anticipate this trend will continue with gold companies.
Figure 3: Current Share Prices Shown as a Percentage of Their Four‐Year High‐Low Spread
100% 90% 80% 70% 60% 58% 55% 57% 50% 41% 40% 38% 34% 30% 30% 26% 26% 22% 22% 20% 17% 18% 10% 10% 11% 11% 11% 4% 4% 5% 0% 2% 2% 2% 3% 3% Orbis Torex Torex Probe Midas Sabina Sabina Integra Carlisle Carlisle Guyana Guyana Victoria Victoria Premier Pretium Roxgold Rubicon Rubicon Romarco Orezone Orezone Kaminak Gryphon Belo Sun Sun Belo Freegold Freegold True Gold Gold True Seabridge Seabridge MAG Silver Bear Creek Creek Bear Mega Precious Castle Mountain
Source: FactSet, Paradigm Capital Inc.
What’s New? Our original Takeover 20 platform used two fairly simple screening criteria: the Investor Total Cost (ITC) and the Price over Operating Cash Flow Multiple (P/CF). The new version is quite a bit more comprehensive. Each project has been modeled with what details are available, be it NI 43-101s, economic studies or our own estimates. Note, column 4 in Figure 2, our summary table, describes what stage the company’s primary project is at. We have benchmarked companies, particularly in the sustaining capital and G&A costs, which are commonly underestimated. We also apply our judgment elsewhere, frequently with resource estimates (trying to estimate what the mineable resource will be in a year or two) and sometimes capital costs. This additional detail allows us to generate additional screening metrics and put the project on the same playing field: Project IRR: After-tax, basis 100% equity (no debt, no leases) at gold and silver prices of $1,300/oz and $20.80/oz, respectively. Attractive projects, in our opinion, have IRRs over 15%, if in North America or other low-risk jurisdictions, and over 20% for higher-risk locations. Paradigm Capital Inc, IIROC/TSX member 5 August 7, 2014
Gold Sector Note
IRR to the Acquirer: Assuming a 30% takeover premium to the current share price. P/NAV: A metric we have long used to evaluate projects. Capital Efficiency: This divides the NPV by the construction capital. We would like to see this ratio over 0.8, and ideally to be over 1.0, although this is hard for large-scale, low-grade projects.
The Strategic Case for Development‐Stage Companies
Background At the moment, management teams of producer companies are under pressure from investors to limit their acquisitions to producing assets. This is not a very far-seeing answer to the depleting reserve lives that companies face (unless gold prices lift a few hundred dollars) nor is it a value-creating formula. In this section, we walk through several pieces of the logic puzzle outlining why producing companies will be strongly motivated to acquire the Development and Advanced Explorer companies. In this report, we refer several times to an excellent report produced by SNL Metals & Mining (SNL), called Strategies for Gold Reserves Replacement published in June, 2014.
Producers Are Acquirers Not Discoverers First, let’s call a spade a spade. Producers are not generally good discoverers except, and this is an important stipulation, when they are looking in their own backyard. There is a reason for this – they don’t really try. Of the ~$90B spent by 26 major global producers replacing and expanding reserves, from 2004 to 2013, only 19% ($17B) was spent on exploration. The rest was spent on acquisitions. (See Figure 4 and Appendix 2 for data). And of the 19% spent on exploration ($5B) only a one-third, just 6% of the total, was spent on greenfield exploration, according to SNL. Producers acquire, they do not discover.
Figure 4: Major Producers’ Reserve Expansion Spending by Tier 2004‐2013
Grassroots $5B Late Stage & Feas. $5B
Minesite $7B
Acquisitions $73B
Source: SNL Research
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Gold Sector Note
No Sense of Scarcity or Urgency There have been few obvious signals to investors just how scarce gold really is. For a decade, producers had been able to show growing reserve lives, even after allowing for annual depletion (production). According to SNL, the average reserve life for 27 major producers increased from 15 years in 2004 to 18.4 years in 2013. Yet, discovery rates were falling even while exploration budgets were increasing (Figure 5). In 2012, exploration spending increased, but the pace of new discoveries continued to fall. In 2013, due to the decline in the gold price, SNL estimated that exploration spending decreased 28%. Companies lowered the gold price used when calculating reserves, which resulted in a 10% decline in reserves. Any sense there might have been of gold's growing scarcity was tainted. Falling discovery rate was symptomatic of inefficient spending, a plague that visited upon the entire mining industry. Exploration dollars, it was felt, were probably being squandered. The fact that explorer and developer share prices were falling precipitously further removed any sense of urgency. Contradictions like this, where something is believed to be plentiful while it is quietly becoming scarcer, create outstanding buying or selling opportunities. It is what puts the cycle in “cyclicals”.
Figure 5: Potential Production and New Discoveries Relative to Gold Production 1999‐2013
Source: SNL Research
Six Signals of Gold's Growing Scarcity 1. Declining Reserve Lives In early 2014, as companies announced their year-end 2013 reserves and resources, we had our first taste of the future – a declining trend for reserves (Figure 6 & Figure 7) – unless the gold price increases appreciably. According to SNL, 27 major producers cut their exploration budgets by 28% in 2013 and their reserve ounces dropped an average of 10% from the year prior and 17% in terms of mine lives. This was the first time that reserves had failed to grow for the group since 2004-2005.
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Gold Sector Note
Figure 6: Major Producer’s Reserves and Resources
1,200 120
1,000 80 (Moz)
800 40 600 Moz Replaced 0 400
-40 Reserves 200
-80 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013
Reserves Resources Reserves Replaced by Exploration
This represents the top 27 gold producing companies. Historically, exploration accounts for 62% of reserve replenishments. The decrease in reserves is attributed to companies increasing their cut-off grade and therefore reclassifying reserves. Reserves replaced by exploration are net of acquistions.
Source: SNL Research
Figure 7: Changes in Major Producer’s Reserves and Resources
150
100
50
0 Moz 2005 2006 2007 2008 2009 2010 2011 2012 2013 -50
-100
-150
Reserves Resources Reserves Replaced by Exploration
Source: SNL Research, Paradigm Capital Inc.
2. Further Contraction of Reserves Is Likely The gold producer industry is essentially unprofitable at $1,250–$1,300/oz, and unless gold prices increase producers will be forced to raise cut-off grades to bring about the profitability that investors are insisting on. This will further reduce mine lives. We discuss this in more detail later on, but we are not inclined to believe producer assertions that they cannot raise their grades, at least not
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Gold Sector Note
fully. It is just difficult and a bit scary in terms of how it shortens mine lives, but the mining industry is remarkably resilient and adaptable.
3. Exploration Spending Has Dropped Precipitously Producer after producer has slashed its exploration budgets. Exploration companies have halted their spending; total gold exploration spending decreased 31% in 2013 y/y (Figure 8). Yet the aggregate impact hasn’t registered with the industry or investors, in our opinion. SNL produces the mining industry's leading study of global exploration spending, but its updated view will not be presented until October. The magnitude of the drop in spending will be jaw-dropping, we suspect, especially when considered in light of the trend of declining discovery rates before the cuts. Figure 8 shows historical gold sector exploration spending and the split between brownfield (mine site and development) and greenfield (grassroots) spending using SNL data through 2013 and our estimates for 2014 and 2015, assuming gold prices stay in the $1,300/oz range.
Figure 8: Global Gold Exploration Budgets by Tier
Gold Exploration Budget by Tier $12,000
$10,000
$8,000 USD $6,000 $M $4,000
$2,000
$0 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014E 2015E
Grassroots Late Stage & Feas. Minesite
Source: SNL Research, Paradigm Capital Inc. , PCI Estimates
4. Discovery Rates Were Falling – Even Before the Cuts Anecdotally, the industry and those who are close to it know that, despite rising exploration spending, there was a notable decline in the number of new major discoveries. SNL has quantified this impression very well in Figures 5 and 9 (SNL uses 2Moz as its threshold).
Paradigm Capital Inc, IIROC/TSX member 9 August 7, 2014
Gold Sector Note
Figure 9: Major Gold Discoveries (2Moz+) over the Past 24 Years
Source: SNL Research
5. Gold Is Getting Harder to Discover Like SNL, we too consider 2Moz a major discovery, which, on average, can produce 180Koz annually over a 10-year mine life (after 10% assumed recovery losses). However, this is dictated by what is significant in market terms. According to Mother Nature’s recipe, which has at its heart an inverse logarithmic relationship between size and frequency, a 1Moz discovery is also a major discovery. The probability of finding a 1Moz deposit is also very small.
6. The Low Hanging Fruit Has Already Been Gathered Members of our gold research team analyzed major discoveries in the late stages of the last downturn, 2001. We noted that the precipitous drop in exploration spending caused by the sharp drop in gold price three years before had caused discoveries to also drop – not exactly rocket science, evident in Figures 5 and 9. However, we noted another phenomenon at play: the odds of a successful discovery had dropped by the early 2000s. In the 1990s, many new regions of the world opened their doors to gold exploration and mining, as the Soviet Communist model failed. A bulge of new discoveries occurred in that decade, carrying into the 2000s. However, the easy, low-hanging fruit has been discovered, in our opinion, and that would be one of our interpretations of Figures 5 and 9. Going forward, short of new technology or higher gold prices, it will be more expensive to find new gold deposits. This conclusion was lost in the massive exploration spending boom that took place between 2003 and 2013 and with sharply higher gold prices, which, in turn, transformed older marginal discoveries.
Paradigm Capital Inc, IIROC/TSX member 10 August 7, 2014
Gold Sector Note
Headgrades Will Increase – Mine Lives Will Shorten As gold sold off in the spring of 2013, several producers commented that they could not raise their grades in response. Our experience in previous downturns suggests that this might be accurate in the immediate term, but given time grades will increase. Figure 10 shows that operating costs move in tandem with the gold price. There is a 0.97 R-square correlation. Over the past year, our universe of producing companies with applicable AISC has dropped $105/oz, or 9% y/y (Figure 11).Yet, the current gold price of $1,300/oz is 22% lower than 2012's average of $1,669/oz. If history has a role, odds are very good that costs will continue to fall. This is consistent with what companies are saying: operating performance will be best in the second half of the year.
Let’s examine at the situation from another angle. According to SNL, major producers replaced 180% of production between 2004 and 2013 while reserve lives increased from an average of 15 years to 18.4 years. Much of this came from adding lower-grade material as cut-off grades fell. The median grade from undeveloped deposits over 5Moz has fallen 50% since 2004, from 1.64 gpT to 0.82 gpT (Figure 12). Notice how much smaller the deposit sizes were in 2004. It stands to reason that producers will now exclude this marginal-grade material from mine plans, boosting the average production grade, but their reserves will shrink.
Figure 10: Gold Price vs. Cash Costs
Gold Price versus Cash Costs R-Square = 0.97 where costs asssumed to lag price by one year.
$1,900 $800
$1,700 $700 $1,500 $600 $1,300
$1,100 $500
$900 $400 Gold Price $700 $300
$500 TotalGlobal Cash Cost $200 $300
$100 $100 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014E
Au Price (US$/oz) Global Cash Cost (US$/oz)
Source: GFMS, Paradigm Capital Inc.
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Gold Sector Note
Figure 11: Comparing AISC Q1/14 Year‐over‐Year
Total AISC Per Oz Produced Q1/14 Q1/13 Change YOY %Change AEM $799 $1,019 ($220) (22%) ASR* $680 $885 ($205) (23%) AGI $908 $692 $216 31% AUQ* $1,390 $1,382 $8 1% ABX $833 $933 ($100) (11%) ELG $1,284 $1,729 ($445) (26%) G $840 $1,135 ($295) (26%) GSC $1,523 $1,403 $120 9% IMG $1,198 $1,290 ($92) (7%) K $1,001 $1,030 ($29) (3%) LGC $787 $1,015 ($228) (22%) NGD $674 $1,004 ($330) (33%) NEM $1,034 $1,121 ($87) (8%) P $1,381 $1,236 $145 12% YRI $975 $1,014 ($39) (4%)
Average $1,020 $1,126 ($105) (9%) Prod Weighted Avg $932 $1,049 ($117) (11%) Median $975 $1,030 ($92) (8%)
# of Increase Costs 4 # of Decreased Costs 11 Net Decrease of 7
* These company's 2013 AISC don't exist the figures are Q2 2013 instead Source: Company filings, Paradigm Capital Inc.
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Gold Sector Note
Figure 12: Comparing the Undeveloped Gold Projects’ Grade and Reserves between 2013 and 2004
2013 2004 25.0 25.0
5.0 5.0 Median = 1.64 (g/t) Median = 0.82 (g/t)
1.0 1.0 Grade Grade
0.2 0.2
0.0 0.0 1 112131415161718191101 1 112131415161 Gold Reserves and Resources (Moz) Gold Reserves and Resources (Moz)
Source: SNL Research, Paradigm Capital Inc.
Operating Cost Outlook – Further Reductions Ahead Our analysis of the All-in Sustaining Costs from Q1/13 to Q1/14 showed an $81–$90/oz cost decrease, but not in operating costs, just the low-hanging fruit like exploration spending, administration and capital deferrals. Over 2014 and 2015, we expect companies will seek to boost efficiencies, but will also raise their cut-off grades. While this will reduce reported mine reserve lives, from an investor’s perspective, it’s important to note that the contraction will be mostly a statistical phenomenon. In practice, few of the ounces will truly be "lost". Most will be move into the Resource category and/or still be there if gold prices increase in future.
Conclusion – The Strategic Case for Developers It stands to reason that the loss of ounces from reserves, together with a shift in momentum from gaining mine life to losing it, will heighten the sense of gold’s scarcity among producers, motivating them to look at development-stage and advanced exploration projects more carefully. Adding to the motivation is a compelling value proposition: it is now cheaper to acquire undeveloped ounces than to discover, in many cases. Our Takeover 20 group of companies represent the best of breed explorers. Their book value to find their resources is $46/oz, as we show in the Financial Summary in Figure 14. At current share prices we estimate that their ounces are being valued at about cost, $42/oz, no premium is being paid for success. We will discuss this situation in more detail in the next section.
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Gold Sector Note
Figure 13: Description
DESCRIPTIONS "TAKEOVER TWENTY"
4 Year Share Price Economic Analysis? Metals Fully Production Ticker & Share Price Company Rating Target Property Name Location (in order of Permitted Start Year Exchange C$ Increease as signif) ? (Assumed) High Low Type Date % of Range**
Bear Creek Mining BCM-V $3.46 Spec. Buy $3.50 $12.00 $1.17 21% Corani Peru Feasiblity Dec-11 Ag, Pb, Zn N 2017
Belo Sun Mining BSX-T $0.24 N/R N/A $1.83 $0.15 5% Volta Grande Brazil PEA Mar-14 Au N 2017
Carlisle Goldfields CGJ-T $0.05 Spec. Buy $0.27 $0.36 $0.03 5% Farley/Maclellan Canada PEA Feb-14 Au, Ag N 2019
Castle Mountain Mining CMM-V $0.69 Spec. Buy $2.60 $1.10 $0.11 59% Castle Mountain USA PEA May-14 Au, Ag Y 2016
Freegold Ventures FVL-T $0.20 Spec. Buy $0.42 $1.35 $0.17 3% Golden Summit USA Resource Aug-13 Au N 2018
Gryphon Minerals GRY-ASX A$0.17 Spec. Buy A$0.25 $2.12 $0.12 3% Banfora Burkina F. Feasibility Aug-14 Au Y 2016
Guyana Goldfields GUY-T $3.12 Spec. Buy $4.00 $11.79 $1.17 18% Aurora Guyana Feasibility Jan-13 Au Y 2015
Integra Gold ICG-V $0.21 Spec. Buy $0.60 $0.87 $0.13 11% Lamaque Canada PEA Apr-14 Au N 2017
Kaminak Gold KAM-V $0.92 Spec. Buy $1.50 $4.71 $0.46 11% Coffee Canada PEA Jun-14 Au N 2018
MAG Silver MAG-T $9.79 N/R N/A $14.15 $5.15 52% Juanicipio Mexico PEA Jun-12 Ag, Au, Zn, Pb Y 2017
Mega Precious Metals MGP-V $0.12 Spec. Buy $0.35 $1.04 $0.09 3% Monument Bay Canada Resource Jan-14 Au, W N 2018
Midas Gold MAX-T $0.73 Spec. Buy $2.95 $4.85 $0.65 2% Golden Meadows USA PEA Sep-12 Au, Ag N 2020
Orbis Gold OBS-ASX A$0.38 Spec. Buy A$0.70 $0.90 $0.11 34% Natougou Burkina F. Scoping Study Oct-13 Au N 2017
Orezone Gold ORE-V $0.80 Spec. Buy $1.15 $5.26 $0.32 10% Bombore Burkina F. PEA Mar-14 Au N 2017
Premier Gold Mines PG-T $2.96 N/R N/A $8.00 $1.28 25% Hardrock Canada PEA Mar-14 Au N 2018
Pretium Resources PVG-T $7.38 N/R N/A $18.15 $2.83 30% VOK Canada Feasibility Jun-13 Au, Ag N 2017
Probe Mines PRB-V $2.35 N/R N/A $3.95 $0.33 56% Borden Canada Resource Jul-14 Au N 2018
Romarco Minerals R-T $0.90 Spec. Buy $1.20 $2.88 $0.31 23% Haile USA Feasibility Feb-11 Au N 2016
Roxgold ROG-V $0.89 N/R N/A $2.27 $0.12 36% Yaramoko Burkina F. Feasibility Jun-14 Au N 2016
Rubicon Minerals RMX-T $1.64 N/R N/A $6.50 $0.69 16% Phoenix Canada PEA Feb-14 Au Y 2015
Sabina Gold & Silver SBB-T $0.87 Spec. Buy $1.50 $7.63 $0.55 5% Hackett Canada Pre. Feas Mar-14 Au N 2018
Seabridge Gold* SEA-T $10.38 Spec. Buy $20.00 $35.00 $7.09 12% KSM Canada Pre. Feas. Jun-12 Au, Cu, Ag, Mb N 2021
Torex Gold Resources TXG-T $1.52 N/R N/A $2.43 $0.85 42% Morelos Mexico Feasibility Oct-12 Ag, Au Y 2015
True Gold Mining TGM-V $0.41 N/R N/A $1.09 $0.21 22% Karma Burkina F. Feasibility Dec-13 Au Y 2016
Victoria Gold VIT-V $0.14 Spec. Buy $0.30 $1.55 $0.08 4% Dublin Gulch Canada Feasibility Apr-12 Au N 2017
"Takeover Twenty" Average $2.16 $6.07 $0.97 20% "Takeover Twenty" Median $0.89 $2.88 $0.32 16%
*Seabridge reserves and resources only use Mineable gold resources; operating costs are net of copper and other metal credits **Price increases from their four year lows as a percentage of their four year trading range Highlighted companies are new initiations Bolded companies are existing coverage (All $ ratios are in US$ (eg. Mark et Cap/oz) except NAV/sh, which is C$/sh) (Per ounce ratios use PCI Mineable resource estimate) (IRR and NAVs are based on 100% equity, no leverage. NAVs are at 5% discount except with Copper at 8%.) (All dollar figures except share prices quoted in US$) Source: Paradigm Capital Inc.
