The junior mining sector has had a brutal 2022, sending the share prices of many companies down 80% or more. The combination of low share prices and the gold reserve replacement cycle of senior gold producers creates an environment ripe for M&A in the gold mining sector. We have already seen M&A in the gold sector begin to accelerate in recent months with several notable transactions hitting the tape:
- Gold Fields (NYSE:GFI) acquired Yamana Gold in a transaction valued at $6.7 billion, making GFI the 4th largest gold producer globally.
- Anglogold Ashanti (NYSE:AU) buys Coeur Mining’s Walker Lane Trend assets for US$150 million.
- IAMGOLD (NYSE:IAG) sold its Rosebel Mine in Suriname for US$360 million to Zijin Mining.
- Sandstorm Gold (NYSE:SAND) acquired Nomad Royalty Company for US$590 million.
I believe the M&A cycle will accelerate further over the coming months as large companies take advantage of the sector wide decline to snap up assets at attractive valuations. This leads me to look for under the radar opportunities in the gold sector that others might have overlooked, or not fully appreciated. Most senior gold producers are looking for projects that meet the following criteria:
- More than 3,000,000 ounces in M&I categories.
- Average grade of resources above 1.0 g/t gold, or an ore body that can be mined at low cost and fit into the lowest quartile of the all-in sustaining cost curve.
- Project located in stable, mining friendly jurisdiction (look at the top 20 jurisdictions in the Fraser Institute Survey).
- No major red flags (local opposition, challenged metallurgy, etc.) or project feasibility issues.
The criteria led me to examine different Canadian gold juniors and select two:
- A fairly well known Canadian gold developer that has had a rough year in 2022 primarily due to being in the dreaded project construction “orphan stage” of the Lassonde Curve.
- An under the radar junior that holds a 25% fully carried interest in a multi-million ounce gold deposit in a great location/jurisdiction.
Marathon Gold’s Valentine Gold Project is located in the Central Region of Newfoundland and Labrador, one of the top mining jurisdictions in the world. Valentine hosts measured & indicated (M&I) gold resources totaling 4 million ounces at an average grade of 1.9 grams/tonne gold, in addition to 1.1 million ounces of inferred resources at an average grade of 1.65 grams/tonne gold. When completed, the Valentine Gold Project will be the largest gold mine in Atlantic Canada and a significant contributor to the economy of Newfoundland and Labrador.
In September 2022, Marathon Gold (TSX:MOZ, OTC:MGDPF) made a construction decision to move forward at an estimated C$470-$490 million to complete construction at Valentine.
In the next couple months, Marathon is expected to release an updated feasibility study using a 3 pit mine plan and detailed gold price sensitivities for the project.
Construction is slated to take approximately two years and the existing feasibility study envisions a 13 year mine life with average annual production of 173,000 ounces per annum:
Valentine has multiple key advantages that sets it apart from other gold projects of its scale:
- Road accessible with a hydro power substation located within 30 kilometers.
- A unique repeating pattern of gold mineralization that formed five gold deposits with mineral resources now identified.
- Straightforward metallurgy with 96% recoveries from gravity separation, flotation and cyanide leaching.
- High grades for an open pit intrusive gold deposit.
The recent gold price and stock market downturn has created an environment where deep value investors have the opportunity to buy advanced development stage companies like Marathon at valuations that didn’t seem possible just six months ago. Those who understand the long term cyclicality of the gold mining sector, such as large mining companies, have the opportunity to invest in the highest quality gold projects in excellent jurisdictions at cyclical low valuations.
At Marathon’s recent C$.84 share price, its 5.1 million ounces (in all categories) are being valued at less than C$70 per ounce in the ground. While Marathon will have to take on debt in order to complete mine construction at Valentine, a project of this quality should be valued at well above C$150 per ounce once commercial production is achieved. Marathon’s 2021 feasibility study demonstrated a C$600 million NPV (using a 5% discount rate) at a US$1,500 gold price. It’s fair to say that a C$600 million valuation is conservative and could see considerable upside in the event gold rises back above US$1,800 as Valentine moves into production in the next few years.
Another notable example of a gold mining company trading well below the intrinsic value of its assets is IAMGOLD (NYSE:IAG, TSX:IMG). Vanstar Mining Resources (TSX-V:VSR, OTC:VMNGF) holds a 25% non-contributory carried interest on the multi-million ounce Nelligan Project. IAG can earn another 5% in Nelligan by completing a feasibility study at its expense.
