I have owned shares of Vista Gold (VGZ) since September 18, 2007, purchased at $4.75. Like many another junior mining company, it shot up to $8 in early November last year, then has slowly dripped down to the current $3.50 level in the last 8 months. What's interesting is, two years ago, Vista was actually traded at over $13 (pre-spinoff of Allied Nevada Gold Corp) at one point while gold was still around $600. But now that gold is 50% higher, Vista has lost almost 75% of its peak market cap in last the 2 years.
The CFO of Vista Gold, Greg Marlier, was in New York City for a lunch discussion on July 30. Among the things I learned:
VGZ actually has a long history as a public company. It was first listed on the TSX back in 1984, and on the AMEX in 1986. Since 2001, Vista has correctly predicted that gold prices would significantly increase for many years to come, and has acquired a number of impressive gold projects during 2001-2006 with 13 million ounces of gold resources at an average cost of $0.67/ounce. Currently, there are six major projects in their portfolio, and they have gone through a priority review process to allocate their capital and resources accordingly.
The foremost and core project for Vista right now is to advance the Paredones Amarillos project, including the preparation of a definitive feasibility study and the purchase of long delivery equipment items, so that construction can begin during the second half of 2008. In August 2002, Vista completed the acquisition of this project in Baja California Sur, Mexico, from Viceroy Resource for $2.3MM. This is planned to be an open pit mine, and Vista has purchased a used mill with plant capacity of 11,000 tpd (tonnes per day). The M&I (Measured and Indicated) gold resources for this project is 1.9MM ounces, with expected average annual production of 114K oz per year. The mine life should be over 12 years. From the press release in February, the pre-production capital need is about $169MM, and operating cost is estimated to be $419/oz.
In order to see the value of this project, I put together a quick spreadsheet with the following assumptions: today's $850/oz gold, $169M capital expenditure and $419/oz operating cost indicated above, discount rate at 10%, and only 12 years of mine life. The net cashflow will be $431/oz, or with 114K production per year, $49M per year for the next 12 years. Based on my NPV model, it gives me a value of $165MM, compared to the current market cap of Vista at around $120M. It seems that just this project alone would support the market cap of Vista. Vista has cash reserves of $28M now, but with the pre-production capital needs, managers are currently looking at various options of project financing to best serve the interest of shareholders. If everything goes smoothly, Vista is looking to start production toward the end of 2009.
The second major project for Vista is the Mt. Todd project in Australia. Most recently, the M&I reserves have increased 65% to 2.9MM ounces of gold, with additional inferred 1.5MM ounces. The results of a preliminary assessment completed in 2007 were encouraging and additional technical studies are underway with a definitive feasibility study planned for completion by mid-2009. Again it is an open pit mine, with annual production estimated to be 266K oz of gold and 4.3MM lbs of copper. This copper credit pays for approximately $35 per oz of gold produced. Again, based on my NPV spreadsheet, with assumptions of $850/oz gold, $391/oz operating cost (including copper byproduct), discount rate at 10%, capital investment of $264MM, and 10 years of mine life, the NPV for this project is about $380MM. Once the Mt. Todd project, a bigger project than Paredones Amarillos, is in production in a few years, Vista would become a mid-tier gold producer.
Vista's other holdings include the Guadalupe de los Reyes Project in Mexico, Yellow Pine Project in Idaho, Awak Mas Project in Indonesia, and Long Valley Project in California. Including the Paredones and Mt. Todd projects, these six properties host 10.3 million ounces of measured and indicated gold resources and 3.9 million ounces of inferred gold resources. If we ignore the inferred reserves conservatively, and say roughly $100/oz for acquired value, the market cap of Vista would be valued at $1B, or more than 8 times of its current market cap. Let us use another approach, with M&I 10.3 million ounces on 42.8 million fully diluted shares, or 0.24 ounce behind each share (10.3/42.8). At today's gold price at $850 and Vista stock price of $3.5, a buyer of a Vista share gets gold in the ground for only $15 an ounce ($3.5/0.24 per share). As we can see, Vista is currently quite undervalued. And more importantly, Vista acts as a never expired long term gold call option, which provides investors a large leverage to gold price once this gold bull market continues.
Disclosure: I am long Vista Gold since September, 2007, and I believe it provides a good opportunity for a diversified mining portfolio for long term capital gain.
