While the Gold Miners Index (GDX) has enjoyed a nice bounce off its lows after suffering a 2-year cyclical bear market with a 52% peak-to-trough correction, many developers are still hovering near the bottom of their multi-year bases after much more violent corrections. The problem with the exploration/development sector is that the fundamentals have rarely been uglier.
For starters, inflationary pressures and rising contractor costs have made exploration/development more expensive, and labor tightness in prolific regions has made retaining current employees more expensive as well. Secondly, building projects and operating mines have never been more expensive due to the inflationary environment, meaning that many economic studies and their economics are stale, and cut-off grades may have to rise to incorporate higher mining/processing costs. Finally, the environment for raising money is the worst in years due to multi-year highs for interest rates, plus disinterest in the sector and distrust of the sector due to recent blow-ups like Pure Gold (PGM.V), Great Panther (GPR.T), and Aurcana (AUN.V). Adding insult to injury, share prices have fallen to their lowest levels in years, meaning that those companies that must raise money from the equity market are getting much less capital per share sold. To summarize, each dollar goes less far due to rising costs, and each share has less worth due to this violent bear market. The result is that the outlook for keeping share counts tight is bleak, making it much more difficult to grow resources/reserves per share when the share count is growing at the same pace as ounces being drilled out.
Due to this deterioration in the fundamentals, I have been much less inclined to buy any exploration/development stories since Q2 2021 with the wind in their face and share dilution looking likely. However, there are always exceptions, and with the ASA Gold & Precious Metals Limited Fund down another 50% since then, a point comes when much of this negativity and the unfavorable backdrop is already mostly priced into these stocks. The problem is that there are only 10-12 names worth owning in the exploration/development space, especially from a relative value standpoint when one can buy producers that are a lower risk with over 70% upside to fair value, like Agnico Eagle (AEM.T). That said - if one is willing to be rigid and stick to the companies with the better projects in safer jurisdictions that have done a much better job managing their share count - opportunities are out there. One name that fits this bill and is beginning to look much more appealing is Liberty Gold (LGD.T).
Liberty Gold has seen a significant fall from grace over the past two years, giving up nearly all of its Q1 2019 to Q3 2020 advance, where it was one of the best performers sector-wide (~690% return). This is evidenced by an 86% decline from its Q3 2020 highs above US$1.80 per share to below the stock's 2020 lows when the gold price was sitting near $1,500/oz. However, while the decline of this magnitude in other juniors is partially justified due to considerable share dilution, Liberty has done an excellent job keeping share dilution to a minimum. This is evidenced by less than 20% growth in its fully-diluted share count from ~295 million fully diluted shares at the end of Q3 2020 (stock's peak) to just ~340 million fully-diluted shares estimated at year-end. This has been achieved by selling off non-core assets in a favorable environment, including the sale of Hailaga in Turkey near the peak for gold juniors, its share in Kinsley Mountain, a Net Profit Interest [NPI] on the Regent gold Project, and the Griffon Property, as well as a few smaller transactions. The result is that Liberty was able to fund exploration ~$30 million in exploration without needing to dilute shareholders, something that many other juniors should have done with several having non-core assets in their portfolio.
It's also worth noting that we've seen a major overhaul in the management team, with Jason Attew joining as CEO (previously CFO at Goldcorp), Darin Smith joining as Senior Vice President, Corporate Development (previously SVP Corporate Development at Kirkland Lake Gold), and Jon Gilligan as COO, who previously held senior and technical project roles at Torex (TXG.T), SSR Mining (SSRM.T), and BHP (BHP), and notably advanced many mining operations including the nearby Marigold open-pit, a similar operation to Liberty's Black Pine and Goldstrike Projects in Idaho and Utah, which are expected to be heap leach operations as well. Finally, Liberty continues to benefit from Vice President, Exploration & GeoScience Moira Smith, who was the Chief Geologist for Fronteer and a major part of the advancement of Long Canyon, the prize which saw the company acquired for ~$2.0 billion by Newmont (NEM). Given this massive upgrade to the management team, limited share dilution on a relative basis, and considerable growth of its flagship project, I see the pullback in the stock as overdone. Let's take a closer look at its main asset:
Liberty Gold's main asset is the Black Pine Project just north of the Idaho/Utah border, which the company acquired for a song in 2016 ($800,000 cash, 300,000 shares, and a 0.5% NSR). The project was drilled for over two years before Liberty announced a maiden resource estimate of ~2.09 million ounces of gold, with an indicated grade of 0.51 grams per tonne of gold (~1.72 million ounces) and an inferred grade of 0.37 grams per tonne of gold (~370,000 ounces). However, the company has completed considerable drilling since then on the project, and with 74% of the resource located in the Discovery Zone (D-1, D-2, D-3), there is a significant upside to this existing resource. The reason is that the company has since expanded the Rangefront Zone (only 78,000 ounces contributed to the 2021 mineral resource) that lies southwest of the main mineral resource, and we should see additional ounces in the E Zone down-dip, the F Zone, and the M Zone. Meanwhile, the company continues to work on drilling a potential connection to the Back Range Zone to the northwest of the Discovery Zone and appears to have linked the CD Zone (~200,000 ounces in 2021 mineral resource) to the Discovery Zone with the F Zone.