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Gold Sector Note
Figure 14: Financials
FINANCIALS "TAKEOVER TWENTY"
Project Construction Book Shares Outstanding Market Capitalization (US$M) Current Balance Sheet Value attrib to Ratio Current Finding Cost Capital Value per Company assets other Mkt Cap / per oz Au Fully LT Debt & than core project LOM Initial Capex Resource oz Basic FDIM Fully Diluted Basic FDIM W Cap Intial Capex Equiv Diluted Equiv Capex
Bear Creek Mining 93 99 101 $294 $314 $319 $46 $0 $20 $650 $690 0.48 N/A $31
Belo Sun Mining 266 266 289 $57 $57 $62 $11 $0 $0 $347 $632 0.16 N/A $4
Carlisle Goldfields 284 304 416 $12 $12 $17 $0 $0 $0 $190 $285 0.07 $5 $14
Castle Mountain Mining 72 77 83 $45 $49 $52 $4 $0 $0 $123 $123 0.39 N/A $2
Freegold Ventures 78 78 90 $14 $14 $16 $1 $0 $0 $185 $185 0.08 $2 $36
Gryphon Minerals 401 401 444 $63 $63 $70 $32 $0 $0 $105 $105 0.60 N/A $281
Guyana Goldfields 150 158 159 $428 $450 $452 $63 $0 $10 $265 $441 1.70 N/A $93
Integra Gold 186 186 250 $36 $36 $48 $12 $0 $0 $101 $106 0.35 N/A $31
Kaminak Gold 123 125 147 $103 $105 $123 $28 $0 $0 $345 $360 0.30 N/A $9
MAG Silver 68 71 72 $608 $632 $646 $91 $0 $2 $88 $132 7.18 N/A $67
Mega Precious Metals 173 173 237 $18 $18 $25 $5 $0 $0 $300 $320 0.06 N/A $11
Midas Gold 142 144 164 $94 $96 $109 $16 $0 $0 $880 $880 0.11 N/A $45
Orbis Gold 250 250 252 $88 $88 $89 $9 $0 $3 $269 $279 0.33 N/A $28
Orezone Gold 96 101 104 $70 $74 $76 $11 $0 $0 $180 $225 0.41 N/A $12
Premier Gold Mines 154 157 167 $415 $425 $450 $55 $0 $0 $423 $705 1.00 N/A $81
Pretium Resources 115 118 118 $776 $795 $796 $66 $0 $91 $580 $787 1.37 N/A $96
Probe Mines 76 87 88 $164 $186 $189 $27 $0 $0 $300 $340 0.62 N/A $14
Romarco Minerals 660 690 700 $542 $566 $574 $30 $0 $0 $400 $650 1.42 $18 $55
Roxgold 236 244 246 $191 $198 $200 $32 $0 $0 $117 $117 1.69 N/A $175
Rubicon Minerals 371 372 422 $554 $556 $631 $164 $33 $0 $173 $200 3.21 $30 $155
Sabina Gold & Silver 194 194 226 $154 $154 $180 $54 $0 $25 $650 $710 0.24 N/A $75
Seabridge Gold* 48 48 52 $458 $458 $490 $18 $0 $44 $5,450 $5,450 0.08 $1 $7
Torex Gold Resources 727 806 813 $1,008 $1,118 $1,127 $303 $0 $0 $505 $877 2.21 N/A $108
True Gold Mining 398 406 482 $147 $150 $178 $59 $0 $0 $132 $132 1.14 N/A $53
Victoria Gold 340 348 364 $43 $44 $47 $17 $0 $17 $430 $435 2.21 $8 $36
"Takeover Twenty" Average $255 $266 $279 $46 $1 $8 $528 $607 1.10 $11 $61 "Takeover Twenty" Median $147 $150 $178 $28 $0 $0 $300 $340 0.48 $6 $36
*Seabridge reserves and resources only use Mineable gold resources; operating costs are net of copper and other metal credits Highlighted companies are new initiations Bolded companies are existing coverage (All $ ratios are in US$ (eg. Mark et Cap/oz) except NAV/sh, which is C$/sh) (Per ounce ratios use PCI Mineable resource estimate) (IRR and NAVs are based on 100% equity, no leverage. NAVs are at 5% discount except with Copper at 8%.) (All dollar figures except share prices quoted in US$) Source: Paradigm Capital Inc.
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Gold Sector Note
Figure 15: Operations
OPERATIONS "TAKEOVER TWENTY" Reserves Au Resources Au PCI Mineable Est. Annual Production Koz Total Cash Cost/oz WGC AISC/oz Mine Life (Yrs) Equiv Equiv Au Equiv Au Equiv Au Equiv Au Equiv Type of Production Start Company Process Type Mine Year (Assumed) Moz gpT Moz gpT Moz gpT Yr 1-3 LoM Reserves PCI Est Yr 1-3 LoM Yr 1-3 LoM
Bear Creek Mining OP/UG Concentrate 2017 4.32 0.86 4.00 0.37 4.32 0.86 204 146 19 19 -$41 $125 $122 $250
Belo Sun Mining OP/UG CIL 2017 0.00 0.00 7.64 1.71 4.44 1.12 159 171 0 24 $684 $852 $774 $938
Carlisle Goldfields OP CIP 2019 0.00 0.00 2.58 2.25 1.95 2.22 125 143 0 12 $483 $685 $633 $818
Castle Mountain Mining OP/UG Heap Leach 2016 0.00 0.00 3.39 0.94 3.60 0.85 102 122 0 21 $837 $988 $923 $1,086
Freegold Ventures OP Heap Leach 2018 0.00 0.00 6.52 0.62 1.07 0.51 116 95 0 9 $637 $763 $569 $839
Gryphon Minerals OP Heap Leach/CIL 2016 0.74 1.48 2.52 1.33 0.74 1.48 83 65 9 9 $727 $825 $919 $1,006
Guyana Goldfields OP/UG CIL 2015 3.48 2.74 3.26 4.04 3.48 2.74 125 203 16 16 $512 $619 $829 $870
Integra Gold UG CIL/CIP 2017 0.00 0.00 0.83 10.77 0.85 8.12 100 118 0 6 $675 $675 $1,000 $913
Kaminak Gold OP Heap Leach 2018 0.00 0.00 3.43 1.36 2.68 1.22 208 176 0 12 $601 $698 $757 $918
MAG Silver UG Concentrate 2017 0.00 0.00 2.58 6.48 1.65 7.96 187 239 0 6 $362 $372 $782 $553
Mega Precious Metals OP/UG Concentrate/POX 2018 0.00 0.00 3.59 1.19 4.56 1.36 124 86 0 33 $562 $929 $652 $1,017
Midas Gold OP Concentrate/POX 2020 0.00 0.00 7.11 1.65 5.06 1.72 411 354 0 13 $511 $580 $611 $677
Orbis Gold OP CIL 2017 0.00 0.00 2.35 4.40 1.35 3.37 210 169 0 8 $631 $709 $789 $865
Orezone Gold OP Heap Leach 2017 0.00 0.00 2.37 1.00 1.41 0.88 132 120 0 10 $663 $691 $843 $837
Premier Gold Mines OP/UG CIL 2018 0.00 0.00 7.61 1.48 4.47 1.48 217 286 0 14 $622 $719 $689 $808
Pretium Resources OP/UG CIL/Concentrate 2017 7.56 13.51 5.90 16.70 7.56 11.30 296 308 24 23 $391 $369 $606 $569
Probe Mines OP CIL/CIP 2018 0.00 0.00 3.38 2.61 2.00 4.84 187 157 0 12 $412 $485 $709 $803
Romarco Minerals OP CIL 2016 2.02 2.06 2.82 1.44 5.13 1.75 155 230 7 18 $513 $694 $693 $847
Roxgold UG CIL 2016 0.68 11.82 0.30 23.10 0.74 11.02 102 84 8 9 $512 $560 $782 $847
Rubicon Minerals UG CIL 2015 0.00 0.00 3.35 9.00 3.60 7.92 124 153 0 20 $653 $641 $1,324 $1,334
Sabina Gold & Silver OP/UG CIL 2018 2.74 5.69 4.48 6.47 4.27 5.30 279 240 11 17 $607 $698 $786 $889
Seabridge Gold* OP/UG Concentrate 2021 38.20 0.55 69.89 0.49 38.20 0.00 733 487 55 55 $433 $378 $600 $620
Torex Gold Resources OP CIP 2015 4.08 2.61 4.73 2.64 6.71 2.34 222 417 8 11 $531 $383 $527 $436
True Gold Mining OP Heap Leach 2016 0.85 0.89 0.38 0.80 1.59 0.84 95 88 8 16 $795 $839 $906 $939
Victoria Gold OP Heap Leach 2017 2.30 0.78 4.01 0.60 3.66 0.86 206 193 8 13 $678 $798 $805 $923
"Takeover Twenty" Average 2.68 1.72 6.36 4.14 4.60 3.28 196 194 7 16 $560 $643 $745 $824 "Takeover Twenty" Median 0.00 0.00 3.39 1.65 3.60 1.72 159 169 0 13 $601 $691 $774 $847
*Seabridge reserves and resources only use Mineable gold resources; operating costs are net of copper and other metal credits Highlighted companies are new initiations Bolded companies are existing coverage (All $ ratios are in US$ (eg. Market Cap/oz) except NAV/sh, which is C$/sh) (Per ounce ratios use PCI Mineable resource estimate) (IRR and NAVs are based on 100% equity, no leverage. NAVs are at 5% discount except with Copper at 8%.) (All dollar figures except share prices quoted in US$) Source: Paradigm Capital Inc.
Paradigm Capital Inc, IIROC/TSX member 16 August 7, 2014
Gold Sector Note
Figure 16: Valuations
VALUATIONS "TAKEOVER TWENTY" Project Construction Capital Net Mkt Cap/ oz LOM WGC Net Mkt Unfinancd Project IRR Ratio of Financed Construction Capital Efficiency Au Equiv of ITC/oz Avg Oper IRR to Construction AISC/oz Cap/oz From Start Acquirer IRR Company Start Year Au Cash P/CF Acquirer (w (NAV/ Capex/oz Au Au Equiv Annual of to Project (Assumed) LOM PCI Equiv*** Flow/yr 30% prem) Intial Capex Construction Reserve Equiv LoM Prod C$ NAV/sh P/NAVConstruction IRR C$ NAV/sh P/NAV Capex Resource Capex)
Bear Creek Mining 2015 $650 $690 0.91 $83 $83 $249 $250 $543 $1,577 $159 6.3x $6.64 0.52x 20% 9% 44% $4.42 0.78x
Belo Sun Mining 2015 $347 $632 0.42 $0 $11 $151 $938 $1,100 $268 $62 11.2x $0.79 0.30x 12% 7% 62% $0.56 0.42x
Carlisle Goldfields 2017 $190 $285 0.68 $0 $7 $165 $818 $990 $85 $69 4.3x $0.55 0.08x 28% 22% 77% $0.09 0.50x
Castle Mountain Mining 2015 $123 $123 1.39 $0 $16 $46 $1,086 $1,147 $344 $26 6.6x $2.65 0.26x 24% 14% 56% $1.51 0.46x
Freegold Ventures 2017 $185 $185 0.45 $0 $16 $217 $839 $1,071 $142 $44 4.5x $1.28 0.16x 23% 17% 75% $0.58 0.35x
Gryphon Minerals 2014 $105 $105 0.56 $0 $49 $182 $1,006 $1,145 $431 $25 6.7x A$0.29 0.59x 21% 7% 33% A$0.24 0.72x
Guyana Goldfields 2014 $265 $441 1.10 $110 $110 $135 $870 $1,031 $1,783 $104 8.6x $4.47 0.70x 24% 5% 21% $4.47** 0.70**
Integra Gold 2015 $101 $106 1.05 $0 $32 $138 $913 $1,020 $205 $53 2.7x $0.66 0.32x 25% 15% 59% $0.36 0.58x
Kaminak Gold 2015 $345 $360 0.70 $0 $34 $162 $918 $983 $428 $90 5.2x $2.08 0.44x 18% 9% 52% $0.92 1.00x
MAG Silver 2014 $88 $132 4.63 $0 $372 $94 $553 $1,020 $2,186 $178 4.3x $9.59 1.02x 41% 1% 3% $9.43 1.04x
Mega Precious Metals 2016 $300 $320 0.42 $0 $3 $80 $1,017 $1,100 $149 $24 13.9x $0.69 0.17x 12% 10% 81% $0.14 0.81x
Midas Gold 2017 $880 $880 0.85 $0 $18 $196 $677 $890 $223 $221 4.4x $5.05 0.14x 20% 15% 74% $1.44 0.51x
Orbis Gold 2015 $269 $279 0.74 $0 $61 $222 $865 $1,082 $449 $85 4.3x A$0.91 0.42x 31% 11% 36% A$0.52 0.42x
Orezone Gold 2015 $180 $225 0.90 $0 $49 $184 $837 $977 $500 $67 4.5x $2.61 0.31x 23% 13% 56% $1.39 0.58x
Premier Gold Mines 2017 $423 $705 0.55 $0 $91 $176 $808 $1,074 $1,267 $141 8.0x $3.69 0.80x 24% 4% 16% $3.18 0.93x
Pretium Resources 2014 $580 $787 1.63 $85 $85 $108 $569 $762 $2,024 $225 7.0x $13.30 0.56x 24% 6% 26% $11.15 0.66x
Probe Mines 2016 $300 $340 1.03 $0 $77 $182 $803 $944 $913 $96 5.5x $4.84 0.49x 24% 7% 29% $3.44 0.68x
Romarco Minerals 2014 $400 $650 0.74 $309 $122 $152 $847 $1,063 $2,255 $118 10.3x $0.99 0.91x 18% 3% 16% $0.91 0.99x
Roxgold 2014 $117 $117 1.19 $0 $234 $167 $847 $1,168 $1,940 $45 7.0x $0.81 1.09x 39% -1% -2% $0.77 1.15x
Rubicon Minerals 2011 $173 $200 0.52 $0 $127 $60 $1,334 $1,018 $2,777 $72 10.6x $1.65 1.00x 10% 2% 23% $1.65** 1.00**
Sabina Gold & Silver 2016 $650 $710 0.52 $29 $19 $177 $889 $1,056 $313 $106 8.2x $1.80 0.48x 14% 7% 53% $0.97 0.90x
Seabridge Gold* 2017 $5,450 $5,450 0.26 $0 $15 $203 $620 $768 $814 $365 16.2x $29.33 0.35x 9% 8% 99% N/A N/A
Torex Gold Resources 2013 $505 $877 1.19 $203 $124 $153 $436 $814 $1,701 $318 6.3x $2.51 0.61x 22% 6% 25% $2.00 0.76x
True Gold Mining 2014 $132 $132 0.98 $124 $67 $100 $939 $1,094 $1,001 $33 8.6x $0.54 0.74x 21% 4% 18% $0.53 0.77x
Victoria Gold 2015 $650 $435 0.39 $6 $4 $170 $923 $1,083 $48 $75 6.4x $0.74 0.19x 14% 11% 78% $0.21 0.77x
"Takeover Twenty" Average $536 $607 0.95 $38 $73 $155 $824 $998 $953 $112 7.3x $4.23 0.51x 22% 8% 44% $2.20 0.72x "Takeover Twenty" Median $300 $340 0.74 $0 $49 $165 $847 $1,031 $500 $85 6.6x $2.08 0.48x 22% 7% 44% $0.95 0.74x
*Seabridge reserves and resources only use Mineable gold resources; operating costs are net of copper and other metal credits **Already Financed ***ITC = Investor Total Cost = Market Cap/oz + Construction Capex/oz + AISC/oz Highlighted companies are new initiations Bolded companies are existing coverage (All $ ratios are in US$ (eg. Market Cap/oz) except NAV/sh, which is C$/sh) (Per ounce ratios use PCI Mineable resource estimate) (IRR and NAVs are based on 100% equity, no leverage. NAVs are at 5% discount except with Copper at 8%.) (All dollar figures except share prices quoted in US$) Source: Paradigm Capital Inc.
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Gold Sector Note
The Value Proposition for Development‐Stage Companies and Our Takeover 20
Explorer-Developer share prices are coiled springs: In April 2011, the median market capitalization of the roughly 80 explorers that we monitored at the time was US$157M. As of early July 2014, the group median was US$14M. While there has been a notable recovery in Explorer-Developer share prices in 2014, Figure 17 shows how prices have recovered modestly on a yea-to-date basis, with the smaller companies recovering the least. We refer readers to Figure 3, which shows that share prices have only recovered a small amount when looked at with a four-year time frame. We believe the Developer and Explorer share prices are a coiled springs waiting to be released.
Figure 17: Percentage Increase of Gold Equities Above YTD Lows (by Tier)
100%
80%
60%
40%
20%
0% Explorer Junior Developer Senior Intermediate Royalty
Average Median
These charts depict gold equities' price increases from their YTD lows as a percentage of their YTD trading range
Source: FactSet, Paradigm Capital Inc.
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Gold Sector Note
Valuation Metrics Shown in the Takeover 20
There is no single metric which can rank development companies from best to worst. Investors, we say, are like snowflakes. While similar in their pursuit of share price performance, each is constructed differently in the criteria that are used to build an investment decision. Our five comparative tables (Figures 2 and 13-16) provide a significant amount of data for each of the 25 companies in our Takeover 20 analysis. The summary table (Figure 2) pulls together several metrics, which, in some combination, will hopefully help investors rank the companies. The four criteria we tend highlight are: The Internal Rate of Return (IRR) is the measure that best indicates a project’s overall profitability, but this must still be put into context of other factors, such as the magnitude of the development capital required, project size and mine life. In calculating the project IRR, we have assumed 100% equity, no leverage. The IRRs are all after tax and are calculated from the anticipated start date of construction. The capital efficiency ratio shown on the right hand side of the summary table is also useful to consider (project NAV divided by construction capex). We like to see this ratio close to 1 or more, though this is difficult given the low grades of today's deposits. Our Investor Total Cost (ITC) is also a useful measure that shows the overall project profitability, expressed on a “per ounce” basis, without time discounting This allows investors to quickly ascertain a sense of project profitability at differing gold price assumptions (whereas the IRR measures are fixed at our $1,300/oz gold price deck). This can be compared to the P/NAV where we use a 5% discount rate for precious metals. In the case of long-life projects, where the discounting masks the full magnitude of future cash flows, the ITC can help provide a useful perspective. P/NAV remains one of the best overall, long-term measures of value in our opinion. We provide P/Long Term Cash Flow as well in the summary table. Our NAVs and cash flows are based on a $1,300/oz long-term gold price and the NAV uses a 5% discount rate. The copper price used is $3.00/lb and our discount rate varies from 8%, for well-defined projects, to 10% for earlier-stage projects. Our Summary Table shows the “Unfinanced P/NAV”, which is the NPV of the project plus net debt and other assets. It does not reflect the dilution that would occur if the company were to finance the project at this time. Readers can find the ratio of the current company market cap to the construction capital in our Financial Summary table (Figure 14). More than half of the 25 companies have market caps substantially below the project capital. In these cases, the capex is substantially more than the company’s current market cap, in which case the theoretical dilution outweighs the quality of the project, as can be seen in the Financed P/NAV ratio found in the Valuations Summary (Figure 16). If financing the project is imminent, the financed P/NAV may be more helpful, otherwise we look at the unfinanced P/NAV first. We consider both P/NAV measures in our company initiations. IRR to the Acquirer estimates the return from future cash flows that an acquirer might expect if it offered a 30% premium to the current share price. We would like to think this is important to acquirers – and no doubt it is, but our experience has shown that, more often than not, acquirers are more concerned about whether a deal is accretive or fills a strategic gap. We saw this with the Osisko bidding (which we estimate provides a negative IRR to the acquirers). In the acquirers’ defense, the risk of execution associated with undeveloped projects has been so high this past cycle that acquirers have tended to shy away from unproven projects. The “proof-of-concept” that an operating project can provide
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Gold Sector Note
has tended to override the theoretical value creation that acquiring an undeveloped project might offer.
IRR – Part 1: IRR to Current Shareholders The median IRR of the projects of the 25 companies in our analysis is 22% at $1,300/oz gold. This is a respectable IRR and we expect that most company’s boards would approve projects with IRRs over 20%. We examined many more companies than we included in our analysis and did not include those with projects we felt might not make the cut. With the selective nature of the companies included in our report, it should come as no surprise that the IRRs appear robust.
The best projects by this measure, with IRRs of at least 25%, are MAG Silver (41%), Roxgold (39%), Orbis Gold (31%), Carlisle Goldfields (28%), Integra Gold (27%), with Castle Mountain, Premier and Pretium tied at 24%.
Figure 18: Primary Project IRRs (after tax @ $1,300/oz)
Project IRR 45% 41% 40% 39%
35% 31% 30% 27% 28% 24% 24% 24% IRR 24% 24% 25% 22% 23% 23% 21% 21% 20% 20% 20% 18% 18% Project 15% 14% 14% 10% 12% 12% 10% 9%
5%
0%
Source: Paradigm Capital Inc.
