It should come as no surprise that with the recent plummet in the price of gold this past year, gold miners and exploration companies began to feel the squeeze. Gold mining and exploration usually incur heavy fixed costs, something well worth it when the price of gold was nearing all-time highs of $1800-$1900/oz. But with the slump in prices to an $1100-$1300 range, the cost can quickly become too much to bear, making them attractive acquisition targets for larger gold producers.
Following Goldcorp's (GG) recent bid to acquire Osisko Mining (OTCPK:OSKFF, TSE: OSK), a flurry of reports poured into the market announcing the birth of the Acquisition Age of Gold. An interesting article on Seeking Alpha even uses the bid as a way to analyze other miners (here).
I believe Probe Mines (OTCPK:PROBF) to be grossly undervalued, with the added benefit as a high-grade gold exploration candidate for an acquisition.
For more information, the company's website can be found here.
Probe Mines engages in the exploration and development of base and precious metal properties in Canada. The Borden Lake gold project near Chapleau, Ontario is the company's focus. Located in mining-friendly regions with reliable access to nearby infrastructure and highways, plus zero debt with about $34 million in cash for further drillings, Probe Mines is a junior explorer with proven high-grade resources that are currently way undervalued. Since the last Resource Estimate, excellent drilling results have pushed Probe Mines into the takeover spotlight.
The Asset: An initial and out-of-date Resource Estimate of more than 4 million oz @ over 1 g/t, not including the impressive high-grade system currently being filled in. The drilling results continuously expand the High-Grade Zone (HGZ) with intervals adding hundreds of meters of high-grade mineralization and incredible width continuity. Most recently, infill drilling in the HGZ returned the highest-grade interval to date with ~40 meters @ over 16 g/t, with over half of that @ 32 g/t. The high-grade mineralization makes this project a highly sought-after takeover target, by allowing would-be producers to develop these sites first and turn a profit even under current prices.
We will take our most base case, ignoring the Chromite deposit and other valuable assets owned by Probe Mines.
Conservative: We can assume that the total reserve will be close to 10 million ounces of gold, for the conservative valuation we will use 7 million ounces. (Keep in mind that according to the dated 43-101, almost 5 million ounces were already discovered in 2013.)
A) 5 million ounces @ $50/ounce = $250 million - This is the low-grade, low-cost gold.
+ 2 million ounces @ $85/ounce = $170 million - This is the high-grade, high-cost gold.
= $420 million ÷ 75 million shares outstanding = $5.60/share. That is a conservative 87% upside increase on a $3.00/share cost.
Realistic: We will assume 8 million ounces.
B) 6 million ounces @ $55/ounce = $330 million - Representing the low-grade gold.
+ 2 million ounces @ 100/ounce = $200 million - Representing the high-grade gold.
=$530 million ÷ 75 million shares outstanding = $7.06/share. That is a realistic 135% upside on a $3.00/share cost.
Optimistic: We will assume 9 million ounces.
C) 6.5 million ounces @ $65/ounce = $422.5 million - Representing the low-grade gold.
+ 2.5 million ounces @ $120/ounce = $300 million - Representing the high-grade gold.
= $722.5 million ÷ 75 million shares outstanding = $9.63/share. An optimistic valuation offering over 200%.
These are valuations of just the gold deposits already discovered and indicated. More value should be assigned to management's potential to continue finding higher-grade intersects plus the other assets owned by Probe Mines.
Probe is perfectly positioned due to its mining-friendly location, available cash on hand, proven high-grade reserves discovered at amazingly lows price per ounce (Discovery Costs are ~$4/ounce), excellent management, and firm shareholders who will not accept a low-ball offer. Near-term catalysts include further drilling as Probe begins its winter drilling season to continue expanding the HGZ, as well as an up-to-date PEA scheduled for March of 2014.
I cannot know who will purchase Probe Mines, but seeing as Agnico Eagle Mines (AEM) took a 10% position in Probe just last year, the sharks are beginning to circle, offering shareholders huge potential upsides.
To get a better picture of how Probe will fit into a producer like Agnico Eagle, take a look below for a simple example:
Agnico Eagle is a bellwether in the gold industry. It currently operates five mines across three (rather mining-friendly) jurisdictions, including Canada, Mexico, and Finland. With 18.5 million ounces of gold reserves at an average of 3 g/t, it should not come as a surprise that the stock currently trades at 3.9x NPV (assuming a 10% discount rate). As production continues, AEM plans on extracting a total of 1.2 million ounces per year by 2015 (1). While this is healthy production growth, existing reserves are quickly depleting the life at these 5 operating mines.
From a cost perspective, operating cash costs per ounce are in the $735-$785 range, while total production costs including capital costs are at $1,100, well below the industry average. In an effort to keep cash reserves and its balance sheet strong, AEM recently announced a $50 million reduction in capital expenditures in 2013, with an additional $200 million in 2014 (2).
Despite a challenging gold environment, where mining economics are breaking down (operating costs > gold prices = unprofitable mines), we are encouraged by AEM's decision to take a 10% stake in Probe Mines despite industry headwinds and the need to preserve cash.
The question is why spend tightly-held cash to purchase a strategic position in an early-stage mining exploration and development company (e.g., PROBF), when you are limiting your own exploration expenditures. The answer, as always, is in the numbers; Probe Mines has something that Agnico Eagle simply does not:
Currently, Agnico Eagle has 5 out of 8 of its mines in operation:
Gold in MOZ
Est. Life of Mine
By the end of 2018, AEM will have lost 438,000 oz per annum as Lapa and Meadow Bank close down. Its two new mines may be able to add on 175,000 oz (see table below). With CAPEX being reined in, it looks like Meliadine may not come on as it had planned, and there may be a decline in production by as much as 263,000 oz (-26%) unless it can bring on more production.
While the remaining 3 mines are in the developmental stage:
Gold in MOZ
Est. Life of Mine
Yearly Production by 2015
Note: AEM does not disclose the est. mine life and annual production for its Meliadine mine, since it is largely inaccessible due to extreme weather conditions (located in Nunavut, Canada). This is a fundamental issue with many mining jurisdictions in Canada, but not in Probe's case at Borden Gold.
Information on mining operations can be found here.
In the tables above, one can see that by 2018, three of its operating mines will be eliminated (including Goldex, which is currently in development), among them the highest average grade (Lapa) and the largest quantity producer (Meadow Bank). Almost half of all production will be depleted and the total average grade will be considerably less. Given this reality, Agnico Eagle needs another asset base to replace them, and with Probe Mines, it may have what it wants and needs.
As of the outdated PEA, Probe Mines' Borden Lake project has 3.6 moz of gold at 1.02 g/t, with an additional 625,000 oz at 1.08 g/t, totaling 4.3 moz at over 1 g/t. The large volume (4.3 moz) and solid grade (1 g/t) is attractive to back-filling AEM's depleting resource base.
While Agnico Eagle has taken a toe-hold position in Probe given its healthy drilling results thus far, the improving recent drill results are where the greater opportunities can benefit shareholders. As Probe transitions to a higher-grade mineralization, producers will be taking a closer look. The higher-grade, more valuable gold is what large producers are after. This volume, coupled with high grades in a mining-friendly jurisdiction, with an established infrastructure and a strong balance sheet, has Probe Mines especially positioned for high shareholder return.