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Junior gold mining companies that have just entered the production phase, and are starting to generate positive cash flow can often provide an opportunity where the downside risk is limited and the potential outcome is weighted to the upside.
Metanor Resources Inc (OTCPK:MEAOF) recently declared the start of commercial production at its refurbished Bachelor Lake mine and mill in northern Quebec. During the first month of commercial production, Metanor produced 4,514 ounces of gold at a cash cost of 766 USD (based on a CAD/USD exchange rate of 0.94). The ore milled was 21,106 tonnes at a feed grade of 6.82 g/tonne and 97.5% recovery.
In January, gold production was 4,028 ounces from 21,407 tonnes of ore at a grade of 6.06 g/tonne, recovery was 96.6%. Feed grades for both December and January were negatively affected by the processing of development ore. In February, gold production was 4,234 ounces from 18,612 tonnes of ore with a feed grade of 7.31g/tonne. Based on the NI43-101 study carried out in 2011, the expected life of mine head grade (after allowing for 10% dilution) is 7.38g/tonne.
Operating costs at the Bachelor Lake mine and mill should reduce further as the mine is developed and a larger proportion of the ore is coming from the stopes, rather than from mine development. Also, the Canadian dollar has fallen to about 90 cents, which will further reduce the U.S. dollar denominated operating costs. Once the mine is fully operational, cash operating costs of 750 USD/oz should be easily achievable.
In addition to the Bachelor Lake property, the company has claims on three other properties, two of which are in the greenstone belt area of Quebec, and one in the Sudbury area of Ontario. For the purpose of this evaluation, I am only including the two properties which are the focus of the company's major efforts at this time.
Bachelor Lake Mine and Mill
The mine and mill at Bachelor Lake has recently been refurbished to provide a facility with an ore processing capacity of 800 tonnes per day.
The known resources at Bachelor Lake were the subject of an NI13-101 pre-feasibility report issued in April, 2011. The resource estimation contained in that report was based on exploration done in 2005 in the area of the mine illustrated in the picture below.
The estimated resources at that time were:
Source: April, 2011 feasibility study.
Since the completion of the 2011 study, Metanor has conducted an underground drilling program to further define the extent of the ore body.
Assays from that study have been published from time to time, but the information has not yet been assembled and compiled into an updated resource estimate.
Drilling results have confirmed that the main ore body at the Bachelor mine extends below the previously explored depth, and have expanded the extent of the ore body at the existing lower levels of the mine; including a significant new find to the west of the known ore body.
Hewfran is a gold bearing deposit, approximately 850 metres from the Bachelor Lake mineshaft, and accessible from level 6 of the Bachelor Lake mine. The resource is open in all directions and ongoing drilling is expected to significantly expand this resource. The company has stated that, based on the drilling results it is very confident to increase the resources in this zone of the mine
In 2011 a near surface deposit was found about 2.5 km. west of the existing mine.
Although the NI13-101 resource estimates only show measured and indicated resources of around 200,000 ounces plus 89,000 ounces inferred (equivalent to a 5 year mine life), it is very likely that the resource will be significantly expanded based on results from recent drilling referenced above.
Industrial Alliance analyst Killian Charles had this to say in a report on the company in August of 2011:
"With the geology and mineralization of the property well understood, back-of-the-envelope calculations allow us to estimate the size of the deposit closer to 700,000 ounces of gold."
Bachelor Lake Evaluation
I have calculated the net asset value of the Bachelor Lake and Hewfran deposits based on the following parameters:
Cash operating costs of 750 USD/oz
Sales of 20% of production to Sandstorm, at 500 USD/oz (as per a streaming agreement used to finance part of the mine and mill development)
Production of 50,000 ounces for 2014, increasing to 60,000 ounces in 2015, and 90,000 ounces from 2016 to end of mine life. This assumes that a planned expansion of the mill in 2015 will be implemented for an estimated cost of 4 million CAD.