IRR – Part 2: IRR to an Acquirer The IRR to the Acquirer ratio is an “unfinanced” scenario, so it does not factor in how the development capex will be raised. In this ratio, shown in our Summary table on the right hand side and in Figure 19, we assume that a larger producing company makes an acquisition bid for the company, pays a 30% premium to the current share price, and funds the development from cash on hand and/or internal cash flow generation. The IRR attributable to the acquirer subtracts the net acquisition price paid off the front end of the anticipated life-of-mine cash flows of the project.
In difficult financing markets, a takeover can become the best chance of a project moving forward. Thus, choosing a project with a good acquirer IRR provides some risk protection. If the markets are not conducive to directly funding development, at least the company has a better-than-average chance of being taken out by a larger or better-funded company looking to grow its production.
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Gold Sector Note
There are seven projects where there is very little return, 5% or less, left for an acquirer after paying the acquisition price. The median acquirer IRR is 7%, a 68% reduction from the IRR to current shareholders, but still an acceptable return, particularly if “soft” factors such as the project being strategic in size/location. For example, there is usually significant blue-sky remaining in terms of exploration potential. Over time, we have found that the mineable resource used in economic studies used to justify building the mine is only about one-half of what ultimately is mined, but there are wide variations to this generalization. While companies try not to pay for this exploration upside, it is very important in their decision-making process.
The best projects in terms of the IRR to an acquirer, with IRRs of at least 12%, are Carlisle Goldfields (22%), Freegold Ventures (17%), Integra Gold (15%), Midas (15%), Castle Mountain (14%,) and Orezone (13%). Honourable mentions go to Orbis Gold (11%) and Victoria Gold (11%). Note that only four of the companies (Carlisle, Integra, Castle Mountain, and Orbis) are at the top of the rankings in both current shareholder and acquirer IRR metrics.
Figure 19: IRR to the Acquirer Assuming 30% Premium Paid to Current Price
IRR to the Acquirer 25% 22%
20% 17% 15% 14% 15% 15% 13% 11% 11% 9% 10%
Acquirer 10% 8% 9%
to 7% 7% 7% 7% 6% IRR 5% 6% 5% 4% 4% 2% 3% -1% 1% 0%
-5%
Source: Paradigm Capital Inc.
IRR – Part 3: The Ratio of Acquirer IRR to Project IRR We examine the spread between the theoretical Acquirer IRR and the Project IRR, by dividing the former by the latter. The resultant figure is the partial (percentage) of the current shareholder IRR that remains for the acquirer. The ratio is shown in Figure 20 and on the right hand side of the Valuation table in Figure 16. Ideally, the higher this figure the better, but it of course must be examined in context of whether or not the project IRR is compelling enough to proceed.
Indeed the “best” company by this “Ratio IRR” measurement is Seabridge Gold with 99% of the IRR “transferring” through to the acquirer. However, the project capex is over $5B and the IRR of the project is below 10%. On the other hand it has over 36Moz of gold and massive projects tend to have lower IRRs.
Other companies with good rankings on this “Ratio IRR” measure, with approximately 55% or greater include Mega Precious (81%), Victoria Gold (78%), Carlisle Goldfields (77%), Freegold (75%), Midas Gold (74%), Belo Sun (62%), Castle Mountain (56%), Orezone Gold (56%), and Integra Gold (54%). Paradigm Capital Inc, IIROC/TSX member 21 August 7, 2014
Gold Sector Note
Figure 20: The Ratio of IRR to the Acquirer: Primary Project IRR
Acquirer IRR as a % of Project IRR 99% 100%
81% 77% 78% 80% 74% 75%
62% 60% 56% 56% 52% 53% 54% 44% 40% 33% 36% 29% 25% 26% 21% 23% 20% 16% 16% 18%
3% -2% 0%
-20%
Source: Paradigm Capital Inc.
Overall IRR: We would rank Carlisle, Integra and Orbis as the three overall best companies on an IRR basis, as they rank highly on all three IRR measures.
Are Some Companies Too Expensive to be Acquired? The companies that are in the bottom quartile on both acquirer IRR and a low “current- acquirer ratio IRR”, include: Roxgold, MAG Silver, Rubicon, Romarco, True Gold, Premier Gold Mines and Guyana Goldfields. So are these companies trading at share prices too high to be a takeover target? Not necessarily, but they are somewhat “priced to perfection” on the known data, so an acquirer would need to have a high level of confidence that there are factors remaining, such as exploration upside, that will improve the economics of the project.
If a project is deemed “strategic”, in that it ranks highly in numerous criteria (e.g., resource size, grade, safe jurisdiction, low technical risk and abundant blue-sky upside), then acquiring companies are likely to lower the investment “hurdle rate”. By our calculations, the recent acquisition of Osisko by Agnico-Eagle and Yamana had essentially a zero IRR, possibly negative. Admittedly, this was for an operating mine, but nevertheless by our calculations, it is critical that something improve the economics (be it increasing reserves, increasing throughput/production rate, a rising gold price, and/or development of the non-producing projects acquired as part of the portfolio) for Osisko to prove to be a value-adding acquisition. Our thoughts on some of the “expensive” projects in this analysis follows (we will leave discussion of some of the others, like MAG and Premier, for a future version of the Takeover 20).
Roxgold: Has the second-highest IRR to existing shareholders, 39%, but it falls to the lowest IRR on an acquired-basis, of -1%. Roxgold’s project, Yaramoko, has the highest grade of all the projects that we have reviewed, with an Indicated resource grade of 15.7 gpT and an estimated mineable (diluted) grade of 11.8 gpT. In a world where grade is king, Roxgold is more like “Rox-God”. But this has led to a situation where we believe an acquisition has a lower-than-average probability due to the technical risk of the project
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Gold Sector Note
(the first modern underground gold mine to be built in Burkina Faso). We still view it as a very good project, and believe it will be developed by the current company, but an acquirer would need to have confidence in both its ability to handle the technical risk and faith in future discovery upside.
Romarco: Has a below-average (but still acceptable) IRR of 18% as a stand-alone entity, but the IRR to an acquirer drops to just 3%. The Haile project ticks off a lot of the right boxes in terms of strategic project (5Moz resource estimate, good grade, safe jurisdiction, large prospective land package), so an acquisition is still a possibility. The blue-sky upside exists in resource upside at depth and in the large regional land package with multiple targets remaining to be tested. However, it will require a company with faith in that upside and the acquisition may be, at least initially, negatively perceived by the acquirer's shareholders.
Guyana Goldfields: The Aurora project is fully financed and under construction; generally the least likely point at which a company will be acquired. It makes the most sense to acquire before construction begins, so development can be controlled, or wait until the project is completed and operating. We believe this is the position where Guyana is now. It is a “proof of concept”, where potential acquirers are likely to monitor, but not move, unless the company experiences a major setback during development (i.e., wait to see if they “stumble”).
Investor Total Cost – The Cost to Buy, Build, and Operate Our Investor Total Cost (ITC) measure shows our estimate of the full cost to an investor, to buy, build and operate a project. Four constituent parts can be found in the middle of the Summary table (Figure 2) and are: Market Cap/oz; Life-of-Mine Construction Capex/oz; Total Cash Cost/oz and Sustaining Capex/Oz. Collectively the sum of the ITC. All are expressed in a US$/oz of Paradigm recoverable resource including the cost to buy the shares of the company (before a premium), build the project and operate it. This metric includes sustaining costs, all expressed as a US$/oz number (based on our assumed total life-of-mine production).
The advantage of this metric over the IRR is that the “$/oz” figure gives investors the ability to supply their own gold price assumption and gain a sense of the margin from the delta between the assumed gold price and ITC. This margin could be considered the equivalent of an untaxed NAV using a 0% discount rate, sometimes a helpful measure when looking at long life versus short-life projects. The ITC and associated margin is also much easier to calculate than an IRR and NPV. It was the basis for our earlier Takeover 20 reports — and those seemed to work out pretty well.
The median ITC for our 25 companies is $1,031/oz (implying a $269/oz margin at $1,300/oz gold), and range is from $762/oz (Pretium) to $1,168/oz (Roxgold). The best companies under our ITC valuation measure are: Pretium ($762/oz), Torex ($814/oz), Midas ($890/oz), Probe ($944/oz), Orezone ($977/oz), and Kaminak ($983/oz).
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Figure 21: Investor Total Cost over PCI Recoverable Ounces
Investor Total Cost/ PCI Recoverable oz $1,400
$1,168 $1,200 $1,147 $1,145 $1,100 $1,100 $1,094 $1,083 $1,082$1,074 $1,071 $1,063 $1,056 $1,031 $1,020 $1,020 $1,018 $990 $983 $977 $1,000 $944 $890 $814 $768 $800 $762
ITC/oz $600 $543
$400
$200
$0
Source: Paradigm Capital Inc.
Two outliers are worth discussing: Bear Creek Mining ($543/oz) and Seabridge ($768/oz). In Bear Creek’s case, the primary product is silver, with a substantial base metal credit (about 45% of the revenue), all expressed on a gold-equivalent basis. Seabridge is an excellent example of how different the ITC can look from the project IRR. Seabridge has the largest gold resource base by far among the 25 developers, an order of magnitude larger than the average, with a life over 50 years. Despite its low IRR its ITC is third best. The ITC helps highlight the benefit of its longer life.
Net Market Cap/Recoverable Oz of Resource – Where the Leverage Is Our discussion would not be complete without discussing this simple valuation metric. It shows up in the Summary and the Valuation pages (Figures 2 and 16) under “Net Mkt Cap/Equiv oz”. It gives investors a measure of how much they are paying per ounce of recoverable resource, based on our assumptions about the mineable resource and process recoveries. Where there is a large silver co-product we generally convert it to gold equivalent. If there is copper, we show just the gold and allow for a copper credit in the operating costs. We note that the average net market cap/oz for our 25 developers, based upon the PCI estimates is US$73/oz (median US$49/oz). Five of the group members, however, are essentially fully or partially financed and are near or under construction. One would expect their figures to be higher, which they are, averaging US$193/oz. If we remove the five from the average, the remaining 20 developers are trading at an average of US$42/oz.
We believe that US$42/oz is substantially less than the real finding cost for projects of the quality and low-risk found in our Takeover 20 analysis. One way of gaining a sense of the situation is to look at the book value per ounce shown in our financial summary (Figure 14). If these are the most successful of their breed, then the average of the 20 lesser- developed companies in the list should seem like a low figure, yet it is $46/oz. If this is the best of the breed, what is the average when the failures are included? Presumably substantially more. We would expect the real “replacement” cost to for high-quality successful ounces is closer to US$100/oz and not likely less than US$75/oz.
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The market cap per ounce of resource is probably one of the best measures for investors looking for a simple measure of the gearing of a company to higher (or lower) gold prices. Unless there is a project fatal flaw, a higher gold price will disproportionately benefit those in the group with the smallest valuations per ounce, generally speaking. While the best performers under this metric tend to be smaller companies in our Takeover 20 list, the best half-dozen companies under this measure span the market cap spectrum, from Carlisle (US$12M) to Seabridge (US$458M).
The best companies under our Market Cap/oz of Resource measure, all shown in US$/oz, are: Mega Precious ($4/oz), Carlisle Goldfields ($6/oz), Seabridge Gold ($12/oz), Victoria Gold ($12/oz), Belo Sun Mining ($13/oz), Freegold Ventures ($13/oz), and Castle Mountain Mining ($13/oz).
Figure 22: Market Capitalization over PCI Recoverable Ounces
Market Cap/PCI Recoverable oz $450 $384 $400 oz $350 $269 $300
$250 Recoverable
PCI $200 $167 $155 $129
Cap/ $150 $110 $105 $95 $94 $93 $85 $100 $73 $65 Market $52 $42 $39 $36 $50 $19 $13 $12 $13 $13 $12 $6 $4 $0
Source: Paradigm Capital Inc.
Conclusion Our apologies to the feline lovers of the world, but there are many ways to skin a cat and the process of deciding which companies are the best takeover candidates is no less varied a task. The five comparative pages provided in Figures 2, 13-16 of this report contain several metrics that must weigh into the decision. We have discussed just a few. Of the analysis, we selected seven companies that we felt captured the best project and takeover qualities. We are initiating coverage of the following (shown alphabetically): Carlisle Goldfields (CGJ-T); Castle Mountain Gold (CMM-V); Freegold Ventures (FVL-T); Integra Gold (ICG-V); Midas Gold (MAX-T); Orbis Gold (OBS-ASX); and Seabridge Gold (SEA- T). We will discuss these next, but we hasten to note that a few other companies we do not currently cover also merit consideration in the future: MAG Silver (MAG-T); Pretium Resources (PVG-T); Premier Gold (PG-T); and Torex Gold (TXG-T).
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Gold Sector Note
Company Profile (All figures in US$, Carlisle Goldfields unless otherwise noted )) Sector Gold Mid‐Sized, High IRR Project Gives Plenty of Upside Ticker CGJ‐TSX
Stock Rating Spec. Buy Description Closing Price (C$) $0.05 Carlisle Gold is a small Canadian explorer-developer holding a 100% interest in the Farley 12‐Mth Target (C$) $0.27 and the MacLellan gold deposits near Lynn Lake, Manitoba. Both are former producers Potential ROR 440% from the 1980-1990s. As at December 2013, the combined project had indicated Shares O/S Bsc (M) 284 resources of 1.6Moz, grading 2.2 gpT, plus inferred resources of 0.3Moz, grading 2.4 gpT. Shares O/S FDIM (M)* 304 While the Farley deposit’s combined resource is only 0.8Moz, it is the highest grade at 3.0 Mkt Cap, Bsc (C$M) $14 gpT and carries two-thirds of the project economics. Carlisle also owns 100% of two other Mkt Cap, FD (C$M) $15 lower-grade deposits in the area: Burnt Timber and Linkwood. In December 2013, TetraTech completed a PEA, followed by an optimized PEA in May 2014. The latter * includes assumed equity financing to fund exploration proposed an initial 3,750 Tpd mill fed by the Farley deposit, expanding to 7,500 Tpd in NAV/sh (C$)** $0.55 Year 4 with the start-up of MacLellan. Given the history of mining in the area, the support Working Capital/sh (0.00) of the Manitoba government, and desire for jobs, we believe that permitting and reaching Debt/sh $0.00 agreements with the local First Nations will be straightforward. It has been our experience ** NAV@ 5% DCF rate, $1,300/oz gold price, per diluted share incl. exploration funding that Manitoba is one of the best jurisdictions in the world for building a mine. Our estimates, based largely on the PEA, are as follows: initial capital cost of $190M plus $95M Company Description for expansion in Year 4; start-up in 2019 with a life of 12 years; annual production of Carlisle Gold is a small junior explorer- 125Koz/year until Year 4 then 190Koz, dropping to 135Koz/year in years 7-8; total cash developer with a 100% ownership in two gold deposits located in northern Manitoba, one of cost is $685/oz life of mine, but $525/oz in years 1-5; and we assume a higher sustaining the world’s most supportive and stable mining capital of $130/oz. The project IRR at $1,300/oz (100% equity) is 28% after tax. More jurisdictions, in our opinion. The Farley deposit details can be found on the side bar on the next page and attached summary pages. that was mined in the 1990s has a remaining relatively high grade 3 gpT, open-pit-mineable resource of 0.8 Moz. The second deposit, Investment Thesis MacLellan, was mined as an underground in the 1980s. Its 1.1Moz, 1.8 gpT resource is being One of Best Small Companies – Good Projects in the Right Place: While modest in recast as an open pit with today’s higher gold market cap (C$14M), Carlisle stands out in our study of 25 Development Stage projects as prices. Both deposits and the region have very one of two exceptional small companies, from either an investor’s perspective, or an good exploration potential. Our analysis points to a robust IRR at current gold prices, even if acquirer’s. It has two deposits with excellent potential to become mines once through the limited to the best deposit – Farley, but if gold PFS, feasibility and permitting stages. Carlisle has the third best project IRR (28%) in the prices increase above $1,450/oz a larger scale, study and highest IRR to the acquirer at 22% (the latter is the estimated after-tax IRR to an longer life project could take advantage of substantial low-grade resources not included in acquirer, including the acquisition price, assuming a 30% premium is paid to Carlisle’s our analysis. current share). A February 2014 PEA estimated preliminary construction capital at $185M, 1-Year Stock Chart clearly a challenge for Carlisle, but manageable for a wide bandwidth of companies. In the interim, Carlisle can add considerable value to the project moving it toward development. Carlisle Goldfields Limited (CGJ‐CA) Price (CAD) Volume (Thousands) Here’s the prize: the project’s after-tax NPV is over C$200M, more than 15x Carlisle’s 0.09 4,000 3,500 0.08 current market cap – and it could be more if exploration efforts expand resources, or the 3,000 0.07 gold price rises. 2,500 Excellent Project Economics Indicated: The PEA indicated excellent economic potential 0.06 2,000 1,500 0.05 (34% after-tax IRR at $1,300/oz). Several of our assumptions are more conservative, but 1,000 0.04 the IRR remains attractive at 28% (same gold price), third best of the 25 Development 500 Stage companies in our study. While the full life-of-mine capital efficiency ratio of 0.68 is 0.03 0 Aug Sep Oct Nov Dec Jan Feb Mar Apr May Jun Jul not particularly compelling, if one considers just the Phase 1 portion of the development, Volume Carlisle Goldfields Limited the capital efficiency ratio improves to an above-average 1.0 score. Carlisle is also the best Source: FactSet Prices
takeover candidate in our study, when viewed from the potential rate of return to the acquirer (CGJ Figure 1), which we estimate at 22%, more than twice the 8% average in our study. Given its modest C$14M market cap, it’s no surprise that Carlisle also has the most attractive P/NAV ratio in the study at 0.1x, on an unfinanced basis (CGJ Figure 2) (here we have a good example of why presenting a financed P/NAV would not be helpful, since the financing dilution is so extreme that the NAV becomes whatever price the financing occurs at).
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Company Profile (All Units in US$, Emphasis on the Other Syllable: The PEA proposes that production begin with Farley for Unless Indicated Otherwise) years 1-3 at 3,500 Tpd, then expands to 7,000 Tpd in Year 4 to include MacLellan. While Stage of Project PEA the PEA focuses mostly on the 1.1Moz MacLellan deposit, we think Carlisle should actually Type of Mine OP, CIP focus on the 0.8Moz Farley project. The latter’s 3 gpT grade and reasonable 5:1 strip ratio make it better than most small projects that we have looked at. While the PEA does not P&P Reserves n/a split it out, Farley accounts for two-thirds of our Carlisle NAV and has a robust stand-alone M&I 1.7Moz @2.4 gpT IRR of 28%. Inferred 0.3Moz @2.5 gpT PCI Est. Mineable 2.0Moz @2.2 gpT The MacLellan deposit might be the largest, but its 8:1 strip and 1.8 gpT grade generates a Estimated 2017 22% incremental IRR in our model. While attractive enough to support the PEA’s plans for Construction Start development, we think consideration should be given to tacking MacLellan onto the end Estimated Production 2019 of Farley’s life with no expansion. The loss of NPV is small and, with Farley’s 2.2-year Start payback, cash would flow to investors faster. Higher gold prices might justify the PEA’s Mine life (Years) 12 expansion to 7,000 Tpd, particularly given that Carlisle has a few million ounces (at least) of lower-grade resources worth considering at gold prices above $1,450/oz, we think. Ann. Au Prod'n (Koz) 143 These give Carlisle excellent upside leverage to the gold price. Construction Capital $285 Risks Cost ($M) Total Cash Cost/oz Better Understanding of Farley: More drilling is required to provide the necessary $685 detailed understanding of both deposits’ resources, although Farley’s appears better LoM defined than MacLellan’s, with 68% of ounces in the indicated category. The latter is Sustaining cost/oz $133 based on 347 historical drill holes and 25 Carlisle holes in 2012. Confirmation and infill drilling should be combined with a program to expand Farley’s current six-year resource, Royalties $/oz $26 something to which the project economics are particularly sensitive. WC ($M) at Mar/14 $(0.4)
IRR after tax Financing Challenge: Financing the large capital is clearly a risk for a small-cap company. 28% Even preparing a PFS was estimated at C$16M, according to the PEA. @1,300/oz NPV@ 5% US$M $193 Capital efficiency More Metallurgical Work is Required: Farley’s assumed 94% recovery is based on 0.68 ratio historical records, but the metallurgical characteristics of the current resource should be IRR to acquirer @ confirmed. More metallurgical testwork is also required to characterize MacLellan’s 22% 30% premium metallurgy, which we recall from our experience with the project in the 1980s was Investor total cost $990 variable, depending on the zone from which the ore was taken (we have assumed an 84% ($/oz) MacLellan recovery, versus the PEA’s 89%). P/OCF (LoM avg) 4.33x
Construction Capital: While Lynn Lake offers a good airport, highway and enough power * R&R are displayed on a Gold‐ for a small mill, the town is run down and would require capital and provincial help to Equivalent Ounce basis make it an attractive place for the workforce and service providers. ** IRR, NAV, NPV use the start of construction as the beginning Other Royalties?: The PEA notes that other royalties could conceivably exist in addition period to Farley’s 2% NSR, but the consultant’s search brought none to light.
