Ascot Resources: A Gold Mine Developer With A Very Attractive Valuation
- Ascot plans to restart four high-grade underground gold mines in the southern corner of British Columbia's Golden Triangel.
- The ore from the mines should be processed at a central facility at the Premier mine.
- It is expected that the integrated mining operation will produce over 200,000 toz gold per year, at an AISC of around $800/toz.
- As we are talking about a brownfield project, a lot of infrastructure and facilities is already in place and the initial CAPEX should be only around $100 million.
- The numbers need to be confirmed by a feasibility study, that should be completed by the end of March.
The current stock and gold market volatility has a very negative impact on the share prices of companies in the mining industry. Steep share price declines experienced also companies with very good development projects. One of them is Ascot Resources (OTCQX:AOTVF).
Ascot is developing two high-grade gold projects (Premier Gold and Red Mountain) in a safe jurisdiction of British Columbia, Canada. Both projects are close to each other, they have good infrastructure and as they are brownfield projects, some facilities are already built, they need only some repairs and refurbishment. The CAPEX should be relatively low, the permitting process should be relatively easy, and a feasibility study is expected later this month. Despite all of the positive developments, Ascot's share price is more than 40% below its early January highs.
The Premier Gold Project
The Premier Gold project is located in the Golden Triangle region of British Columbia. The region is well known for its large gold and copper deposits, such as Brucejack (Pretium Resources (PVG)), KSM (Seabridge Gold (SA)), Schaft Creek (Copper Fox Metals (OTCQX:CPFXF)), or Galore Creek (Teck Resources (TECK)). Premier Gold is situated just to the south of Pretium's claims, around 30 km to the south-east of the Brucejack mine.
The Premier Gold property contains three main (Premier, Big Missouri, Silver Coin) and several smaller gold deposits. According to the December 2019 resource estimate, the deposits contain indicated resources of 1.066 million toz gold and 4.669 million toz silver, at a gold grade of 8.01 g/t and silver grade of 35.1 g/t. It equals to 1.099 million toz of gold equivalent, at a gold equivalent grade of 8.25 g/t. The inferred resources contain 1.18 million toz gold at a gold grade of 7.25 g/t and 4.673 million toz silver, at a silver grade of 28.7 g/t. It equals to 1.213 million toz of gold equivalent at a gold equivalent grade of 7.45 g/t.Source: Ascot Resources
Premier Gold is a brownfield project. The mining operations took place between 1918 and 1952 and between 1989 and 2001. Although they ceased almost 20 years ago, there remained a lot of infrastructures. The property is accessible by two gravel roads, there are powerlines, and there is also a tailings dam facility, a water treatment plant, the mill and assay buildings (however, the SAG & Ball mill has been removed), and also the Premier, Silver Coin, and Big Missouri underground mine workings. Although it will be inevitable to repair or refurbish a lot of equipment, the process should be much quicker and much cheaper in comparison to building a completely new mine and related facilities.
Another positive feature of the project is the fact that many permits are still valid, they only need some amendments. Although it will take some time and energy, the process should be much easier than a normal mine permitting process.
The Red Mountain Project
The Red Mountain Project is situated approximately 10 km to the east of Premier Gold. The Red Mountain deposit alone is located approximately 20 km to the south-east of the Premier mine facilities. This distance is important, as Ascot intends to process the ore from Red Mountain at the Premier facilities, along with ore from Premier, Silver Coin and Big Missouri.
According to the August 2019 resource estimate, Red Mountain contains measured and indicated resources of 782,600 toz gold, at a gold grade of 7.63 g/t, and 2.156 million toz silver, at a silver grade of 21.02 g/t. The inferred resources contain further 69,300 toz gold, at a gold grade of 5.32 g/t, and 95,500 toz silver, at a silver grade of 7.33 g/t.
Source: Ascot Resources
Red Mountain is a brownfield project, just like Premier. Although it hasn't been in production yet, the previous owners prepared approximately 2,000 meters of underground workings. There is also a 45-person winterized camp, diesel power generators, and mining equipment and shop facilities. The problem is that the Red Mountain deposit is not road-accessible right now. Ascot is in the permitting process for a new road that will connect the property to the highway. On the other hand, permits are relatively fresh. The Provincial Environmental Assessment Certificate was issued in October of 2018 and the Federal Environmental Assessment Certificate in January 2019. Right now, a feasibility study is underway. It will evaluate two development options, namely Red Mountain as a standalone operation and Red Mountain as a part of the Premier Gold operation.
The Upside Potential
The current market capitalization of Ascot Resources is $106.5 million. The company has a convertible debt of $10 million, but it has also a similar volume of cash, which means that the enterprise value is very similar to the market capitalization. As the feasibility study hasn't been released yet, it is hard to estimate a more exact upside potential of the company. However, there are some indications that may help a little.
