Pure Gold Mining (OTCPK:LRTNF) released the results of the feasibility study for its 100%-owned Madsen Project. Although the project is still very attractive, some of the numbers, especially the slightly increased AISC and significantly increased initial CAPEX, caused a disappointment. The market responded by sending Pure Gold's share price down by 15%. The majority of gains recorded since the beginning of this year was erased in a single trading day.
When comparing the feasibility study and the 2017 PEA, several differences can be seen (table below). The projected mine life has decreased slightly, from 13.8 years to 12.3 years. This is caused mainly by the increased capacity of the mill. While the PEA envisaged a mill throughput rate of 600 tpd, the FS projects a throughput rate of 800 tpd, which represents a 33% increase. What is positive, further metallurgical tests resulted in an improvement of the expected gold recoveries from 92% to 96%. Also, the total gold production has increased slightly, from 911,000 toz to 970,000 toz gold. The average annual gold production grew from 66,109 toz to 80,000 toz. During years 3-7, the average annual production should be 102,000 toz gold. The problem is that the projected cash costs and AISC grew as well. The cash cost increased by 2%, to $607/toz, and the AISC increased by 10%, to $787/toz.
The most negative surprise is the notably increased initial CAPEX estimate. The PEA projected initial CAPEX of C$50.9 million ($40.72 million at the PEA CAD/USD exchange rate of 0.8). This very attractive number has increased notably, to C$95 million ($71.25 million at the FS CAD/USD exchange rate of 0.75). Although even the new CAPEX isn't high and Pure Gold definitely will be able to finance the mine construction, a lower number and a lower potential share dilution were expected by the market.
The economics of the project remains very attractive, despite some above-mentioned negative developments. Both of the studies used the same gold price ($1,275/toz), only the CAD/USD exchange rate differs slightly. The after-tax NPV (5%) is C$247 million ($185.25 million), which is only slightly lower than the PEA after-tax NPV (5%) of C$258 million ($206.4 million). The after-tax IRR worsened from 47% to 36%. However, a project with a 36% after-tax IRR is generally accepted as very attractive.
Pure Gold's management believes that Madsen can be put into production very quickly, probably by the end of Q2 2020. The production decision is expected in April. The financing package should be completed by June, with construction starting in July. As Madsen is a brownfield project, some of the permits are already in place. The needed amendments should be obtained by the end of this year. If everything goes well, the gold production should start in May 2020.
The main obstacle seems to be the financing right now. Although I have no doubt that Pure Gold will be able to somehow secure C$95 million ($71.25 million) needed to take Madsen into production, the main question is, what will be the structure of the financing package and how dilutive it will be for Pure Gold's shareholders.
As of the end of September, Pure Gold held cash of C$11.4 million ($8.6 million at the current CAD/USD exchange rate). As Pure Gold's cash position worsened approximately by C$8 million during Q3, it is possible to estimate that Pure Gold will run out of money soon. It means that it will have to secure more than C$95 million of pre-production capital, in order to finance the non-construction related activities of the company as well as the mine ramp-up process. I would guess that Pure Gold will try to secure at least C$120 million, or around $90 million. It is possible to expect that at least 50% (let's round it up to $50 million) will be covered by debt financing. The remaining $40 million will be financed in a different way. One of the options is to sell a gold stream. If Pure Gold decides to sell a gold stream on 10% of the Madsen mine gold production at ongoing payments of $300/toz, it should be able to get at least $40 million at the current gold price. Given the low-risk nature of the project, its short timeline to production, safe jurisdiction, and the upside potential represented by the satellite deposits, it is possible that some of the streaming companies could be willing to pay even more than $40 million for such a stream.
But, to be more conservative, let's say that there will be no gold stream, and the remaining $40 million will be financed via an equity financing. At the current share price of $0.5, the share count would grow by 80 million, to 336 million. In this case, the FS after-tax NPV (5%) attributable to 1 share would be $0.56. This explains the recent share price decline.
However, it is important to note that there is a lot of space for further improvements. Pure Gold owns the 3rd largest land package in the Red Lake district, and it has already identified three satellite deposits and 20 drill-ready targets. A PEA expanding the mine plan by the Russet South, Fork and Wedge deposits is being prepared, and it should be released later this quarter.
Although the increased costs are a negative surprise, the Madsen Project remains to be very attractive. However, at the current gold price, it offers only little upside for the potential new Pure Gold investors. To push the share price notably higher, a higher gold price, a huge new discovery or a very successful inclusion of the satellite deposits is needed. Right now, the downside is pretty limited. However, the upside is limited as well.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. 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.