Upside Exploration Potential: The Lynn Lake belt has hosted two sizeable base metal mines and at least two smaller gold mines since the mid-1900s, but most of the historical exploration effort was directed toward base metals, until gold prices increased in the 1970s. The region has been under-explored with modern exploration techniques and offers excellent exploration potential with at least 20 known gold occurrences in the Lynn Lake greenstone belt to be tested and potential to expand both Farley and MacLellan. One extra year of production at Farley would boost Carlisle’s NAV/share by 15% to C$0.49 and Farley’s IRR by 2% (to 30%), making it a priority target for exploration funding.
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Large Low‐Grade Resource Provides Leverage to Rising Gold Prices: Both the MacLellan and Farley deposits have significant lower-grade areas that are uneconomic at current gold prices, but which offer optionality in the event of significantly higher gold prices. We think a gold price over $1,450/oz would be sufficient. Carlisle also owns 100% of two other deposits in the area that we believe could also become attractive at gold prices over $1,450/oz: Burnt Timber (0.3Moz, 1.3 gpT) and Linkwood (0.3Moz, 1.3 gpT), each of which is contained in larger, but lower-grade historical resources which, combined, are 1.6Moz grading 1.1 gpT.
Rating and Target Price We are initiating coverage of Carlisle Goldfields with a Speculative Buy rating and C$0.27 target. For investors looking for exposure to a mid-sized project with an attractive IRR (28% after tax at $1,300/oz), appealing takeover potential and a low P/NAV (0.1x), we think Carlisle shares should be considered. It stands out as one of the best in our study of 25 Development-stage companies on those criteria. At our target gold price of $1,425/oz, the unfunded NAV/share rises to C$0.78 from C$0.43 at our $1,300/oz price deck. (The unfunded NAV is the project NPV allowing for construction costs plus working capital and debt divided by diluted-in-the-money number of shares.) Based on the Lynn Lake projects’ high quality, we would ordinarily expect Carlisle’s NAV multiple to rise from its current 0.1x to around the group average of 0.5x; however, we have allowed for two matters in selecting out 0.35x target multiple. First, the relatively small market cap of C$14M and slightly negative working capital (-C$0.4M) at March 30, 2014 means that funding drill programs and testwork necessary to move to a PFS will be dilutive, unless the share price picks up. Since we are not able to predict the timing of the latter we have allowed for dilution by way of a C$5M financing in 2014 at current prices and by assuming a lower projected multiple. Second, the relatively large number of shares (284M basic) and small current price (C$0.05) suggest that a consolidation may be necessary and this can overhang a share’s price performance. Notwithstanding these assumptions, the resultant target price of C$0.27 leaves substantial upside from the current C$0.05.
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CGJ Figure 1: Project IRRs and IRRs to the Acquirer (assuming a 30% Premium)
Project IRR and IRR to the Acquirer
45% 41% 39% 40%
35% 31% 30% 27% 28% 24% 24% 24% 24% 23% 24% 23% 25% 22% 22% 21% 21% 20% 20% 20% 18% 18% 17% IRR 14% 15% 15% 15% 14% 14% 13% 12% 12% 11% 10% 10% 11% 9% 8% 9% 9% 10% 7% 7% 7% 7% 5% 6% 6% 4% 4% 5% 3% 1% 2% -1% 0%
-5%
Project IRR IRR to the Acquirer
Source: Paradigm Capital Inc.
CGJ Figure 2: Price over Net Asset Value Comparable
P/NAV 1.20x 1.09 1.02 1.00 1.00x 0.91 0.80 0.80x 0.74 0.70 0.61 0.60x 0.59 0.56 0.52 P/NAV 0.49 0.48 0.44 0.42 0.40x 0.35 0.32 0.31 0.30 0.26 0.19 0.17 0.20x 0.16 0.14 0.08
0.00x
Source: Paradigm Capital Inc.
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Gold Sector Note
Company Profile (All figures in US$, Castle Mountain unless otherwise noted ) Sector Gold This Heap Leach Project Embodies the Best Mix of Value and Ticker CMM‐TSX Risk and Should Be Built by the Owner Stock Rating Spec. Buy
Closing Price (C$) $0.69 Description 12‐Mth Target (C$) $2.60 Castle Mountain Mining has the right to acquire 100% of a former gold heap leach mine in Potential ROR 277% California that went by the same name and produced 1.2Moz from 1991 to 2004. Mining Shares O/S Bsc (M) 71.9 ceased in 2001, a year in which gold averaged US$271/oz. Shares O/S FDIM (M)* 77.1 Permitted: Fortunately, the Castle Mountain property still has its key operating Mkt Cap, Bsc (M) (C$) $50 permit and the San Bernardino County has extended it to 2025. Mkt Cap, FD (M) (C$) $53
Recent Resource Estimate: Roscoe Postle Associates (RPA) used historical and CMM’s * includes assumed equity financing to fund exploration drilling to provide an estimate of resources remaining on the property, published on NAV/sh ** (C$) $2.65 Dec. 6, 2013 with 3.15Moz of indicated resources grading 0.6 gpT, and 1.05Moz of Working Capital/sh $0.06 inferred resources grading 0.6 gpT at a 0.14 gpT cut-off. Debt/sh $0.00 Recent PEA: Three development cases were presented in an April 2014 PEA by RPA: ** NAV@ 5% DCF rate, spot $1,300/oz gold price, per diluted o Static Case: using only the permitted footprint (1.1Moz at 0.84 gpT) share incl. exploration funding
o Base Case: within the original EIS footprint, but requiring an expansion of the footprint of disturbance (3.6Moz at 0.85 gpT), Company Description o Unconstrained Case: although still within the EIS boundary the permit is Castle Mountain Mining’s flagship asset, the assumed to be revised to enable expansion to 18.1MTpy (currently Castle Mountain property was formerly built and operated by Viceroy Resources as an open permitted 8.2MTpy) and expanding the footprint of disturbance to allow pit, heap leach project. It is located in California, mining of the full resource (4.2Moz at 0.62 gpT.) USA. A resource estimate and subsequent PEA Feasibility Study Soon Under Way: It was clear from the PEA that CMM should move in April presented three mining options with quickly to advance the project, moving to a full feasibility study skipping the PFS mine resources ranging from 1.1Moz to 4.2Moz. A rarity in its class, CMM has the key operating stage. A realistic target of Q1/15 has been established with M3, the engineering permit for the project which has been extended company selected to complete the feasibility. to 2025 and estimates a short 2 year timeframe Our Resource Estimate is a hybrid, using the Static Case 6.4MTpy production design, to possible production, i.e. in 2016. but the base-case resource, giving a robust 24% after-tax IRR at $1,300/oz. If we had just used the Static Case resource, our NAV/share would only have been one-third 1-Year Stock Chart
smaller. The base-case resource provides considerable upside leverage to higher gold Castle Mountain Mining Co. Ltd. (CMM‐CA) Price (CAD) Volume (Thousands) prices, however. At $1,400/oz, our NAV is 77% more than if we just used the Static 1.2 5,000 4,500 Case’s resource. 1 4,000 Flexible Mine Plan: At lower gold prices, CMM could simply resort to the Static Case 3,500 0.8 3,000 resource, which we believe could easily be extended a few years, keeping it pretty 2,500 robust (e.g., after-tax IRR of 15% at $1,150/oz.) 0.6 2,000 1,500 Our Estimates: As with most projects in our Takeover 20 analysis, we have assumed 0.4 1,000 500 higher G&A (34%) than the PEA. We estimate: a 3.6Moz mineable resource at 0.85 0.2 0 Aug Sep Oct Nov Dec Jan Feb Mar Apr May Jun Jul gpT; production start-up in mid-2016; life-of-mine annual production of 122Koz/year Volume Castle Mountain Mining Co. Ltd. Source: FactSet Prices gold; total cash costs (inclusive of expected royalties) of $988/oz life of mine; AISC of
$1,086/oz; mine life is 21 years with expansion potential; and after-tax IRR at $1,300/oz of 24%. More details can be found in the side bar of the next page and the
summary tables provided with this report.
Investment Thesis If we had to pick two companies from our study of 25 Development-stage companies that embodied the best mix of valuation and risk, with projects very much within the capabilities of the company to finance and build, one would most certainly be CMM. The company’s Castle Mountain project has a robust IRR, operating flexibility, one of the lowest jurisdictional and project execution risks and a valuation that offers attractive upside to investors and potential acquirers alike. It is already permitted and can be rapidly
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Gold Sector Note
put into production, potentially by 2016. This heap leach mine is a project perfectly suited Company Profile (All figures in US$, to the capabilities of a small company, while the current environment is ideal for unless otherwise noted) attracting high-quality construction teams and keeping construction costs under control. Project Castle Mountain
Location USA Very Attractive Metrics: The Castle Mountain project is near excellent infrastructure in Stage of Project PEA California, attractively sized, with one of the highest capital efficiencies in our study at 1.4 Type of Mine OP/UG, Heap Leach – compared to the average of 0.95 in our study, and a robust project IRR of 24% at a gold price of $1,300/oz. Notably, CMM also has one of the best IRRs to a potential acquirer at P&P Reserves n/a 14% (CMM Figure 1), including the cost to acquire and assuming a 30% premium to the M&I 2.6Moz @0.94 gpT current share price. The shares offer excellent value trading at 0.26x NAV on an Inferred 0.8Moz @0.94 gpT unfinanced basis, compared to a median of 0.48x for the 25 companies in this study (CMM PCI Est. Mineable 3.6Moz @0.85 gpT Figure 2). Estimated 2015 Construction Start Project is Within the Reach of Many – Including CMM: Our $123M initial capital for this Estimated Production 2016 heap-leach project is not only within reach of a large pool of acquirers, but within CMM’s Start reach too. Our construction capital estimate is materially higher than the $98M used in Mine life (Years) 21 the 2014 PEA’s Static Case because we have assumed new equipment, conveyors and grid power, as opposed to generators. The PEA includes these in the larger-scale base case, but Ann. Au Prod'n (Koz) 122 not the Static Case. Construction Capital $123 Project Flexibility: We kept things simple and flexible in our projections, sticking with the Cost ($M) Total Cash Cost/oz Static Case 6.4MTpy production, although this gave a 21-year life. CMM can wait 3-4 years $988 before deciding whether to pursue the larger base-case resource, which goes beyond the LoM current mine permit, and expand the mine to 8.1MTpy per the PEA’s base case. This Sustaining cost/oz $97 flexibility helps with our only reservation – our hybrid case’s life of mine AISC of $1,100/oz. With just the Static Case resource, our AISC would be under $900/oz. This is Royalties $/oz $26 because of the higher strip ratio currently attached to the base-case resource, WC ($M) at Mar/14 $4.3 (incremental 8.0:1 vs. Static Case 4.3:1, same grade). While the expansion would help IRR after tax lower unit costs, CMM also has three opportunities to lower the strip ratio: its 10km drill 24% program in 2014 will test areas assumed to be waste and could well find that portions are @1,300/oz ore grade; pit walls assumed to be 49 degrees could be steepened (old walls are stable at NPV@ 5% US$M $171 Capital efficiency ~55 degrees); and one of the pits was backfilled with material that was considered waste 1.39 at the time (<0.5 gpT), some of which might now exceed the new ore grade cut-off (>0.3 ratio IRR to acquirer @ gpT). 14% 30% premium
Investor total cost Recent Former Mining Helps Reduce Risk: The Castle Mountain project has another, less $1,147 ($/oz) quantifiable, but equally important advantage to the investor or acquirer – its relatively P/OCF (LoM avg) 6.57x recent history as an operating mine, having closed in the early 2000s. A corporate acquirer once advised us that this provides greater certainty about critical operating variables like mining characteristics, recoveries, dilution and unit costs. * R&R are displayed on a Gold‐ Equivalent Ounce basis * * IRR, NAV, NPV use the start Notable Risks of construction as the beginning period
There are several risks inherent to development-stage projects. A few that we believe are important to the CMM investor are:
Water: Castle Mountain is located in the arid high desert of eastern California near the Nevada border, its patented claims coming within a few kilometres of the National Mojave Preserve. Unlike parts of Nevada, where water is abundant below the surface, finding enough water for a 17,500Tpd heap-leach facility could pose a challenge. Viceroy operated the former mine at ~10,000Tpd and had 15 wells, five of which were key. Hydrological testing is under way. Fortunately, CMM would be the only consumer in the basin. It is also looking at additional sources from other watersheds.
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Permitting the Larger Resource Mining the 1.1Moz resource on the permitted footprint should pose little risk and this represents two-thirds of our $179M NPV @ 5% for Castle Mountain, assuming $1,300/oz. The Static Resource is sufficient for seven years and we think there’s an excellent chance the life could be extended by at least another few years before being forced outside the permitted footprint, which would take it up to about three-quarters of the value of our hybrid base case. Regardless, either scenario would give more than ample time to submit revision applications to the original EIS for mining a larger footprint within the original EIS permitted area. There is no assurance this will be given, or the conditions that might apply to a new permit (e.g., backfilling pits, which has been a requirement for recent mines). California and San Bernardino County, as lead agency, has already indicated a degree of willingness. In July 2013, the county extended the key permit by five years to 2025 and continued to allow the mining of 8.2MT of ore per year with no pit backfill requirements.
Metallurgical Recovery of Deeper Fresh Rock: The resource is composed of a variety of ore types, not all of which have operating track records, in particular below the former pits, in the deeper fresh rock. CMM is drilling PQ-sized holes (85mm ID) to sample these other ore types and has sent material from four of five planned holes to McClelland Labs for bottle roll and column leach testing. We have built a bit of a buffer for lower recoveries in the unknown ore types into our 74% average recovery assumption, versus the Static Case’s 77%, but we will only know if this is too much or too little once test results are received in the feasibility study, expected in Q1/15.
Upside “Heaps” of Exploration Potential: A review of the project’s resource drawings strongly suggests that upside exists for both the Static and base case resources at depth, along strike and with potential new discoveries in areas that had limited drilling by the previous operator, Viceroy. We’re comfortable that the seven-year life of the 1.1Moz Static Case could be extended another few years. As mentioned earlier, at $1,300/oz, this would bring its NPV within 19% of what it would be with the much larger 3.6Moz base case resource. The additional base case resource has a much higher strip ratio than the Static Case (8.0:1 vs. 4.3:1). Significant unexplored areas within the base case pit shell were assumed to be waste. These might turn out to have mineralization, lowering the strip ratio. For every additional year of life for the Static Case, our NPV increases $25M and would be equivalent to our hybrid base case NPV if a little more than two years were added. By contrast, adding two more years to the base case resource has relatively little impact, boosting the NPV by less than 6%, but with a projected life of over 20 years it would likely prompt a production expansion.
Excellent Leverage to Higher Gold Prices: There is good deal of flexibility possible in Castle Mountain’s mine plan to respond to higher and lower metal prices. In the early years, if the gold price stayed much below $1,250/oz, it would make sense to just mine the smaller Static Case resource where our IRR remains in the mid-teens after tax at $1,150/oz. The upside is considerable. A $100/oz price increase from our $1,300/oz assumption increases the project NPV from US$179M to US$278M (63%) and the financed version of our NAV/share for CMM from C$1.51 to C$2.16 (i.e., by 45%).
Target Price and Rating We would like to see CMM build this project. A large takeover premium is the dream of most investors, but if a candidate can realistically take a project through to production successfully it can boost the valuation multiple substantially. In CMM’s case, we estimate that it is trading at 0.26x NAV on an unfinanced basis currently and would say a 0.55x NAV is fair as a one-year target, relative to its undeveloped peer median of 0.5x. As a producer
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we would expect this multiple to be in the order of 1.1-1.3x on a financed basis, a substantial lift given the 2–3-year time frame. However, it would also depend on the state of the market and CMM’s share price at the time it financed the project.
To put this into perspective, our unfinanced NAV is C$2.65/sh, whereas if it were to finance with 50:50 debt:equity and issue the equity at the current C$0.69/sh our NAV would be C$1.51/sh, quite dilutive because the equity raised roughly doubles the shares outstanding. We would like to think that CMM’s share price and those of the development group as a whole will see a substantial lift when the market starts to relook at this stage of company, in which case financing Castle Mountain would be much less dilutive and the future NAV substantially stronger. A lift in the gold price would be a logical trigger because the valuations of this group are now cheap and very sensitive to higher gold prices.
For now our target price for CMM is based on a 0.55x NAV multiple applied to our unfinanced NAV of C$4.72/sh at our target gold price of US$1,425/oz. This equates to a target price of C$2.60/sh. We like CMM’s upside and dual appeal as a takeover candidate or owner-build and are assigning a Speculative Buy rating.
CMM Figure 1: Project IRRs and IRRs to the Acquirer (assuming a 30% Premium)
Project IRR and IRR to the Acquirer
45% 41% 39% 40%
35% 31% 30% 27% 28% 24% 24% 24% 24% 23% 24% 23% 25% 22% 21% 21% 20% 20% 22% 20% 18% 18% IRR 17% 14% 14% 14% 15% 15% 15% 12% 12% 13% 10% 10% 11% 11% 9% 8% 9% 9% 10% 7% 7% 7% 7% 5% 6% 6% 4% 4% 5% 3% 1% 2% -1% 0%
-5%
Project IRR IRR to the Acquirer
Source: Paradigm Capital Inc.
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CMM Figure 2: Price over Net Asset Value Comparable
P/NAV 1.20x 1.09 1.02 1.00 1.00x 0.91 0.80 0.74 0.80x 0.70 0.61 0.60x 0.59 0.56 0.52 P/NAV 0.49 0.48 0.44 0.42 0.40x 0.35 0.32 0.31 0.30 0.26 0.19 0.17 0.20x 0.16 0.14 0.08
0.00x
Source: Paradigm Capital Inc.