In a recent interview, Ascot's CEO indicated that they aim at a CAPEX around $100 million and AISC around $800/toz gold. However, more precise numbers will be known only after the feasibility study is released. For now, let's assume that the mill will process 3,000 tonnes of ore per day (this mill capacity was confirmed by the CEO in the abovementioned interview). At a gold grade of 7 g/t and gold recoveries of 90% (the actual numbers will be most probably higher, 7 g/t and 90% were used only to keep the estimates more conservative), the mine should produce around 220,000 toz gold per year. At a slightly more conservative AISC of $900/toz gold and a gold price of $1,500/toz (the current gold price is $1,675/toz), the annual free cash flow should be around $130 million. It is more than the current market value of the whole company. At this volume of free cash flow, it is reasonable to expect a future market capitalization of around $1 billion.
Of course, this is only a rough estimate, as there are still too many unknowns. Moreover, even if the market capitalization of Ascot Resources hits the $1 billion level sometime in the future, it doesn't mean that the share price will grow tenfolds. The initial CAPEX will be probably around $100 million, maybe more. A big part of the CAPEX will be covered by debt financing. However, it is probable that the financing package will contain also an equity component. If Ascot had to raise only $30 million via equity financing, at the current share price, the volume of outstanding shares would increase by nearly 30%. But given the current state of the stock markets, it is quite possible that the equity financing will have to be done at an even lower share price, which would mean an even bigger share dilution. Despite of it, the upside potential remains several hundred percent. Another good news is that the shareholders probably won't have to wait for too long. According to the CEO, if everything goes well, the production could start in H2 2021. It means that 2022 should be a pretty realistic target.
It is also important to note that while Premier Gold and Red Mountain are the key projects, Ascot owns also the Swamp Point - Sand & Gravel project and a polymetallic Mt. Margaret project in Washington. While Swamp Point is not too interesting, Mt. Margaret is a big project that contains 523 million tonnes of ore that contains copper, molybdenum, gold, and silver. The copper equivalent grade equals 0.56%. The volume of contained metals equals 6.46 billion lb of copper equivalent (NI43-101 non-compliant historical resource estimate). While not much attention is paid to these two projects, they have some value.
Just like any investment, also Ascot Resources is related to some risks. However, in comparison to common mine developers, the risks are significantly reduced here. First of all, the permitting risk seems to be relatively small, as various permits are in place, they only need to be amended. According to the company:
The Premier Gold Project has historical Mines Act and Environmental Management Act (Water Discharge) permits and is in the process of applying for an amendment for these permits with respect to a new mining plan and refurbished operation.
Moreover, Ascot seems to have good relations with the locals. Last April, a benefits agreement with the Nisga'a first nation was signed and it looks like there is no meaningful opposition to the project.
Also the financing risk seems to be manageable. Ascot completed a C$10.3 million private placement only two weeks ago and its 2020 financial needs should be covered. However, it will probably need around $100 million to refurbish and restart the mines and also some $10-20 million to fund its other activities during the construction and ramp-up period. The good news is, that at the current gold price, the project should be highly profitable. The combination of low capital intensity and high profitability should be very attractive for potential creditors. As a result, a major portion of the financing package should be covered by debt financing. It is also possible that the debt or a combination of debt and a stream will be able to cover the whole CAPEX. In this case, the future share dilution would be pretty limited.
The biggest unknown is the results of the feasibility study. However, they should be announced soon, probably by the end of this month. Although the actual numbers may differ from the expectations communicated by the management, they shouldn't differ too much, as the studies are well advanced and the management surely has a relatively good idea about the final results.
Ascot Resources is a very prospective company. It has an advanced brownfield project located in a safe mining-friendly jurisdiction, that will combine four formerly operating gold mines. Although the feasibility study is only about to be released, there is a very good chance, that the CAPEX will be only around $100 million and the AISC will be around $800/toz. It means that at the current gold price, the project should be highly profitable and it shouldn't be a problem to obtain the financing. Given the current stock market volatility, further share price decline cannot be excluded in the near term. However, at the current prices, shares of Ascot Resources are very attractive.
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This article was written by
I am an associate professor at the University of Economics in Bratislava, Department of Banking and International Finance. My dissertation was focused on commodity markets and my habilitation was focused on the calendar anomalies. I have more than 15 years of investing experience. My investments mostly focus on small- and mid-cap companies in the resource sector. Since May 2019, I have been preparing regular monthly reports focused on the precious metals royalty & streaming industry. Based on positive feedbacks and numerous inquiries, I decided to launch a Marketplace Service named "Royalty & Streaming Corner", which provides an in-depth analysis of this exciting market segment, as well as investment ideas from the mining industry.
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