A foreign exchange rate of 0.90 USD = 1.00 CAD
Discount rate of 8%
All G& A costs allocated to Bachelor Lake at 3 million CAD per year (based on approximate current level of G&A spending)
Sustaining capital of $1 million CAD per year for three years, rising to $4 million after 2016 to account for ongoing mine development.
All interest charges and principal amounts of debts and other charges paid when due using cash flow generated from operations.
Value adjusted to account for current status of balance sheet items (cash and finished product inventory, payables etc), using balance sheet as of Dec 31st, 2013.
The company will not pay taxes for at least four years because it has an accumulated deficit of about 60 million USD plus equipment and exploration costs of 89 million USD which can be depreciated.
I have evaluated the net asset value over a range of gold prices from 1050 USD/oz to 1650 USD/oz (today's price +/-$300). I have evaluated a mine life, based on a range of resource estimates between 300,000 ounces and 800,000 ounces.
The results are presented graphically in the chart below:
Metanor is trading at about 0.23 Cdn on the TSX, equivalent to 0.21 USD. At today's gold price, and a minimum of 300,000 ounces of resources, the calculated NAV is 0.24 USD per share.
At today's gold price the net asset value of Bachelor Lake, without accounting for any of the other properties fully justifies that share price without allowing for any increase in the resources. If the expected increases in resource estimates materialise, then there is potential for a two or three fold increase in the share price, based solely on the Bachelor Lake operation.
The Barry property is 65 kilometres from the Bachelor Lake mill. In 2010, a resource estimate based on drilling results from less than 10% of the area provided the following estimate, (based on a 0.5g/tonne cut off grade):
309,500 oz Au of Indicated Resources (7,701,000 t at 1.25 g/t Au)
471,950 oz Au of Inferred Resources (10,411,000 t at 1.41 g/t Au)
The resource is open in all directions, and at depth. This is a near surface open pit mineable resource, with easy access from existing paved and gravel roads.
In 2013 the company initiated a drilling program, the results of which are still being compiled. So far the company has found a new gold bearing zone to the west of the known deposit.
Induced Polarization surveys have identified 150 anomalies over a potential strike length of 13 kilometres. In its resource estimate in 2010, SGS made the following statements:
"The exploration and development work at Barry has significantly increased the amount of resources. The mineralization is open in all directions and the property has not been drilled out to its full extent. The property has the potential to become a significant low grade high tonnage deposit similar to the Aurizon (Joanna), Osisko (Malartic) and Detour Gold (Detour) deposits."
Debt and capital requirements
The company debt (denominated in CAD) includes:
$5.3 million outstanding on a loan from the government of Quebec, bearing interest at 12 % and payable in monthly installments ending in March 2015
$10,000,000 in convertible debentures, bearing interest at 10%, maturing August 2015. The conversion price is 0.28 CAD per share.
The company also has a commitment to pay $4 million to cover the restoration costs of the property. This money has to be deposited in 2014 ($3 million) and 2015 ($1million).
All of the debt can be repaid on existing terms from the cash flow of the Bachelor Lake mine if gold prices remain above 1100 USD. It is not necessary therefore for the company to raise any more money or dilute the shares further to continue the operations at Bachelor Lake. The capital is already invested, and the mine and mill are operating, which limits the risk associated with this sector of the company's operations. Any increases in resource estimates should therefore be reflected in the share price at full value, rather than at the highly discounted values normally associated with exploration companies.
Menator's current share price is fully justified by the value of the developed mine and mill and the known resources at its Bachelor Lake property. Risks exist, as with any mining operation, the key risk being a collapse in the price of gold. However, the downside is limited and the upside potential from growth in the size of the Bachelor Lake resources could provide a two or threefold increase in share price.
In addition, the "blue sky" potential of the Barry deposit provides an opportunity for a future ten bagger.
Disclosure: I am long MEAOF. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.