Paradigm Capital Inc, IIROC/TSX member 34 August 7, 2014
Gold Sector Note
Company Profile (All Unitsfigures in in US$, US$, Freegold Ventures Unlessunless otherwiseIndicated indicated)Otherwise ) Sector Gold Not Exactly “Free” But Valued at Only $3/oz of Gold Resource Ticker FVL‐TSX
Stock Rating Spec. Buy Description Closing Price (C$) $0.20 Freegold Ventures is an Arctic exploration company. Its 100%-controlled Golden Summit 12‐Mth Target $0.42 property is a rapidly growing, low-grade gold project located 32km from the town of Potential ROR 110% Fairbanks, Alaska, and 11 miles north of Kinross’ Fort Knox mine, the analogue for the Shares O/S Bsc (M) 78 project. Shares O/S FDIM (M)* 78 Infrastructure Is Excellent: Golden Summit is within easy driving distance of Mkt Cap, Bsc (C$M) $16 Fairbanks via highway and 2km of upgraded gravel road; power lines cut across Mkt Cap, FD (C$M) $16 the western end of property; the topography is low rounded hills, while * includes assumed equity financing to fund exploration permafrost is limited to north-facing, steep slopes. Fairbanks is an appealing location to attract staff, offering the full facilities of a large centre (pop. ~87K), NAV/sh (C$)** $1.28 including a university. Working Capital/sh $0.01 Quick Pace of Discovery at Low Finding Cost: Gold was discovered in the region Debt/sh $0.00 ** NAV@ 5% DCF rate, $1,300/oz gold price, per diluted share in 1902 and an estimated 9.5Moz has been extracted, including ~6.7Moz from incl. exploration funding
placer operations on drainages around the Golden Summit property. While
~0.5Moz grading > 1 oz/ton has been mined from Golden Summit’s mesothermal Company Description quartz veins historically, little exploration has occurred since the 1940s, with over Freegold Ventures is a small Arctic exploration 80 lode gold occurrences documented. On a limited budget and focusing on 1% company whose Golden Summit property in Alaska is next door to Kinross’ highly successful, of the property, Freegold has quickly grown a bulk tonnage resource at its but low grade Fort Knox mine. Fort Knox has Dolphin/Cleary deposit at an average finding cost of just US$2/oz since 2011. operated the arctic’s only successful heap leach Combined indicated and inferred resources of 0.7Moz in March 2011 grew to project to this point in time, although a handful 6.5Moz by July 2013, grading 0.63 gpT. Exploration potential remains excellent of companies now have studies indicating the potential to do so at their properties. Freegold for expansion of oxide and sulfide mineralization on the 5,276 ha property. is one. The company quickly built up a large, Our Conceptual Forecast: TetraTech is preparing Freegold’s first PEA, looking at a low grade resource from 2011-2013 and is heap-leach operation focused primarily on the oxide portion of the deposit. The investigating the possibility of heap leaching anticipated completion date is late 2014/early 2015. Our forecasts, therefore, are the 0.7Moz oxide cap of its 6.5Moz resource (M&I + Inferred). A PEA is anticipated in early conceptual, based on our best judgment of the oxide’s potential, and should be 2015. The potential to expand both the oxide considered simply a snap shot in the evolution of Golden Summit. Our estimates and fresh rock resource is excellent on this property in the heart of an historic gold camp. can be found in the side bar on the next page and the comparative tables that are part of this report. One key assumption is that exploration will boost mineable 1-Year Stock Chart oxide resources by half to 1.1Moz from the current 0.7Moz. Freegold Ventures Limited (FVL‐CA) Price (CAD) Volume (Thousands) Investment Thesis 0.45 900 800 Freegold is one of the smallest companies (C$16M market cap) included in our 0.4 700 comparison of 25 development-stage projects and would be the cheapest at US$3/oz of 0.35 600 resource if we use its full 6.5Moz resource (FVL Figure 3). We have restricted our analysis 500 0.3 to oxide potential as this has the highest probability of being economic at near-current 400 0.25 300 prices, the sulfide providing considerable optionality to higher gold prices. We like 200 0.2 Freegold’s potential to improve quickly, at low cost, and its low-risk jurisdiction. The first 100 0.15 0 PEA is liable to show passable economics as a heap-leach operation because the current Aug Sep Oct Nov Dec Jan Feb Mar Apr May Jun Jul Volume Freegold Ventures Limited indicated and inferred oxide grade of 0.5 gpT is low and still small at 0.7Moz, but we Source: FactSet Prices expect it to demonstrate that the project is near economic with strong potential benefits from adding resources and a high sensitivity to higher gold prices. Considering Freegold’s US$2/oz finding cost and the property’s exploration potential with oxide found over large areas yet to be drilled (discussed later) we think the resource upside is excellent.
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Project Golden Summit Fort Knox Analogue: Proof-of-concept is critical when considering the relatively unproven Location USA art of Arctic heap leaching, Fort Knox is one of Kinross’ 3-4 most important mines (second Stage of Project Resource in 2013) and it operates a highly successful heap leach near Fairbanks, Alaska, 11km from Type of Mine O/P Heap Leach Freegold’s Golden Summit property (FVL Figure 1). While Fort Knox’s grade is only half of P&P Reserves n/a Golden Summit’s, it derives considerable benefit from the primary ore processing path – a M&I 1.6Moz @0.7 gpT large 35-40KTpd mill. Fort Knox’s reserves are sufficient for ~5 years, possibly making Inferred 4.8Moz @0.61 gpT Kinross the most likely buyer of Freegold – some day. Fort Knox started production in PCI Est. Mineable 1.1Moz @0.51 gpT 1997 and has since mined over 5Moz, averaging 0.73 gpT since 2012. In 2013, it produced Estimated 422Koz at an average grade of 0.45 gpT and cash cost of $569/oz. One-third of the gold 2017 Construction Start came from heap leaching, where the grade was 0.29 gpT, and two-thirds was from the Estimated Production mill, which processed an average grade of 0.82 gpT. Kinross does not split costs out 2018 between mill and heap, but it is believed that heap leaching is providing low-cost Start production – a belief supported by the mine’s low overall average cost, the mill’s low Mine life (Years) 9 grade and by actions; Kinross is undertaking a large expansion of the heap leach. Ann. Au Prod'n (Koz) 95 Golden Summit’s oxide component is critical to its near-term economic viability, as it has Construction Capital $185 a low strip (<1:1), easy mining (ripable), and preliminary metallurgical testing has Cost ($M) indicated good kinetics (bottle roll recoveries of 88%). In the most recent resource Total Cash Cost/oz $763 estimate (June 2013), the oxide resource was 0.44Moz in the indicated category grading LoM 0.55 gpT plus 0.25Moz inferred at 0.47 gpT. Sustaining cost/oz $76 FVL Figure 1: Freegold’s Proximity to Kinross’ Fort Knox Royalties $/oz $52 WC ($M) at Mar/14 $0.7 IRR after tax @ 23% $1,300/oz NPV@ 5% US$M $83 0.45 Capital efficiency ratio IRR to acquirer @ 30% 17% premium Investor total cost $1,071 ($/oz) P/OCF (LoM avg) 4.55x
* R&R are displayed on a Gold‐ Equivalent Ounce basis
* * IRR, NAV, NPV use the start of construction as the beginning period
Source: Company filings
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Exploration Upside: Resource drilling has been limited to a 300m x 1.5km area, less than 1% of the property. Several untested anomalies exist on the property, but, as shown in the map in (FVL Figure 2), management believes there is a high probability of adding resources in the immediate area of the current resource. Oxide is found in the first 100m from surface, so we believe the potential to expand the oxide and sulfide resource is exceptional. The history of high-grade lode mining on Golden Summit and the over 80 documented lode occurrences over a 17-km strike length on the property also suggest the potential for finding higher-grade areas, a boost to the project economics, particularly if it was able to help make the >5Moz sulfide resource viable.
FVL Figure 2: Freegold – Golden Summit Resource Expansion Potential
Source: Company filings
Risks Arctic Heap Leaching: Fort Knox is the only truly economically-successful Arctic heap leaching that we are aware of. Fortunately, it is only ~11km (~20km by road)1 from Golden Summit, making comparisons possible and reducing several of the risks attached to Arctic heap leaching, such as climate and the benefits of infrastructure. Arctic heap leaching is an exercise in thermodynamics and having a mill is an advantage as a source of warm(er) process water. Three other Arctic heap-leach hopefuls have released economic studies that point to economic projects in more remote locations, albeit with substantially higher grades. Two are included in the comparison tables in this report, Victoria and Kaminak.
Metallurgy Important: The Dolphin stock hosting most of Golden Summit’s mineralization is similar in age to the Fort Knox pluton, but it is not a simple extension of Fort Knox’s mineralization. Therefore, understanding the metallurgical differences is important. Preliminary bottle roll tests on oxide material grading 0.85 gpT gave recoveries over 85%
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Gold Sector Note
in 24 hours with kinetics that indicate heap leaching should be possible. Sulfide recoveries were 45%, suggesting that this, the largest portion (87%) of Golden Summit’s total resource, will need to be milled. Here we note that Fort Knox has milled an average grade of 0.75 gpT in the past 9 years as compared to Golden Summit’s average grade of 0.71 gpT of indicated resources (although the sulfides in the metallurgical testing ranged from 0.65 to 1.03 gpT). Further testwork being carried out this year includes a series of column tests, partial oxidation and heap-leach amenability, with results expected in the Q4/14 PEA. We believe it is important for cold temperature testwork to be carried out, much like consultants KCA carried out for Kaminak’s Coffee project in the Yukon, to ensure the kinetics remain favourable.
Financing: Freegold’s modest C$16M market capitalization puts development of Golden Meadows out of its reach, but this and current weak demand for exploration stories also constrain its ability to mount a significant exploration campaign. Much work is justified to explore the project and maximize the resource, following which extensive infill drilling will be required for a PFS. Like most exploration companies, its ability to advance the project will be success driven. Fortunately, Freegold has a track record of low discovery costs and a demonstrated ability to stretch the exploration dollars that it receives.
Rating and Target As shown in FVL Figure 3, Freegold shares are best suited to investors looking for low-cost exposure to resource ounces in a small-cap vehicle whose property is located a safe, permittable jurisdiction and whose price will be strongly geared to higher gold prices and exploration success. Freegold’s oxide resource, currently 0.7Moz, has the potential to provide an economic starter, while the remaining 5Moz+ low-grade resource will require higher gold prices and/or discovery success. The company has demonstrated low finding costs of $2/oz and the ability to add resources quickly. Only 1% of its Golden Summit property has been explored, while the Dolphin/Cleary deposit hosting the resource remains open for expansion, so the Freegold story could change faster than most of the 25 companies in our analysis. Given Freegold’s relatively early stage and that a PEA is not expected on the oxide resource until Q1/15, our projections should be considered conceptual. Accordingly, in arriving at a target price we have applied a relatively low valuation multiple of 0.25x NAV (Developer group average is 0.5x) at our target gold price of US$1,425/oz in arriving at our target price of C$0.42.
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FVL Figure 3: Freegold – Market Capitalization over Our Estimated Recoverable Ounces
Market Cap/PCI Recoverable oz $450 $384 $400
$350
$300 $269 $250
$200 $167 $155 $150 $129 $110 $105 $95 $100 $94 $93 $85 $73 $65 $52 $42 $39 $50 $36 $19 $6 $13 $13 $13 $12 $12 $4 $3 $0
Source: Paradigm Capital Inc.
FVL Figure 4: Freegold – Price over Net Asset Value Comparable
P/NAV 1.20x 1.09 1.02 1.00 1.00x 0.91 0.80 0.74 0.80x 0.70 0.61 0.60x 0.59 0.56 0.52 P/NAV 0.49 0.48 0.44 0.42 0.40x 0.35 0.32 0.31 0.30 0.26 0.19 0.17 0.20x 0.16 0.14 0.08
0.00x
Source: Paradigm Capital Inc.
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Gold Sector Note
Company Profile (All figures in US$, Integra Gold unless otherwise indicated) Sector Gold The Perfect Mix – Great Value, high IRR, Low Capex, and in Ticker ICG‐TSX.V Val d’Or Stock Rating Spec. Buy
Closing Price (C$) $0.21 12‐Mth Target $0.60 Description Potential ROR 186% Integra Gold is an advanced gold exploration company moving toward development of its flagship Lamaque project near Val D'or, Quebec, which currently hosts total resources of Shares O/S Bsc (M) 186 0.83Moz of gold @ 10.8 gpT (a 5 gpT cut-off) and the mineralization remains open (ICG Shares O/S FDIM (M)* 186 Figure 1). The project is surrounded by past and present producers, including: the Sigma Mkt Cap, Bsc (C$M) $39 Mkt Cap, FD (C$M) $39 mine located to the northeast that produced 4.7Moz from 1935 to 2012; the historical Lamaque mine that produced over 4.6Moz from 1935 to 1985; to the southwest is the * includes assumed equity financing to fund exploration underground Goldex mine (~90Koz/year) owned by Agnico; and to the northwest is the NAV/sh (C$)** $0.66 open-pit Malartic mine (~580Koz/year) owned by Yamana and Agnico. The resource is Working Capital/sh $0.07 made up of 6 "plug" structures or zones (No. 4 Plug, Fortune Zone, Parallel Zone, Triangle Debt/sh $0.00 Zone, No.6 Vein, Sixteen Zone) with Parallel and Triangle being the largest. In March 2014, ** NAV@ 5% DCF rate, $1,300/oz gold price, per diluted share a PEA on the Lamaque project was completed, which outlined an underground operation incl. exploration funding capable of 112Koz/year of production at a cash operating cost of C$665/oz for a 4.25-year mine life and initial capex of C$69M delivering an after-tax IRR of 38%, an NPV of C$89M Company Description Integra's flagship asset is the Lamaque project (5% discount rate) and 1.8-year payback at $1,275/oz gold. The PEA analysis assumed a located just outside the city of Val D'or Quebec. toll milling scenario, and with several inactive mills in the area, we see the potential for It is a exploration/development project that Integra to acquire one for a relatively modest cost. Our estimates, based largely on the currently has a total underground resource of PEA, are as follows: initial capital cost of US$100M; start-up in 2017 with a life of 6 years; 0.83Moz @10.8 gpT (5gpT cut-off). The project is located in the Malartic Composite Block in annual production of 118Koz; total cash costs of US$675/oz life of mine; sustaining capital the southeastern section of the prolific gold of US$175/oz life of mine. The project IRR at $1,300/oz (unfinanced) is 25% after tax with mining Abitibi greenstone belt and is adjacent NPV of US$100M at a 5% discount rate. to the well-known historically operated underground Lamaque mine (4.6Moz produced LoM) and Sigma Mines (4.5Moz produced Investment Thesis LoM). We believe that Integra is unique, as there are few undeveloped deposits capable of 1-Year Stock Chart producing 100Koz+/year for a low start-up cost, and the supply decreases exponentially when a filter limits the search to "safe jurisdictions". We believe the proposed Integra Gold Corp. (ICG‐CA) Price (CAD) Volume (Thousands) development is an intelligent market-friendly (low capex, low risk, low cost) option with a 0.4 2,500 0.35 robust IRR, in a good jurisdiction (Quebec) and a valuation that offers attractive upside to 2,000 0.3 investors as well as potential acquirers due to the exploration upside that we see. In 1,500 addition, we view the project as very much within the capabilities of the company to 0.25 1,000 finance and build. 0.2 500 0.15
Safe Jurisdiction Are at a Premium: Corporate interest in projects in safe jurisdictions is 0.1 0 Aug Sep Oct Nov Dec Jan Feb Mar Apr May Jun Jul strong, as is evident with Agnico's strategic ownership positions in Probe and ATAC, as Volume Integra Gold Corp. well as the bidding war for Osisko's Malartic mine. Integra benefits from being not only in Source: FactSet Prices
Quebec but from being located just <5km from Val D'or, a city filled with mining experience (ICG Figure 2). The location of the property is ideal for eventual development: with Highway 117 (running between Val d'Or and Rouyn-Noranda) crossing the northern part of the property, with several mills within a few a kilometres. While permitting is never guaranteed, this district is mining friendly with multiple operating mines both currently and historically, and the Lamaque project is in an area zoned as natural resources within which mining operations are accepted, so permitting risk is quite low. Furthermore, the Lamaque property does not appear to have any major water issues, which are commonly the most problematic parts of permitting. The company is currently engaging First Nations regarding the scope of the Lamaque project. No issues or concerns have been identified, as of yet. We believe the scarcity of viable projects in safe jurisdictions makes Integra a possible acquisition target.
Paradigm Capital Inc, IIROC/TSX member 40 August 7, 2014
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Company Profile (All figures in US$, Project Is Within the Reach of Many — Including ICG: Our US$100M initial capital unless otherwise noted) estimate for this underground project is not only within reach of a large pool of acquirers, Project Lamaque but within ICG’s reach too. Our construction capital estimate is materially higher than the Location Canada C$69M used in the 2014 PEA because we do not capitalize any pre-production ounces Stage of Project PEA (28Koz assumed in the PEA). We do this to put all companies on the same playing field for Type of Mine U/G, CIL/CIP comparison purposes, in real life an acquirer would take advantage of these pre- production ounces to reduce the cash investment. P&P Reserves n/a M&I 0.6Moz @9.8 gpT Current Resource – Only the Tip of the Iceberg: We view the current resource and PEA as Inferred 0.3Moz @13.8 gpT simply a "snap shot in time". It is our opinion that the short 4.25-year mine life has the PCI Est. Mineable 0.8Moz @8.1 gpT potential to be extended through further exploration of additional "plug" structures, in Estimated 2015 the volcanics surrounding the plugs and at depth as the current resource is only defined to Construction Start ~650m while the historical Lamaque and Sigma mines went to a depth of 1,200m+ and Estimated Production 2017 remained open. Integra's appeal could increase considerably with exploration success Start from its 2014 exploration program (40,000m), the release of an updated resource in Mine life (Years) 6 Q4/14 and the completion of a PFS in early 2015.
Ann. Au Prod'n (Koz) 118 Valuation – Attractive on All Metrics: The Lamaque project is attractively sized, with a Construction Capital good capital efficiency at 1.05x above the average of 0.95x in our study, and a robust $106 project IRR of 25% at a gold price of $1,300/oz (ICG Figure 4). Notably, ICG also has one of Cost ($M) (LoM) Total Cash Cost/oz the best IRRs to a potential acquirer at 15%, including the cost to acquire and assuming a $675 30% premium to the current share price. The shares offer excellent value, trading at 0.32x LoM NAV on an unfinanced basis, compared to a median of 0.48x for the 25 companies in this Sustaining cost/oz $175 study (ICG Figure 5). Royalties $/oz $13 Risks WC ($M) at July/14 $11.5 There are several risks inherent to development-stage projects. A few that we believe are IRR after tax @ important to the ICG investor are: 27% 1. Financing: As a pre-production, pre-revenue company, financing the project $1,300/oz remains the single largest risk. However, the roughly $100M in development NPV@ 5% US$M $100 capital we assume make this a manageable project, in our opinion. The ability to 1.05 not require the construction of the mill makes this a technically simpler start-up. Capital efficiency ratio IRR to acquirer @ 30% 2. Execution: Underground mining is typically more vulnerable to the 15% premium inconsistencies of geology versus a bulk mining open-pit scenario. Predicting Investor total cost production for upcoming years can be quite difficult and costly depending on the $1,020 ($/oz) deposit and the knowledge base of management. Integra has a team with P/OCF (LoM avg) 2.66x development and production experience with vein type deposits similar to those found at Integra's Lamaque Gold Project. Herve Thiboutot (Senior Vice President) * R&R are displayed on a Gold‐ was project manager of the feasibility study at Goldcorp's Eleonore project in Equivalent Ounce basis
northern Quebec and Francois Chabot (Manager Operations/Engineering) was a * * IRR, NAV, NPV use the start production engineer for the Sigma mine located just north of the Lamaque of construction as the beginning period project and most recently was a director at Richmont's Beaufor mine and
Monique project, located in Val-d'Or, Québec. Lamaque also has an excellent location (right next to the town of Val D'or), which should provide a competitive advantage in drawing well-trained workers to the operation. 3. Mill Capacity Risk: Toll milling is the current processing scenario contemplated in the PEA; the risk here is that it is difficult to predict if, in the future, a mill could meet Lamaque's future milling requirements. There are 6 mills within 25km of the project that have the capacity to potentially process the material from Lamaque, and given that its ore is relatively clean, we feel the risk of not finding a mill to process the ore is low. The company is also contemplating purchasing an inactive mill that could be refurbished for a relatively modest cost.
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Gold Sector Note
4. Metallurgy: Testing so far has demonstrated that the mineralized material is amenable to gravity, leaching and flotation processing. Integra is now moving into the phase 4 of testing in order to further improve gold recoveries for the Triangle (91%) and No. 4 Plug (86%) zones (average recovery assumed in PEA for all 4 deposits was 92%). Given the similarities to the ore type processed at both the Sigma and the Lamaque mine though, we feel comfortable in our 90% recovery estimate in our model.
Upside Exploration: Integra has also done a significant amount of drilling (~60,000m) since the cut-off deadline for the January resource update, with the greatest focus on the Triangle zone (25,000m), testing both the mineralization within the igneous plug and within the surrounding volcanics. The mineralization on the property is typically confined to the intrusive plugs, but the Triangle zone is surrounded by felsic volcanics that appear to also host mineralized structures contiguous with the intrusive plugs found in the area. We believe the next stage for the company is constructing a decline underground to better define the potential at depth and upgrade the current inferred resources, particularly at the Triangle and Parallel zones, which currently make up two-thirds of total resources. In addition, a decline could be used in the future for production purposes. The current PEA outlined production to vertical depth of 620m and the 2013 drill program intersected multiple high-grade zones well below this level, to vertical depths of up to 1,000m.