Nelligan is an intrusion-related gold project that boasts 3.2 million ounces (inferred) at an average grade of 1.02 g/t gold. IAG produced the maiden resource for Nelligan in 2019, and drilling in 2020 and 2021 has continued to expand the mineralized zones along strike to the west and at depth. IAG is expected to release an updated resource estimate including infill drilling from 2020/2021, as well as resource expansion drilling that has been completed since the 2019 MRE (drilling in 2020 and 2021 extended the deposit at least 700 meters beyond the constraints of 2019 MRE).
In 2019, the Nelligan Gold Project was awarded the Discovery of the Year by the Association de l'Exploration Minière du Québec (Association For Mineral Exploration in Quebec). This award serves to demonstrate the special characteristics of the Nelligan deposit that include:
- Located in the Abitibi Region of Quebec, a prolific mining region of Canada with excellent access to infrastructure and skilled labor.
- Year-round project access and road accessibility.
- Large scale (more than 100 million tonnes of mineralization) and excellent continuity of gold mineralization.
- Ideal deposit for an open pit mining method with gold mineralization beginning at relatively shallow depths (~50 meters) and extending along strike for at least 1,500 meters.
- Deep holes allow the pit to be deepened without significantly increasing the strip ratio, and the deposit remains open at depth.
- Resource expansion drilling to the west at ‘Renard West’ continues to intersect broad intervals of 1+ g/t gold (40.50 meters grading 1.28 g/t Au and 15 meters grading 7.81 g/t Au from 2021 drilling at Renard West).
Vanstar will have a 20% free carried interest in Nelligan (plus a 1% NSR on the original 8 claim blocks at Nelligan) once IAG has completed a feasibility study. This means that Vanstar retains a 20% undivided non-contributory carried interest until commencement of commercial production at Nelligan, and a 1% NSR on the 8 original claims. It’s hard to ascertain an exact value for a 20% non-contributory carried interest in a mining project, however, it is incredibly valuable to not have to share in the expenses of completing a feasibility study, permitting the mine, and then the significant capex bill for project construction. By avoiding sharing in these costs Vanstar is saving tens of millions of dollars’ worth of expenses, and the resulting shareholder dilution and/or debt load involved with financing further project advancement to the production stage.
Vanstar insiders apparently understand the value the company holds at Nelligan and they have been regular buyers of VSR shares in the last year:
It’s rare to find a situation in the junior mining sector in which a company has such limited downside with the potential for an upside return that is multiples of the current valuation. Vanstar stands out as a unique opportunity that hasn’t gained the interest of investors due to limited news flow in the last couple years combined with the gold sector downturn. With majority owner IAMGOLD’s recent divestment of its Rosebel Mine in Suriname for US$360 million in cash, it’s clear that the company has turned its focus back to Canada with its Côté Gold Project in northeastern Ontario. Nelligan offers IAG an attractive development stage project that bolsters the company’s future project pipeline. The completion of a feasibility study for Nelligan will go a long way toward putting a valuation on the project and potentially rerating Vanstar in the process.
VSR.V (Daily - 2 Year)
I have purchased shares of both Marathon Gold and Vanstar Mining Resources on the open market in recent weeks. I look forward to IAG’s next drill results update from Nelligan. Specifically, insight on the timeline of a feasibility study for the project, in addition to Marathon’s updated feasibility study for Valentine before year end. Both share price valuations offer an attractive risk/reward proposition, increased M&A activity in the gold sector combined with a rising gold price should turn the recent headwinds for both company’s share prices into tailwinds over the next year.
Disclosure: Author owns shares of Marathon Gold Corp. and Vanstar Mining Resources at the time of publishing and may choose to buy or sell at any time without notice. Author has been compensated for marketing services by Vanstar Mining Resources Inc.
DISCLAIMER: The work included in this article is based on current events, technical charts, company news releases, and the author’s opinions. It may contain errors, and you shouldn’t make any investment decision based solely on what you read here. This publication contains forward-looking statements, including but not limited to comments regarding predictions and projections. Forward-looking statements address future events and conditions and therefore involve inherent risks and uncertainties. Actual results may differ materially from those currently anticipated in such statements. This publication is provided for informational and entertainment purposes only and is not a recommendation to buy or sell any security. Always thoroughly do your own due diligence and talk to a licensed investment adviser prior to making any investment decisions. Junior resource companies can easily lose 100% of their value so read company profiles on www.SEDAR.com for important risk disclosures. It’s your money and your responsibility.