(Source: Company Presentation)
(Source: Company Presentation)
Given the drilling success to date, this suggests that we could see a 60%+ increase in gold ounces in the next resource upgrade (~3.3+ million ounces of gold), and ultimately, this property is likely to hold at least 4.70 million ounces of gold resources. Even at a 60% resource-to-reserve conversion rate, this would translate to a ~2.8 million-ounce reserve base, supporting a 140,000+ ounce per annum operation with a 20-year mine life. Given the above-average grades for an oxide heap-leach project at Black Pine and industry-leading projected recovery rates vs. current operating mines, I would expect all-in-sustaining costs to come below $1,050/oz even after accounting for inflationary pressures. If we compare these costs to the estimated FY2026 industry average all-in-sustaining costs (~$1,300/oz), Black Pine would be considered a low-cost operation and would receive a premium multiple due to being in a Tier-1 ranked jurisdiction in the Great Basin. Now that we've established this project with ~5.0 million-ounce resource potential, that could very well be a mine one day. Let's take a look at the valuation:
My belief that Black Pine will ultimately be a mine stems from the fact that it's a relatively simple operation (run-of-mine heap leach) and it benefits from a location with no fish, no timber values, hydro-power to the site, and no environmental issues like we have seen in Northern Idaho at Stibnite.
(Source: Company Presentation)
Based on ~345 million fully-diluted shares and a share price of US$0.28, Liberty Gold trades at a market cap of ~$97 million. If we compare this figure to an NPV (5%) of US$520 million at a $1,700/oz gold price, Liberty trades at a fraction of Black Pine's value, and this ascribes zero value to TV Tower (non-core Turkish asset) and Goldstrike (heap-leach project in Utah with NPV (5%) of ~$280 million). So, even if we exclude Goldstrike, TV Tower, and ~$25 million in cash from the valuation and value of Liberty solely on Black Pine and on a market cap vs. enterprise value standpoint, Liberty trades at approximately 0.19x P/NPV. Based on what I believe to be a fair multiple of 0.50x P/NPV, given that Liberty is not as advanced as other developers and is still working on completing a Preliminary Economic Assessment, its fair value would come in at US$260 million or US$0.78 per share. This translates to a 180% upside from current levels.
To ensure that this isn't a stretch and that these numbers are reasonable, we can look at acquisitions over the past two years of open-pit, heap-leach projects in the United States. The two that stand out are Gold Standard Ventures which was acquired for ~$190 million, and Corvus Gold, which was acquired for $370 million. These acquisition prices translated to a valuation per measured & indicated ounce [M&I] of ~$97 and ~$106, respectively, which is miles above where Liberty currently trades at ~$31/oz based on an estimated ~3.1 million M&I ounces at Black Pine proven up by Q1 2024 (US$97 million market cap / 3.1 million ounces). In the case of these two acquisitions, Orla (ORLA) was looking to add a Tier-1 jurisdiction to its Mexican production profile, and it picked up the 2nd largest land package on the Carlin Trend with its acquisition.
In AngloGold's case (AU), the company was adding strategic ounces in an area it was already present, suggesting that both companies might have paid a premium vs. the going rate due to these unique benefits. That said, even if we use a 25% discount on the average price per M&I ounce paid, which would translate to ~$76/oz, and multiply by future M&I ounces at Black Pine, we come up with a fair value of US$236 million, not far from the estimated fair value on a P/NPV standpoint at a 0.50 multiple. However, and as discussed earlier, this values Goldstrike and TV Tower at zero, suggesting this is an ultra-conservative estimate of fair value in my view. To summarize, I see Liberty Gold as significantly undervalued at current levels, and with us nearing peak pessimism in the developer space, I would view further weakness as a buying opportunity to start an initial position in the stock.
Disclosure: I am long AEM.T
Disclaimer: Taylor Dart is not a Registered Investment Advisor or Financial Planner. This writing is for informational purposes only. It does not constitute an offer to sell, a solicitation to buy, or a recommendation regarding any securities transaction. The information contained in this writing should not be construed as financial or investment advice on any subject matter. Taylor Dart expressly disclaims all liability in respect to actions taken based on any or all of the information on this writing. This article is provided for informational purposes only and is not intended to be investment advice of any kind, and the author is not sponsored by any company discussed in the article, nor has he ever been compensated/sponsored by any company in the sector. Given the volatility in the precious metals sector, position sizing is critical, so when buying small-cap precious metals stocks, position sizes should be limited to 5% or less of one's portfolio.