Optimization: The company is in the process of evaluating the acquisition of a mill as an alternative to toll milling. There are a number of non-operating mills in the area that are in reasonable condition and could potentially be re-commissioned at a modest cost (sub- $5M, we estimate). This would likely reduce life-of-mine operating costs (~10% to ~15%) and guarantee that its future milling requirements were met. The company will also be looking at a number of optimization alternatives in the upcoming PFS (early 2015), including examining having one ramp instead of two at the beginning of the mine life, delaying development of the South Ramp by 1–1.5 years in order to reduce upfront capital (~$20–$25M) and use the cash flow from the North Ramp to fund the South Ramp development.
Target Price and Rating We believe the Lamaque development plan with its low capex is one that is intriguing as a takeover candidate by any mid-tier producer but is also in the breadth of Integra. In setting target prices using our NAV metric, we apply what we view as an appropriate P/NAV multiple to an NAV calculated at a target gold price anticipated within the next 12 months. We currently estimate that ICG is trading at 0.32x NAV on an unfinanced basis at $1,300/oz gold. We feel this P/NAV multiple is lower than the quality of the project merits. Indeed, we believe it should trade at an above-average multiple relative to its peers (0.5x). We feel this is fair given its location in Canada, the low capital and the precedent set by other operating mines in the area. We expect that as Integra de-risks Lamaque and moves it into production this multiple should lift to be in the order of 1.1- 1.3x on a financed basis. This will however depend on the stage of the market and ICG's share price at the time that it finances the project.
Our base-case scenario unfinanced NAV @ $1,300/oz gold is C$0.66/sh; this scenario assumes a zero cost of development capex funds, which is very unlikely, it does, however, give a sense of the project value from the perspective of a well-funded acquirer that could fund the project capex from available cash and cash flows from a portfolio of existing operations. On a financed basis with 50:50 debt:equity and issue equity at the current C$0.21/sh, our NAV would be C$0.36/sh, this is in the unlikely event that the company raised all the equity for development at the current spot price. We believe that as Paradigm Capital Inc, IIROC/TSX member 42 August 7, 2014
Gold Sector Note
Lamaque is moved along the development timeline ICG's share price will see a substantial lift when the market starts to re-look at this stage of company, in which case the financing would be much less dilutive.
We are setting our target price for ICG based on a 0.70x NAV multiple applied to our unfinanced NAV of C$0.86/sh at our target gold price of US$1,425/oz. This equates to a target price of C$0.60. We like ICG’s upside and dual appeal as a takeover candidate or owner-build and are assigning it a Speculative Buy rating.
ICG Figure 1: Lamaque Total Resources by Zone
Resources as of March 11, 2014 Technical Report
Indicated with 5.00gpT Au Cut-Off Gold Deposit Name Metric Tonnes Grade (gpT) Ounces No. 4 Plug 522,900 8.3 140,280 Fortune Zone 60,700 8.0 15,610 Parallel Zone 529,300 10.4 176,120 Triangle Zone 412,200 12.6 167,200 No. 6 Vein 245,200 7.8 61,440 Sixteen Zone 41,800 6.9 9,250
Total indicated 1,812,100 9.8 569,900
Inferred with 5.00gpT Au Cut-Off Gold Deposit Name Metric Tonnes Grade (gpT) Ounces No. 4 Plug 00.00 Fortune Zone 111,300 7.7 27,470 Parallel Zone 119,200 21.1 81,070 Triangle Zone 258,000 15.4 128,000 No. 6 Vein 93,400 7.4 22,220 Sixteen Zone 400 6.4 90
Total inferred 582,300 13.8 258,850
TOTAL 2,394,400 10.8 828,750 Source: Company filings
ICG Figure 2: Location of Lamaque Project, Quebec
Source: Company filings
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ICG Figure 3: Key Assumptions of Lamaque Development
Lamaque March 2014 PEA PCI Lamaque Development Assumptions Estimates Estimates % Difference
LoM Estimated Mineable Ore Tonnes (M) 2.08 3.26 57% Grade (gpT) 8.19 8.12 -1% Contained Gold (Koz) 530 848 60%
Gold Production LoM Average Gold recovery (%) 92% 90% -2% LoM Total Recovered Gold (Koz) 506 763 51% LoM Average Annual Production (Koz) 112 118 5% Mine Life (Years) 4.25 6.1 44%
Operating Cost Components Mining Cost, per tonne of ore (US$/tonne) $78.11 $81.92 5% Processing Cost, per tonne of ore (US$/tonne) $43.10 $45.40 5% G&A Cost, per tonne of ore (US$/tonne) $27.87 $28.20 1%
Total Operating costs before royalties (US$/tonne) $149.08 $155.52 4%
Total Operating costs before royalties (US$/oz) $614 $662 8% Royalties @US$1,300 gold price (US$/oz) $13 $13 0% Total Operating costs including royalties (US$/oz) $627 $675 8%
Capital Costs Development Capital (US$M) $65.3 $100.0 53% LoM Sustaining Capital (US$M) $63.0 $133.6 112% LoM Sustaining Capital (US$/oz) $132 $175 33%
Note: Exchange rate assumed is a $1.06 CAD to USD. Source: Company filings, Paradigm Capital Inc.
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ICG Figure 4: Project IRRs and IRRs to the Acquirer (assuming a 30% Premium)
Project IRR and IRR to the Acquirer
45% 41% 39% 40%
35% 31% 30% 27% 28% 24% 24% 24% 24% 23% 24% 23% 25% 22% 22% 21% 21% 20% 20% 20% 18% 18%
IRR 17% 14% 14% 14% 15% 15% 15% 12% 12% 13% 10% 11% 9% 9% 9% 10% 11% 10% 7% 7% 7% 7% 8% 5% 6% 6% 4% 4% 5% 3% 1% 2% -1% 0%
-5%
Project IRR IRR to the Acquirer
Source: Paradigm Capital Inc.
ICG Figure 5: Price over Net Asset Value Comparable
P/NAV 1.20x 1.09 1.02 1.00 1.00x 0.91 0.80 0.74 0.80x 0.70 0.61 0.60x 0.59 0.56 0.52 P/NAV 0.49 0.48 0.44 0.42 0.40x 0.35 0.32 0.31 0.30 0.26 0.19 0.17 0.20x 0.16 0.14 0.08
0.00x
Source: Paradigm Capital Inc.
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ICG Figure 6: Investor Total Cost over Our Estimated Recoverable Ounces
Investor Total Cost/ PCI Recoverable oz $1,400
$1,168 $1,200 $1,147 $1,145 $1,100 $1,100 $1,094 $1,083 $1,082$1,074 $1,071 $1,063 $1,056 $1,031 $1,020 $1,020 $1,018 $990 $983 $977 $1,000 $944 $890 $814 $768 $800 $762
ITC/oz $600 $543
$400
$200
$0
Source: Paradigm Capital Inc.
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Gold Sector Note
Company Profile (All figures in US$, Midas Gold unless otherwise noted ) Sector Gold The Right Project, the Right Place, a Good Analogue – Only Ticker MAX‐TSX Patience Required Stock Rating Spec. Buy Closing Price (C$) $0.74 Description 12‐Mth Target $2.95 Midas Gold owns 100% of the Golden Meadows project in Idaho, U.S., with a total gold Potential ROR 299% resource of 7Moz grading 1.65 gpT. Our forecast assumes a 5.1Moz mineable resource Shares O/S Bsc (M) 142 grading 1.7 gpT; production start-up in 2020; life-of-mine annual production of Shares O/S FDIM (M)* 144 354Koz/year gold; total cash costs of $580/oz net of an important US$80/oz antimony Mkt Cap, Bsc (C$M) $105 credit; AISC of $677/oz; mine life 13 years; and after-tax IRR at $1,300/oz of 20%. Further Mkt Cap, FD (C$M) $107 details can be found in the side bar details on the next page and the summary statistics * includes assumed equity financing to fund exploration comparing Midas to two dozen other development-stage companies attached to this report. We have used the September 2012 PEA as the basis of our analysis, but have made NAV/sh (C$)** $5.05 several adjustments, benchmarking it to the other two dozen companies in our study and Working Capital/sh $0.19 adjusting for expected changes, such as to the mineable resource. Debt/sh $0.00 ** NAV@ 5% DCF rate, $1,300/oz gold price, per diluted share incl. exploration funding
Investment Thesis
We think Midas has a very appealing project given its strategic size, attractive project IRR Company Description and location in the U.S. The 3–5-year permitting time frame is the key limiting factor. We Midas Gold owns 100% of the Golden Meadow project in Idaho, USA. From 2009-2011 Midas believe this is just a passage-of-time matter, with less risk of derailment by environmental accumulated and consolidated the numerous or First Nations issues than many major North American properties face. This is because of fractioned claims of this former antimony and the extensive impact of past mining, the remediation of past damage that the mine’s gold producing region. Based on its exploration development would be about and Idaho’s well-defined permitting path. The Golden work and historical drilling Midas has outlined a 7.1Moz resource of which we estimate 5.1Moz Meadows project is worth the effort and wait, we believe. will be mineable. An updated resource is expected in Q3/14, followed by a PFS in Q4/14. Of the 25 development projects in this report, less than a handful have mineable A significant de-risking step, the PFS will allow resources over 5 Moz. Funny enough, our 5.1Moz mineable resource estimate for Midas is Midas to begin the permitting process in H1/2015, a stage that is expected to take 3-5 the same as Romarco’s, an analogue in many respects. Early in 2015, Midas will enter the years. The prize is worth the wait as Golden permitting stage that Romarco will hopefully finish by year-end 2014. Midas’ market cap is Meadows is one of the most attractive only one-sixth of Romarco’s. Our project 20% IRR for Golden Meadow is approximately undeveloped gold properties in the USA, in our opinion. the average for the 25 Development-stage companies in our analysis, but its IRR to the investor of 15% is tied for third best (MAX Figure 1), while its P/NAV on an unfinanced 1-Year Stock Chart basis is only 0.14x, versus a group median of 0.48x. Golden Meadow’s life-of-mine AISC of Midas Gold Corp. (MAX‐CA) Price (CAD) Volume (Thousands) $677/oz is well below the median of $847/oz, despite the ore’s refractory nature. 1.4 1,000 1.3 900 800 1.2 It worth noting that Senior producers need to replace significant amounts of production in 700 the not-too-distant future and there are few 5Moz+ deposits available in safe jurisdictions 1.1 600 1 500
(MAX Figure 2). Even fewer are economic. For investors looking for leverage to higher gold 0.9 400 300 0.8 prices, Midas is trading at a net market cap of only US$18/oz (recoverable), less than one- 200 third of what we think the global discovery cost for similar quality ounces is and less than 0.7 100 0.6 0 half the company’s own book value per ounce. Aug Sep Oct Nov Dec Jan Feb Mar Apr May Jun Jul Volume Midas Gold Corp. Source: FactSet Prices Background
Historical Mine District: Midas Gold consolidated the numerous and fragmented gold and antimony mining claims of the historical Stibnite Yellow Pine mining district of central Idaho from 2009 to 2011. Mining was active there from the 1920s through the 1950s, then again from the 1980s to 1990s.
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Company Profile (All figures in US$, Antimony — an Important Credit: The 11,000-ha land package, incorporating the unless otherwise noted ) three open-pit deposits targeted for production, is called the Golden Meadows Project Golden Meadows Project, but locally known as Stibnite. The local town of Stibnite got its name from the Location USA antimony mineral that was mined for decades, called stibnite. Antimony is an Stage of Project PEA important flame-retarding additive and is a significant by-product worth ~$80/oz gold Type of Mine O/P, Conc/POX of credits in our analysis, assuming the current $4/lb price. Strategically Sized Resource & Attractive IRR: Midas has systematically explored P&P Reserves n/a M&I 4.2Moz @1.7 gpT Golden Meadows immediately around the three deposits, outlining gold resources of Inferred 2.9Moz @1.6 gpT 7.1Moz grading 1.7gpT, of which 5.6Moz were included in a Sept. 2012 PEA, plus the PCI Est. Mineable 5.1Moz @1.7 gpT addition of a small tailings resource in Oct. 2013. While the estimated $880M initial Estimated capital (incl. $167M contingency) is well beyond Midas’ current C$105M market cap 2018 reach, the company can add considerable value over the next few years progressing Construction Start Estimated Production the project through permitting and feasibility. At some point, Golden Meadow’s size, 2020 attractive IRR, low AISC and U.S. jurisdiction will make it highly attractive to an Start Intermediate or Senior producer. Some projects have execution risks that limit their Mine life (Years) 13 takeover appeal until there is a “proof of concept”. We saw this with Osisko – the first of its kind in Canada (low-grade re-incarnation of a former high-grade underground Ann. Au Prod'n (Koz) 354 mine). It had to prove that it could achieve the projected economies to scale. In Construction Capital Midas’ case, we think the “proof of concept” is limited to the permitting. When and if $880 Cost ($M) this reaches a predictable outcome – quite possibly before final permitting – we Total Cash Cost/oz $580 would not be surprised to see an acquirer step up with a bid, likely prompting LoM multiple bids. Three Open Pits: Yellow Pine is the most important pit accounting for just under two- Sustaining cost/oz $97 thirds of our estimated life-of-mine operating margin, the West End pit about one- Royalties $/oz $23 quarter and Hanger Flats under 15%. There is a distinct possibility that less of Hanger Flat’s resource will be mined than the 1.1Moz projected in the PEA. Approximately WC at Mar/14 $19 one-half of the resource has a high strip ratio, contributing little and diluting the IRR after tax 20% overall project quality. @1,300/oz PFS Near At Hand: A PEA was completed in 2012. A new resource estimate is NPV@ 5% US$M $956 anticipated this autumn followed by a PFS, targeted for late 2014. The PFS is an 0.85 important de-risking step and will be followed by submission of the Plan of Operation Capital efficiency ratio in H1/15, the first major permitting milestone. It is hoped that permitting will be IRR to acquirer @ 30% 15% complete within 3–5 years. premium Investor total cost Romarco Analogue at a Sixth the Market Cap: In many respects, Midas is like $890 Romarco, just roughly 3–5 years earlier in the permitting cycle – and with a market ($/oz) cap of C$0.10B versus C$0.59B. Both have very attractive projects in terms of P/OCF (LoM avg) 4.43x
resource size, AISC, IRR and safe jurisdictions. Both are in states and municipalities * R&R are displayed on a Gold‐ that are anxious for investment and involve sites that were actively mined in the past. Equivalent Ounce basis Golden Meadow sustained considerably more disturbance over the decades, but its * * IRR, NAV, NPV use the start setting is more sensitive, with rivers and fish. This adds complication and might of construction as the beginning extend the permitting process, but considering the extensive past workings, we think period
the view will be taken that the remediation integral to Midas’ mine plan is environmentally very attractive. Two other important differences from a risk perspective (for potential acquirers or investors) are that Idaho has more existing metal mining than South Carolina and it has a well-defined permitting process for mines. Midas has been actively engaging the public and politicians since 2009 and can point to polls with up to 85% local support. Metallurgy – Refractory but Fortunate: The sulfide resource, which accounts for about 90% of our resource, is refractory and requires pressure oxidation (an autoclave). Most autoclaves treat “whole ore”, but Midas is able to concentrate its gold about 10:1 and feed just the concentrate to the autoclave, resulting in a projected cost of $7/T milled ($70/T through the autoclave). This metallurgical
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feature is fortuitous, given the average grade is 1.7 gpT. Autoclaving costs are equivalent to less than 0.2 gpT gold.
Votes of Confidence in Golden Meadows: On May 9, 2013, Franco-Nevada closed a US$15M transaction for a 1.7% NSR agreement. In July 2013, Teck took down a placement, giving it 9.9% of Midas, and has maintained this ownership level, participating in Midas’ March 2014 financing.
Risks There are many risks associated with development-stage projects. We have outlined some that are important to the Midas investor: 1) Permitting Duration: Permitting takes longer in the U.S. than almost anywhere in the world and the potential for delays or refusal adds substantial risk. Romarco, an analogue, suffered a number of timing setbacks over the 5–6 years it has gone through permitting, reflected in sell-offs in its share price, often more than 10% in reaction to disappointing news. Midas is, from the outset, following a better defined path for its permitting and therefore less likely to incur the 1–2-year setback that Romarco did when its effort to follow a simpler Environmental Assessment (EA) path was turned back by the regulators and the company was asked to undertake a more comprehensive EIS application. Midas will follow the EIS application path from the outset and it has spent the past five years consulting with communities and regulators to ensure that it has identified all issues. Nevertheless, when it comes to permitting in North America, particularly the U.S., we have learned that timelines often get stretched. 2) Reserve Likely Smaller than PEA’s Resource: The use of inferred resources is allowed in a PEA, but not a PFS or feasibility study, so Midas’ 2012-2013 exploration focused on infill drilling to upgrade as much inferred resource to measured and indicated (M&I) as possible. inferred ounces made up 37% of the September 2012 PEA’s 5.6Moz mineable resource. New rules for resource calculation were introduced this May that tend to downgrade historical pre-NI 43-101 drill results, of which Midas has plenty, to inferred quality. Minimizing the impact has delayed Midas’ PFS by 3–4 months and may reduce the amount of inferred resource that Midas hoped to convert to measured or indicated. In addition, at Yellow Pine, a fault was found to cut off mineralization that was projected to exist in the inferred resource estimate, likely further reducing the PFS and DFS resource. An updated resource estimate is targeted for Q3/14, integrating the 46,000m of drilling that has been carried out since 2012. The PFS will use this information and Midas expects to receive this in Q4/14. Our mineable resource is 10% less than the PEA’s. This reduction lowered our project NPV by 14% over what it otherwise would have been (i.e., to C$0.80B) while our IRR at $1,300/oz reduced by 0.7% to the 20% after-tax figure used in this report — still quite attractive.
Upside 1) Exploration: By our calculation, Midas’s property acquisition and finding costs have totaled about US$45/oz, but Midas’ drilling focused almost entirely on the three known deposits. Many other exploration targets exist in this historic mining area plus extensions of the existing resources (e.g., Yellow Pine to the northeast). Until Golden Meadow is permitted we would not expect to see much exploration for new targets, but for an acquirer this resource upside is important.
2) Further Optimization: It might be possible to significantly improve the economics by deferring the final phase for Hanger Flats, which has a high strip ratio. This phase contributes relatively little at current gold prices. It might best be considered part of Midas’ inherent optionality to rising gold prices.
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Rating and Target Price There are relatively few undeveloped, economically attractive gold projects of 5Moz+ in size in the U.S. with good prospects of being able to make it through the permitting process. Golden Meadows is one of these rare creatures. It begins what is expected to be a 3–5-year permitting journey when it files its EIA application in H1/15, following the release of a PFS planned for late 2014.
In many respects, Midas is like an earlier-stage Romarco, as readers can see by looking at our comparative statistics – similar in resource size, exploration upside, low operating costs, both will need to fund their projects although Romarco will start at a smaller scale, both are located in the U.S. — albeit different states and are re-activating properties that had extensive mining. Romarco began its permitting voyage in 2009 and will hopefully wrap it up late this year; six years. Midas, having taken five years to prepare for the beginning of the permitting process, is less likely to make some of Romarco’s missteps, we hope. Romarco’s market cap is six times that of Midas. Even if Midas were to take as long, that works out to an annualized one-third increase per year. Another valuation measure, P/NAV, gives a similar answer. Romarco is currently trading at 0.91x NAV and is largely unfunded, whereas Midas is trading at 0.14x. Here again, Romarco’s multiple is six times Midas’.
We reviewed our Stats Pages for Q1/09, when Romarco was just embarking on its permitting process, and at the time Romarco was trading at three-quarters of the average P/NAV of the 15 development-stage companies (i.e., a typical proportion at the time was 0.47x vs. 0.61x.) At 0.91x NAV, Romarco is now trading at 1.8x its peer group average of 0.51x. Given the similarities, we are using the same proportion to establish our target price on Midas, at which point the company will also have officially embarked on its permitting process. At our target gold of $1,425/oz, our C$/share NAV for Midas is C$7.95, to which we have applied a 0.37x multiplier, or about three-quarters of its peer group average. This yields our C$2.95 target.
We are initiating coverage of Midas with a Speculative Buy rating and C$2.95 target price.
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MAX Figure 1: Project IRRs and IRRs to the Acquirer (assuming a 30% Premium)
Project IRR and IRR to the Acquirer
45% 41% 39% 40%
35% 31% 30% 27% 28% 24% 24% 24% 24% 23% 24% 23% 25% 22% 22% 21% 21% 20% 20% 20% 18% 18% 17% IRR 15% 14% 14% 14% 15% 15% 12% 12% 13% 10% 11% 11% 9% 9% 9% 10% 10% 7% 7% 7% 8% 6% 6% 7% 4% 5% 5% 3% 4% 1% 2% -1% 0%
-5%
Project IRR IRR to the Acquirer
Source: Paradigm Capital Inc.
MAX Figure 2: Undeveloped Gold Projects with Greater than 5Moz Undeveloped Gold Projects With Greater Than 5Moz of R&R (Excluding Cu‐Au Projects) 80,000,000 20.00 Golden Meadows#16 High Economic Potential = 30 18.00 70,000,000 Total >5Moz Projects = 62
16.00
60,000,000
14.00
50,000,000 12.00 (g/t)
Ounces
grade 40,000,000 10.00 Equivalent
Equivalent 8.00 Gold 30,000,000 Au
6.00
20,000,000
4.00
10,000,000 2.00
0 0.00 Kyzyl Gaby Kiaka Certej Fekola Esaase Volcan Aurora Yaoure Merian Orisyvo Magino Buritica Chaarat Sleeper Maoling Metates Mt Todd Mt Jeanette Goldrush Kyutchus Bayankol La Colosa La Sub Nigel Hardrock Converse Bombore Barlevsky Brucejack Cote Gold Meliadine Angostura Back River Livengood Gramalote Sukhoi LogSukhoi Springpole Klerksdorp Blackwater Paul Isnard Paul Twin Peaks Rainy RiverRainy Skaergaard Donlin Gold Lobo-Marte Las Cristinas Las Camino Rojo Camino Taseevskoye Volta Grande Rosia Montana Poputninskoye Fruta del Norte del Fruta Golden Summit Evander 6 Shaft Hammond Reef ERPM Extension Courageous Lake Courageous Golden Meadows Spanish Mountain Spanish Central Murchison Potchefstroom Goldfield Southern Free State Goldfield State Free Southern Risky Projects Assumed $20.80/oz of Ag for GEO calculation High Economic Potential Projects * Gold Equivalent Grade (g/t)
Source: SNL, Paradigm Capital Inc.
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Gold Sector Note
MAX Figure 3: Price over Net Asset Value vs. PCI Recoverable Resource
P/NAV vs PCI Recoverable Moz 1.20
ROG MAG 1.00 RMX R
0.80 PG TGM GUY
0.60 GRY TXG
P/NAV BCM PVG PRB SBB KAM 0.40 OBS ICG ORE BSX CMM 0.20 VIT FVL MGP MAX CGJ 0.00 0.00 1.00 2.00 3.00 4.00 5.00 6.00 7.00 8.00 PCI Recoverable Moz
Source: SNL, Paradigm Capital Inc.
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Gold Sector Note
Sector Gold Company Profile (All figures in US$, Ticker OBS‐ASX Orbis Gold unless otherwise noted) Stock Rating Spec. Buy Among the Best Open‐Pittable Grades in Burkina Faso Closing Price (A$) $0.38
12‐Mth Target (A$) $0.70 Description Potential ROR 84% Orbis Gold Ltd. has several properties in Burkina Faso; the most advanced, flagship Shares O/S Bsc (M) 250 property is Natougou, which hosts a total 2.0Moz resource grading 3.4 gpT as at August Shares O/S FDIM (M)* 250 2014. We have used the October 2013 Scoping Study as the basis of our analysis, but have Mkt Cap, Bsc (A$M) $95 made several adjustments, including: increasing mineable resources by 7% (the latest Mkt Cap, FD (A$M) $95 resource estimate provided by the company has 11% more contained ounces than the * includes assumed equity financing to fund exploration resource which formed the basis for the Scoping Study); increasing G&A by 37% and NAV/sh (A$)** $0.91 nearly doubling the life-of-mine sustaining capital. Our forecast assumes a 1.50Moz Working Capital/sh $0.04 mineable resource grading 3.1gpT; production start-up in 2017; life-of-mine average Debt/sh $0.00 annual production of 170Koz; total cash costs of $710/oz; AISC of $882/oz; mine life 8 ** NAV@ 5% DCF rate, $1,300/oz gold price, per diluted share years; and after-tax IRR at $1,300/oz of 31%. incl. exploration funding
Company Description Investment Thesis Orbis is a West African focused explorer We like the West African country of Burkina Faso as a place to do business, with 7 new developer with projects in Burkina Faso and gold mines opened in the past 7 years. The country has a reasonable tax and royalty rate, Cote d'Ivoire. The most advanced, flagship and has shown itself to be very responsive on permitting turnaround times. We believe property is Natougou (Burkina Faso) which hosts a 2Moz resource averaging 3.4 gpT. An the Natougou project is one of the top 3 undeveloped projects in the country (the other October 2013 Scoping Study outlined a two are Orezone’s Bombore project and Roxgold’s Yaramoko project, also reviewed in this development producing ~200Koz/yr for 6-7 report). The particular appeal of the Natougou project is that it is a relatively flat-lying years; a Definitive Feasibility Study is underway. deposit, exploitable by open pit, and has grades of over 3 gpT gold, more than double Orbis also has a good pipeline of projects ranging from greenfields to inferred resources. most of the undeveloped projects in the country, and even better than most of the currently operating mines. While the total resource (2Moz) may be a bit smaller than 1-Year Stock Chart some of its peers, the superior grade still yields a meaningful annual production rate, and Orbis Gold Ltd. (OBS‐AU) Price (AUD) Volume (Thousands) the other properties held by the company provide a pipeline for blue-sky upside growth. 0.42 6,000 0.4 5,000 0.38 Background 0.36 4,000 0.34 Great Grades: The 3.4 gpT average grade for the Natougou resource is the most 0.32 3,000 0.3 striking attribute of the deposit. Semafo started mining its Siou deposit as a satellite 0.28 2,000 0.26 operation feeding ore back to the Mana mill, and this higher-grade material has been 1,000 0.24 a material positive shift in the Mana mine economics. We estimate that Siou ore is 0.22 0 Aug Sep Oct Nov Dec Jan Feb Mar Apr May Jun Jul about 2.7x the value (per tonne) as the main Wona-Kona orebody at Mana. While the Volume Orbis Gold Ltd. Source: FactSet Prices
Natougou grade is not as high as Siou’s, at over 3 gpT it is still double that of most of
the undeveloped projects in Burkina Faso. Grade is king! Attractive IRR – to Build or to Buy: We estimate the after-tax IRR of the Natougou project to be 31%, making it a top-quartile project by that measure. Importantly, it also provides an IRR of 11% to an acquirer (assuming a takeover bid at a 30% premium to the current share price), which gives it a top-quartile ranking on that measure as well. Recent Resource Update Had Good Inferred Conversion: The October 2013 Scoping Study was based on a total 1.8Moz resource that was mostly inferred (with only 11% indicated). The updated resource announced on Aug. 4, 2014 increased the resource to 2.0Moz, with only a very modest reduction of grade (from 3.5 gpT to 3.4 gpT), but most importantly had a 600% increase in indicated resources, which now comprise 60% of the total resource.
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Second Advanced Project with Resources: Orbis Gold has a second advanced Project Natougou exploration project – Nabanga – also in Burkina. The Nabanga project hosts a Location Burkina Faso 0.57Moz inferred resource averaging 10.0 gpT (using a 5.0 gpT lower cut-off and 1.5m Stage of Project Scoping Study minimum horizontal width). An internal scoping study is in progress, conceptually Type of Mine O/P, CIL targeting an underground deposit producing ~50Koz/year. Definitive Feasibility Study Under Way: A DFS Study is under way for the Natougou P&P Reserves n/a project with expected completion in mid-2015, with component updates expected M&I 1.2 Moz @5.1 gpT along the way. Inferred 0.8 Moz @2.3 gpT PCI Est. Mineable 1.5 Moz @3.1 gpT Estimated Risks 2015 There are many risks associated with development-stage projects; however, we have Construction Start Estimated Production outlined several that are important to the Orbis investor: 2017 3) Resource Base Still Inferred‐Heavy: The October 2013 Scoping Study assumed a Start mineable 1.4Moz from a total resource base of 1.8Moz, and only 13% of the Mine life (Years) 8 assumed mineable material is in the indicated resource category (i.e., 87% of the resource is inferred). Additional drilling has been completed and an updated Ann. Au Prod'n (Koz) 169 resource was released on Aug. 4, 2014, which showed a ~600% increase in the Construction Capital indicated resource category (the 2.0Moz total resource is now 60% indicated and $279 Cost ($M) 40% inferred). This is a good conversion, but more drilling is needed to convert Total Cash Cost/oz further inferred resources to M&I categories, and ultimately P&P reserves. We $709 LoM expect conversion to continue, but this remains an uncertainty until the drilling is complete. Sustaining cost/oz $89
4) Cost Creep: The major cost estimates in the October 2013 Scoping Study were to Royalties $/oz $70 an accuracy level of +/- 50%. We don’t think they will be less, and are more likely WC ($M) at Mar/14 $9.4 to be at the high end of the “+” side. However, we have made allowances for this IRR after tax in our forecasts; our forecast after-tax IRR is 31% at $1,300/oz gold versus the 31% @1,300/oz Scoping Study estimate of 60%. Our IRR forecast is substantially less than the NPV@ 5% US$M $198 company's estimate, but it is still in the top quartile of the development projects that we have examined. 0.74 Capital efficiency ratio IRR to acquirer @ 30% 11% Upside premium 1) Exploration: The Natougou deposit is a relatively flat-lying deposit that has been Investor total cost $1,082 folded to a dome-like structure (OBS Figure 1). This orebody orientation is ($/oz) advantageous for mining in the main defined zone, but the orebody starts P/OCF (LoM avg) 4.33x dipping further from surface the further one moves away from the centre, so while the mineralization may continue, the depth of the mineralization may make * R&R are displayed on a Gold‐ Equivalent Ounce basis it prohibitively expensive to exploit by open pit (though underground is still a possibility). We believe the best chances for material additions to the resource * * IRR, NAV, NPV use the start base are likely to come from possible parallel zones of mineralization at of construction as the beginning period
Natougou (OBS Figure 2), or from new discoveries in the regional land holdings around Natougou that could become satellite operations to supplement the ore feed at the mill constructed at Natougou (OBS Figure 3). 2) Second Project: The Nabanga project hosts a high-grade resource (0.57Moz @ 10.0 gpT). We attribute a modest value (~5% of our NAV) to this project, as it looks to be a riskier underground deposit, and it’s not yet clear what the actual mineable (diluted) grade could be. It will also be beneficial to let someone else (e.g., Roxgold) be the first to develop a modern underground gold mine in the country, and build up the in-country expertise needed for that. 3) Pipeline of Projects: Beyond Natougou and Nabanga, the company has an extensive pipeline of projects, including the Bantou project, which has extensive artisanal mining activity, and upon which Orbis has drilled holes that have intersected high-grade mineralization at depths of 100–150m below surface; still potentially open-pittable, but beyond the feasible reach of the artisanals. A fourth project, Tankoro, in Burkina Faso, also has good prospects and Paradigm Capital Inc, IIROC/TSX member 54 August 7, 2014
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encouraging drill results. The company recently announced the granting of exploration permits in Cote d’Ivoire in the Banfora greenstone that hosts Randgold Resources’ Tongon deposit. A substantial pipeline of projects at various stages of advancement.
OBS Figure 1: Natougou Deposit: Size and Orientation
Source: Company filings
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OBS Figure 2: Natougou Deposit: Close Proximity Resource Upside
Source: Company filings, FactSet, Paradigm Capital Inc.
OBS Figure 3: Natougou: Regional Land Holdings, Potential for Additional Discoveries
Source: Company filings, FactSet, Paradigm Capital Inc.
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OBS Figure 4: Price over Net Asset Value (based on current share price, at $1,300/oz Au, 5% Discount Rate)
P/NAV 1.20x 1.09 1.02 1.00 1.00x 0.91 0.80 0.74 0.80x 0.70 0.61 0.60x 0.59 0.56 0.52 P/NAV 0.49 0.48 0.44 0.42 0.40x 0.35 0.32 0.31 0.30 0.26 0.19 0.17 0.20x 0.16 0.14 0.08
0.00x
Source: Paradigm Capital Inc.
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OBS Figure 5: Market Capitalization over Our Estimated Recoverable Ounces
Market Cap/PCI Recoverable oz $450 $384 $400 oz $350 $269 $300
$250 Recoverable
PCI $200 $167 $155 $129
Cap/ $150 $110 $105 $95 $94 $93 $85 $100 $73 $65 Market $52 $42 $39 $36 $50 $19 $13 $12 $13 $13 $12 $6 $4 $0
Source: Paradigm Capital Inc.
OBS Figure 6: Project IRRs and IRRs to the Acquirer (assuming a 30% Premium)
Project IRR and IRR to the Acquirer
45% 41% 39% 40%
35% 31% 30% 27% 28% 24% 24% 24% 24% 23% 24% 23% 25% 22% 22% 21% 21% 20% 20% 20% 18% 18% 17% IRR 15% 14% 14% 15% 15% 12% 12% 13% 14% 10% 10% 11% 11% 9%8% 9% 9% 10% 7% 7% 7% 7% 5% 6% 6% 4% 4% 5% 3% 1% 2% -1% 0%
-5%
Project IRR IRR to the Acquirer
Source: Paradigm Capital Inc.
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Rating and Target Price We are initiating coverage of Orbis Gold with a Speculative Buy rating and A$0.70 target. The Natougou project is, in our opinion, one of the best three undeveloped deposits in Burkina Faso, a country that has demonstrated its mining friendly business environment and permitting regime. The project yields a top-quartile IRR of 31% at $1,300/oz gold, and also an above-average 11% estimated IRR to an acquirer. The company is currently trading at a 0.43x P/NAV multiple (unfinanced), but we are assuming a multiple lift as the company reduces the project risk by completing a DFS (by mid-2015), and we also hope the story gains more traction and awareness with North American investors. We are applying a 0.55x P/NAV multiple (slightly above the average 0.50x multiple) (OBS Figure 4) to our NAV calculated at $1,425/oz gold to arrive at our target price of A$0.70.
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Company Profile (All figures in US$, Seabridge Gold unless otherwise noted) Sector Gold Standing Out Among the Giants Ticker SEA‐TSX
Description Stock Rating Spec. Buy Seabridge is an exploration company whose principle projects are located in B.C. and Closing Price (C$) $10.04 Canada’s Northwest Territories, with total resources of 85Moz gold plus 23Blb copper. Its 12‐Mth Target (C$) $20.00 flagship project is the 100%- owned Kerr-Sulphurets-Mitchell (KSM) project in B.C., Potential ROR 99% located near Pretium’s Brucejack project, purchased from Placer Dome in 2001 (for Shares O/S Bsc (M) 48 $0.2M). KSM’s proximity to Brucejack is not coincidental, they are parts of the same vast Shares O/S FDIM (M)* 48 Jurassic-aged island arc geological system. The terrain is rugged mountains, but the region Mkt Cap, Bsc (C$M) $486 is serviced by Highway 37 and the provincial government has recently extended the power Mkt Cap, FD (C$M) $486 grid into the area. Of critical importance, in late July, KSM’s EIA was approved by the B.C. government. KSM consists of five projects over a 2km x 10km area and is one of the * includes assumed equity financing to fund exploration world’s largest undeveloped copper-gold deposits. December 2013 reserves for KSM’s NAV/sh (C$)** $29.33 four most advanced deposits were estimated at 38Moz gold and 10Blb copper, grading Working Capital/sh $0.38 0.55 gpT gold and 0.21% copper, respectively. A maiden inferred resource for the fifth Debt/sh $0.00 deposit, found in 2013 — Deep Kerr, a core zone to the Kerr deposit and a block cave ** NAV@ 5% DCF rate, $1,300/oz gold price, per diluted share incl. exploration funding mining candidate — was estimated in Feb. 2014 at 6Moz gold and 6Blb copper, grading 0.36 gpT gold and 0.53% copper, respectively. On a recoverable value in concentrates and Company Description the precious metals dore, KSM is roughly 60:40 gold:copper in our estimates (53:47 when Seabridge Gold is a Canadian exploration looking at concentrates only), with minor silver and molybdenum credits. Seabridge company with two major projects: KSM in BC released a PFS by TetraTech in September 2012 for the four deposits. We have used this and Courageous Lake in the NWT. Our analysis focuses on KSM, one of the world’s largest as the basis of our analysis. While Deep Kerr was not included, the PFS was an important undeveloped copper-gold deposits. KSM hosts de-risking step for KSM. Envisioned is a 130KTpd open-pit mine (eventually moving four major deposits/projects with reserves of underground) producing 0.85Moz/year gold and 195Mlb copper for the first seven years, 38Moz Au and 10Blb Cu plus a recently with life-of-mine averages of 0.51Moz/year gold and 147Mlb copper. Other statistics and discovered (2013) fifth project called Deep Kerr with an Inferred resource of 6Moz Au and 6Blb ratios can be found in the sidebar of the next page. Given the $5.3B construction capital Cu. Seabridge has advanced the project through and our $1,300/oz and $3.00/lb price deck, our 9% after-tax IRR falls short of economic permitting receiving the B.C. government’s viability; however, we think the world’s large mining companies will be attracted to the approval for its EIA and now awaits federal approval. project’s strategic size, jurisdiction, advanced permitting status, potential for Deep Kerr, and the unique prospect of selling a precious metal stream to help fund construction. 1-Year Stock Chart
Seabridge Gold Inc. (SEA‐CA) Price (CAD) Volume (Thousands) Investment Thesis 18 250
Seabridge shares provide investors with ownership in what we believe is one of the most 16 200 strategically compelling and prolific copper-gold projects in the world at a cost to the 14 150 investor of $4/oz gold and $0.01/lb of copper resource for its flagship KSM project. 12 100 Exploration momentum remains outstanding, with a major new project — Deep Kerr — 10 discovered in 2012 and potential for other meaningful discoveries in 2014 and beyond. 50 8 Finding costs have averaged ~$1/oz equivalent since 2006. Over the past decade, 6 0 Seabridge has grown its resources by about six times while shares outstanding have less Aug Sep Oct Nov Dec Jan Feb Mar Apr May Jun Jul Volume Seabridge Gold Inc. than doubled. Source: FactSet Prices
Major Permitting Step Forward: On July 31, 2014, the Province of B.C. advised Seabridge that it had given final approval to KSM’s application for an Environmental Assessment Certificate. This was the product of six years of permitting work and a 35,000-page filing. With this important major first-approval in hand it is anticipated that federal approval will be forthcoming before year-end as the process currently sits in the final 30-day public commentary period.
Comparisons Are Challenging: The KSM project is the basis for Seabridge statistics shown in this report; however, its 38Moz reserve base is so much larger than the 3Moz median
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resource of the 25 development companies in our study that the analysis is a bit like Company Profile (All figures in US$, asking a wrestler to pose in a ballerina outfit. It certainly stands out — KSM doesn’t look unless otherwise noted ) anything like the comparables. The C$0.49B market cap makes Seabridge one of the Project KSM largest in this study, yet it is one of the least expensive on a per recoverable ounce basis at Location Canada US$17.50, versus the group median of US$55, as shown in SEA Figure 1. Likewise, the Stage of Project Pre Feas. hefty US$5.45B estimated capital, once divided by the huge resource, yields a very Type of Mine OP/UG, Conc competitive US$264/oz, as shown in our summary statistics table. Adding these two to our life-of-mine total cash cost plus sustaining capital estimates of US$388/oz (net of credits) P&P Reserves 38.2Moz @0.6 gpT and US$172/oz, respectively, we arrive at what we have called our Investor Total Cost M&I 49Moz @0.4 gpT (ITC) of US$845/oz. The ITC is a measure of the all-in cost to the investor per ounce of Inferred 20.9Moz @0.4 gpT recoverable resource, including the value of the shares, construction, operating and PCI Est. Mineable 38.2Moz @0.6 gpt sustaining costs. While KSM’s 8.5% IRR was one of the lowest in the study, its ITC is the third lowest in the study, as shown in SEA Figure 2. Note that we have only used KSM’s Estimated 2017 reserves and not the 6Moz Deep Kerr resource or KSM’s other 26Moz of resources. We Construction Start think the ITC is a valuation criterion worthy of consideration in cases where the mine lives Estimated Production 2021 are long. IRR and NPV calculations mask the benefit of having a project that can endure Start several cycles. KSM has a projected mine life of over 50 years, whereas the median mine Mine life (Years) 55 life in our sample of 25 projects is 14 years.
Ann. Au Prod'n (Koz) 487 IRR and NAV Sensitive to Metal Price: Seabridge’s common shares are suited to investors Construction Capital looking for maximum gearing to rising gold prices, not just in terms of the ounces per- $5,450 dollar invested, but also sensitivity to rising gold and copper prices. If we increase our Cost ($M) Total Cash Cost/oz price deck by 10% our after-tax IRR increases from 8.5% to 10.9% and increases our $378 NAV/share by three quarters. Thus, KSM is within reach of being economic (IRR ≥15%) if LoM one assumes a gold price of $1,650/oz or more and copper above $3.75/lb, in our opinion. Sustaining cost/oz $172
Excellent Potential to Maintain Strong Exploration Momentum and Low Discovery Cost: Royalties $/oz $0 This year could also be an important one for KSM exploration. Seabridge has a $15M WC ($M) at Mar/14 $18.2 IRR after tax exploration budget. Discovery of Deep Kerr added considerably to the understanding of 9% the KSM property geology and controls, including the potential to identify large extensions @1300/oz at depth that might be well suited to block caving mining techniques. Higher-grade NPV@ 5% US$M $558 extensions will be looked for at Deep Kerr and the possibility of an eastern extension. A 0.26 test of the deep potential of one of the other major deposits on the KSM property called Capital efficiency ratio IRR to acquirer @ 30% Iron Cap will also take place as the Deep Kerr model and geophysics both suggest this is 8% possible. premium Investor total cost $768 ‘Big’ Picture: The Suphurets district of B.C. has hosted several small mines over the ($/oz) decades, but over the past 2–3 years it has become clear that these were just the tip of P/OCF (LoM avg) 16.17x * Only Au R&R is displayed for iceberg, mineralogically. The >100 sq km island arc geological system that hosts Pretium’s SEA and Seabridge’s giant deposits is emerging as one of the most strategically important and * * Models assume a $1B au stream copper-gold rich districts in the world, a secular shift that the market has yet to fully * * * NPV discounts the au respect. When viewed individually, the projects of these two companies might fall into the portion of the project by 5% “too good to be true” category. However, they are logically consistent if one considers the which is effectivley a 7% discount rate discoveries from a ’big picture” geologically, that they are related parts of one large system. This is consistent with first-principle geological theory for island arc systems — * * * * IRR, NAV, NPV use the start of construction as the epithermal deposits like Pretium’s high-grade Valley of the Kings (VOK) and copper-gold beginning period
porphyry deposits like those in Seabridge’s KSM are related. The fact that since 2008 KSM’s total resources (incl. inferred) have grown from 47Moz gold and 11Blb copper to 70Moz gold and 23Blb copper with above-average grades (on a gold equivalent [AuEq] basis) is compelling evidence of a “system” that had a high metal endowment in its fluids. The rapid discovery pace at Seabridge’s KSM project seems likely to carry on for several more years. In our opinion, investors who are interested in advanced exploration- development stage companies should first consider the “camp” and whether it is prolific
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and a setting where further discoveries can continue to occur. If yes, then can one gain exposure at a reasonable price? We think the answers are “yes” in Seabridge’s case.
Stands out among the Copper‐Gold Giants: SEA Figures 3 and 4 show the world’s largest undeveloped gold projects greater than 5Moz and copper-gold projects. KSM stands out as one of the biggest in both cases. It stands almost alone within the “giant” category once one eliminates projects that are either unlikely to proceed for technical, economic or political/permitting reasons. KSM is also slightly higher grade than the median among the 68 undeveloped copper-gold deposits we also show in SEA Figures 3 and 4 at 0.95 gpT AuEq versus 0.90 gpT AuEq. At current metal prices, gold accounts for about 60% of recoverable value in concentrates and dore using our US$1,300/oz and US$3.00/lb price deck and silver a few percent. This is high compared to the group median of 38%. It is only 27% for the top 10 largest copper-gold deposits.
Potential for Stream Financing: KSM is probably now of a size beyond the capacity of the world’s largest gold companies, with the possible exception of Barrick. Until recently, the world’s largest mining companies had sworn off major new projects, but this hiatus appears to be softening. In July, Rio Tinto said that it is again beginning to look at growth projects. We think that KSM’s high gold content could uniquely position the project to attract the world’s major diversified miners. A diversified miner would be able to sell a precious metals revenue stream providing access to uniquely low-cost financing. Large royalty companies like Royal Gold or Franco-Nevada trade at roughly 3–4x the valuation multiple of the diversified miners, allowing plenty of room for mutually attractive stream financing. Royal Gold has the option to buy a modest 2% NSR on the precious metals stream for $160M and would, therefore, be a logical buyer – but we would only expect royalties to be put in place once an acquirer was prepared to commit to construction. For example, using the terms of Franco’s purchase of the Cobre Panama revenue stream, we estimate a stream representing just 15% of KSM’s gold-silver production could be worth ~$1B, meaningful in context of the $5.3B construction cost estimate in the PFS.
Risks Permitting and Reaching Agreements with First Nations Groups: These are two of the biggest risks in Canada, we believe — B.C. in particular, especially given the recent high- profile tailings dam breach at Imperial Metals' Mount Polley mine. Often the two are linked. In June, a comprehensive Benefits Agreement was announced with the Nisga’a Nation, the only Treaty nation involved in the environmental assessment process. In February 2013, Seabridge completed the filing process of its provincial application for an Environmental Assessment Certificate (Application) and its federal Environmental Impact Statement (EIS), a 35,000-page document believed to be the most comprehensive in Canadian history. Management had been hopeful that the provincial certificate would be awarded in late July or August and this worked out. Receipt of the federal permit typically follows within a few months; however, there is no guarantee of either timing or a positive outcome.
Needs Higher Metal Prices: KSM is a large (130KTpd) project and requires metal prices in the $1,600/oz and $3.75/lb range to generate a sufficiently attractive return in the low teens after tax, according to the KSM PFS. Our model achieves a 15% IRR, which we would see as attractive for such a large project, at $1,650/oz and $3.80/lb. We suspect that the newly discovered Deep Kerr will be more robust. A PEA could be available for Deep Kerr by mid-2015, but first it is being assessed for its suitability to block caving as a mining method. It is believed that Deep Kerr could fall within the broader property permits by way of amendment.
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Limited Number of Potential Buyers: As discussed earlier, given KSM’s size, there is a limited list of potential buyers and the project is clearly beyond the capacity (and desire) of Seabridge to proceed with. However, we believe that Seabridge can contribute considerable value over the next few years as it continues to advance the project through permitting, adding to its size through exploration and improving the value proposition by further optimization. Seabridge’s P/NAV of 0.34x is well below the 0.48x median of the 25 development stage companies in our analysis. Looking at it another way, the NPV of KSM at our price deck is US$ 1.3B. The impact of relatively small improvements flowing through into Seabridge’s valuation would be considerable.
Recommendation and Target Price Seabridge provides investors with exceptional gearing to higher metal prices in a project that stands out as one of the world’s largest undeveloped gold-copper deposits, in a strategically compelling new camp. It does not stack up well against our list of two dozen other gold development projects on an IRR basis, but it is one of the best in terms of value per resource, ITC, P/NAV and sensitivity to higher metal prices. The KSM project is well advanced in its permitting, having received B.C. approval of its EIA in July, about the same time as the province brought electricity into the area. We expect KSM to continue growing for several years to come.
Both our gold and base metal teams expect their respective metal prices to increase over the next few years. To arrive at our target price for Seabridge we have used a gold price of US$1,425/oz and copper price of US$3.25/lb, which generates an unfinanced NAV/share of C$50.00. This compares with C$29.00/sh at our price deck of US$1,300/oz and US$3.00/lb long term. Given that at our target prices the project IRR remains low-ish at 10.8%, we have only slightly raised the NAV multiple from the current 0.35x to 0.40x. This results in a target price of C$20.00. We are initiating coverage of Seabridge with a Speculative Buy rating.
SEA Figure 1: Market Capitalization over Our Estimated Recoverable Ounces
Market Cap/PCI Recoverable oz $450 $384 $400 oz $350 $269 $300
$250 Recoverable
PCI $200 $167 $155 $129
Cap/ $150 $110 $105 $95 $94 $93 $85 $100 $73 $65 Market $52 $42 $39 $36 $50 $19 $13 $12 $13 $13 $12 $6 $4 $0
Source: Paradigm Capital Inc.
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SEA Figure 2: Investor Total Cost over Our Estimated Recoverable Ounces
Investor Total Cost/ PCI Recoverable oz $1,400
$1,168 $1,200 $1,147 $1,145 $1,100 $1,100 $1,094 $1,083 $1,082$1,074 $1,071 $1,063 $1,056 $1,031 $1,020 $1,020 $1,018 $990 $983 $977 $1,000 $944 $890 $814 $768 $800 $762
ITC/oz $600 $543
$400
$200
$0
Source: Paradigm Capital Inc.
SEA Figure 3: Undeveloped Gold‐Copper Projects Greater than 5M GEO Ounces
Undeveloped Gold Projects With Greater Than 5Moz of R&R (Including Only Cu‐Au Projects) 300,000,000 2.80 KSM #3 High Economic Potential = 18 Total >5Moz Projects = 38
250,000,000 2.30
200,000,000
1.80 (g/t)
Ounces
grade 150,000,000 Equivalent
Equivalent
Gold 1.30 Au
100,000,000
0.80 50,000,000
0 0.30
Risky Projects Price Assumptions for Au Eq Grade Ag/oz - $20.80 High Economic Potential Projects Cu/lb - $3.00 Seabridge Asset Au-oz - $1,300 * Gold Equivalent Grade (g/t) Source: Paradigm Capital Inc.
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SEA Figure 4: Undeveloped Gold Projects with Greater than 5Moz Undeveloped Gold Projects With Greater Than 5Moz of R&R (Excluding Cu‐Au Projects) 80,000,000 20.00
18.00 70,000,000
16.00
60,000,000
14.00
50,000,000 12.00 (g/t)
Ounces
grade 40,000,000 10.00 Equivalent
Equivalent 8.00 Gold 30,000,000 Au
6.00
20,000,000
4.00
10,000,000 2.00
0 0.00 Kyzyl Gaby Kiaka Certej Fekola Esaase Volcan Aurora Yaoure Merian Orisyvo Magino Buritica Chaarat Sleeper Maoling Metates Mt ToddMt Jeanette Bayankol Goldrush Kyutchus La Colosa La Sub Nigel Hardrock Converse Bombore Barlevsky Brucejack Cote Gold Cote Meliadine Angostura Back River Livengood Gramalote Sukhoi Log Springpole Klerksdorp Paul Isnard Paul Blackwater Twin Peaks Rainy River Skaergaard Donlin Gold Lobo-Marte Las Cristinas Las Camino Rojo Camino Taseevskoye Volta Grande Rosia Montana Poputninskoye Fruta del Norte delFruta Golden Summit Evander 6 Shaft Hammond Reef ERPM Extension Courageous Lake Golden Meadows Spanish Mountain Spanish Central Murchison Central Potchefstroom Goldfield
Southern Free State Goldfield State Free Southern Risky Projects Assumed $20.80/oz of Ag for GEO calculation High Economic Potential Projects * Gold Equivalent Grade (g/t) Source: Paradigm Capital Inc.
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Gold Sector Note
Appendix 1: T20 Candidates Share Price Information
Highest Four Year Price Lowest Four Year Price Delta 4 Yr Current Gain as a % Current Price Date High S/O Market Cap Date Low S/O Market Cap % Below High % Above Low High‐Low of Hi‐Low First Tercile Carlisle Goldfields Limited CGJ-CA $0.05 01-Jul-11 $0.34 45 $15 27-Dec-13 $0.04 238 $10 -87% 13% 0.3 2% Freegold Ventures Limited FVL-CA $0.20 14-Apr-11 $1.25 43 $53 02-Jun-14 $0.18 78 $14 -84% 10% 1.1 2% Midas Gold Corp. MAX-CA $0.74 13-Jan-12 $4.85 105 $510 03-Dec-13 $0.66 128 $84 -85% 12% 4.2 2% Gryphon Minerals Limited GRY-AU $0.17 11-Apr-11 $2.11 300 $632 05-Dec-13 $0.12 401 $48 -92% 42% 2.0 3% Mega Precious Metals Inc. MGP-CA $0.11 06-Dec-10 $0.99 40 $40 27-Dec-13 $0.09 116 $10 -89% 29% 0.9 3% Victoria Gold Corp. VIT-CA $0.14 26-Oct-10 $1.51 275 $416 09-Dec-13 $0.08 339 $27 -91% 69% 1.4 4% Sabina Gold & Silver Corp. SBB-CA $0.87 20-Apr-11 $7.55 159 $1,203 05-Dec-13 $0.56 194 $109 -88% 55% 7.0 4% Belo Sun Mining Corp. BSX-CA $0.24 04-Jan-13 $1.73 266 $460 02-Jul-14 $0.16 266 $43 -86% 47% 1.6 5% Average -88% 35% 3% Median -88% 36% 3%
Second Tercile Orezone Gold Corporation ORE-CA $0.80 07-Apr-11 $5.04 83 $418 14-Oct-13 $0.34 86 $29 -84% 135% 4.7 10% Kaminak Gold Corporation Class A KAM-CA $0.92 26-Jul-11 $4.67 69 $321 06-Dec-13 $0.46 88 $41 -80% 100% 4.2 11% Integra Gold Corp. ICG-CA $0.21 24-Jan-11 $0.85 33 $28 19-Apr-13 $0.13 86 $11 -75% 62% 0.7 11% Seabridge Gold Inc. SEA-CA $10.19 23-Feb-11 $34.41 41 $1,421 03-Dec-13 $7.09 46 $323 -70% 44% 27.3 11% Rubicon Minerals Corporation RMX-CA $1.65 29-Nov-10 $6.13 214 $1,309 23-Dec-13 $0.70 289 $202 -73% 136% 5.4 17% Guyana Goldfields Inc. GUY-CA $3.09 04-Nov-10 $11.52 81 $931 26-Jun-13 $1.20 126 $151 -73% 158% 10.3 18% Bear Creek Mining Corporation BCM-CA $3.49 04-Mar-11 $11.65 92 $1,072 26-Jun-13 $1.20 92 $111 -70% 191% 10.5 22% Romarco Minerals Inc R-CA $0.87 08-Nov-10 $2.84 469 $1,333 24-Jun-13 $0.32 585 $184 -69% 176% 2.5 22% Average -74% 125% 15% Median -73% 136% 14%
Third Tercile Premier Gold Mines Limited PG-CA $2.98 05-Apr-11 $7.92 104 $825 20-Dec-13 $1.28 151 $194 -62% 133% 6.6 26% True Gold Mining, Inc. TGM-CA $0.44 08-Apr-11 $1.02 100 $102 02-Jul-13 $0.23 212 $49 -57% 89% 0.8 26% Pretium Resources Inc. PVG-CA $7.49 01-Mar-12 $17.99 88 $1,585 20-Nov-13 $2.89 105 $304 -58% 159% 15.1 30% Orbis Gold Ltd. OBS-ASX $0.38 24-Jan-11 $0.90 137 $123 27-Jun-13 $0.11 217 $24 -58% 245% 0.8 34% Roxgold Inc. ROG-CA $0.89 16-Feb-12 $2.12 92 $195 10-Aug-10 $0.13 9 $1 -58% 585% 2.0 38% Torex Gold Resources Inc. TXG-CA $1.51 27-Feb-12 $2.40 413 $992 06-Dec-13 $0.88 607 $534 -37% 72% 1.5 41% MAG Silver Corp. MAG-CA $9.93 08-Apr-11 $13.84 55 $766 20-Dec-13 $5.15 60 $310 -28% 93% 8.7 55% Probe Mines Limited PRB-CA $2.32 13-Mar-14 $3.82 76 $289 06-Aug-10 $0.35 37 $13 -39% 563% 3.5 57% Castle Mountain Mining Co. Ltd. CMM-CA $0.70 13-Mar-14 $1.07 47 $50 03-Jul-13 $0.19 47 $9 -35% 278% 0.9 58% Average -48% 246% 41% Median -57% 159% 38%
Paradigm Capital Inc, IIROC/TSX member 66 August 7, 2014
Gold Sector Note
Appendix 2: 27 Major Producers’ Reserve Replacement Costs, 2004‐13 ($M USD) (Gold Reserves Only)
Acqusition Cost Reserves Exploration Total Budget as a Percent of Acquisition Cost Budget Total Budget Freeport‐McMoRan $1 $83 $84 1.2% Buenaventura $0 $440 $440 n/a Petropavlovsk $27 $464 $491 5.5% Navoi Mining $80 $97 $177 45.3% Randgold Resources $311 $372 $683 45.5% Polyus Gold International $320 $597 $917 34.9% Centerra Gold $321 $279 $600 53.5% Polymetal $398 $236 $634 62.7% Agnico Eagle Mines $609 $629 $1,238 49.2% Shandong Gold $755 $171 $926 81.6% Zijin Mining $781 $198 $979 79.7% Harmony Gold $994 $347 $1,341 74.1% Sibanye Gold $1,143 $0 $1,143 100.0% Newmont Mining $1,156 $2,207 $3,363 34.4% Zhongjin Gold $1,174 $125 $1,299 90.4% Nord Gold $1,428 $412 $1,840 77.6% Iamgold $1,544 $672 $2,215 69.7% AngloGold Ashanti $2,431 $2,289 $4,720 51.5% Glencore $2,441 $18 $2,459 99.3% Gold Fields $4,077 $1,596 $5,674 71.9% Eldorado Gold $4,466 $254 $4,720 94.6% Yamana Gold $5,074 $637 $5,711 88.9% Newcrest Mining $9,194 $799 $9,993 92.0% Barrick Gold $10,710 $2,004 $12,714 84.2% Kinross Gold $11,455 $949 $12,404 92.3% Goldcorp $16,555 $1,098 $17,653 93.8% Group Metrics $72,889 $16,970 $89,860 81.1% Group Metrics exclude gold acquisitions and divestitures between any two profiled companies included in the metrics calculations to avoid inflating the share of reserves growth or loss attributable to intra-group transactions; however, each profiled company's metrics include all acquisitions and divestitures to properly reflect their individual reserves-replacement efforts.
Source: SNL Research
Paradigm Capital Inc, IIROC/TSX member 67 August 7, 2014
Gold Sector Note
DISCLAIMER SECTION PCI’s disclosure policies and research distribution procedures can be found on our website at: http://www.paradigmcapinc.com/documents/show.php/10016
Research Rating System Paradigm Capital Inc. uses the following rating recommendation guidelines in its research: Number of Percentage Recommendation Companies Breakdown Buy 137 67% Buy – Expected returns of 20% or more over 12 months. Spec. Buy 25 12% Speculative Buy - Expected returns of 20% or more over the next 12 months on high-risk development or pre-revenue companies, such as junior mining and other early stage companies. Hold 23 11% Hold - Expected returns of less than +/- 20% over the next 12 months. Sell* 31%Sell - Expected returns of -20% or more over the next 12 months. Under Review 17 8% Under Review - Estimates, Target and/or Recommendation under review. Total 205 *Includes companies with a "Tender" recommendation
Paradigm Capital Inc, IIROC/TSX member 68 August 7, 2014