It's been a rollercoaster ride for investors in the junior mining sector (GDXJ) in 2020, as we've seen a nearly unprecedented event with several names seeing more than half their value erased in mid-March, only to claw back all of their lost ground in just 60 trading days. This is precisely what we've seen from 2019's sector leader, Wallbridge Mining (OTCQX:WLBMF), as the stock lost more than 60% of its value from its Q4 highs to its Q1 lows but has come racing back to close at new highs with a head of steam last week. While the company continues to add significant value for shareholders and looks like it's sitting on a world-class deposit in Quebec, the stock is now trading at a valuation reserved for producers as an explorer at a market capitalization above C$1 billion. Based on this valuation headwind, the reward-to-risk has shifted back to unfavorable, and I do not believe investors would be wise to chase the stock above C$1.35.
(Source: Company Presentation)
Just over six months ago, I wrote on Wallbridge Mining and discussed that the reward-to-risk had shifted significantly for investors, with a plethora of insider selling showing up near a critical resistance level. The stock promptly fell over 25%, placing investors that had chased the stock underwater, but the mid-March COVID-19 Crash brought with it a tsunami of selling pressure, leaving Wallbridge more than 65% off its highs at its March 16th low. Those that managed to pick up the stock below US$0.45 did an excellent job, as this is where I noted the valuation would get attractive again. Many investors will argue that the stock is higher than where I wrote my December article, and therefore, they may believe my call to take profits was wrong. While it's true that the stock is higher than the December article, one had to sit through a 65% correction before seeing higher prices, and it makes no sense to sit through a correction of this size if you don't have to. Therefore, taking some profits near C$0.95 so one could buy back lower below C$0.50 a month later was the correct trade. While anyone buying in mid- to late March did an excellent job, as we've now doubled off of these levels in less than three months, the issue is that we now have Wallbridge trading for a valuation typically reserved for junior gold producers in the sector. Before digging into the valuation, however, and why it has become a problem yet again here, let's take a look at the project below:
(Source: TC2000.com)
For those unfamiliar, Wallbridge Mining was one of three darlings in the junior gold sector last year. The stock put up an incredible 470% return for the year after reporting several thick intercepts of high-grade gold mineralization at its Quebec Property. The company's property has increased significantly since last year, with the addition of Balmoral Resources (OTCQX:BALMF) holdings in the well-endowed region with a contiguous land package of 85 square kilometers, up materially from the 10 square kilometers that Wallbridge previously held. This has given Wallbridge significant exploration upside when including Balmoral's holdings. While I believe Wallbridge overpaid for the acquisition, it may have overpaid less than I initially thought if we see more drill results as we saw in A52-20-18, with intersected a near-surface monster hole of 2.97 meters grading 807 grams per tonne gold. It's too early to tell if this is a new gold deposit on the company's hands with just a few holes plugged into the area, but this is Windfall-like (OTCPK:OBNNF) high-grade we're seeing thus far. Assuming results in this area continue at even half these grades, it would add further excitement to the story.
(Source: Company Presentation)
(Source: Company Presentation)
Meanwhile, at the original Wallbridge properties, the company continues to delineate a massive gold system, with 75,000 more meters expected to be drilled this year. The most recent release expanded the company's high-grade Tabasco-Cayenne shear zone, both along strike and down-dip. The company continues to hit thick intercepts of 5+ gram per tonne gold along a tested strike length of nearly 600 meters, with a few highlight intersections shown below:
- Drill Hole FA-20-128: 56 meters at 4.84 grams per tonne gold
- Drill Hole FA-20-134: 19 meters at 8.41 grams per tonne gold
- Drill Hole FFA-20-123: 6 meters at 16.93 grams per tonne gold
Based on current drilling and assuming similar success in future holes, I would not be surprised if we saw the company prove up a 1.75-million ounce resource at an average grade above 4.65 grams per tonne gold for both the Tabasco and Cayenne zones alone.
(Source: Company Presentation)
(Source: Company Presentation)
Moving over to the higher-grade Main Gabbro area, we also saw some exceptional intersections reported earlier this month, with 5 meters of 70.84 grams per tonne gold in drill hole 20-5150-0522. The Main Gabbro zone is the most important area to shareholders, as it's the area where Wallbridge Mining is likely to generate cash flow from first, given that it is surrounded by existing infrastructure. Based on continued outstanding grades over moderate widths at the Main Gabbro zones, I would not be surprised to see the company prove up an 800,000-ounce resource here with an average grade above 12 grams per tonne gold. When combining these two deposits and adding in relatively lower-grade bulk tonnage from Area 51 and Andromeda, there's certainly a possibility that Wallbridge could prove up a 3.6-million ounce resource at Fenelon within the next 18 months at an average grade above 4.25 grams per tonne gold. This would make Fenelon a world-class deposit, given that it's in a Tier-1 jurisdiction and passes the 3-million ounce mark that few explorers ever achieve in this sector.
(Source: Company Presentation)
So, why not rush out and buy the stock here?
Unfortunately, the issue is that the company hit a C$1 billion market capitalization as of Friday's close, a hefty price to pay for an explorer that might be in production within the next 18 months. Based on 745 million shares fully diluted, C$40 million in cash, and a share price of C$1.35 as of Friday's close, we've got a company worth C$1 billion in market capitalization, or C$960 million on an enterprise value basis. Given that a good chunk of the company's cash balance will be used up drilling out the property, it's likely that we'll also see further dilution before we see production. This means that the share count could get as high as 765 million shares on a fully diluted basis before production begins. Therefore, I believe the market capitalization figure is more relevant than the enterprise value figure, as the cash is being used up to explore and take care of studies, not sitting there dormant. Based on past precedents in prior acquisitions, I would argue it's hard to justify much more upside here. We can take a look at what suitors have paid for Tier-1 jurisdiction producing assets in the past to get an idea of what fair value might be.
(Source: Management Discussion and Analysis)
As we can see in the table below, suitors have typically paid US$151.50/oz for producing assets with a median of 5 million ounces at a median grade above 3.0 grams per tonne gold. Clearly, Wallbridge stacks up pretty well against this group from a size and grade standpoint if the discoveries continue, and based on my estimate of 3.6 million ounces at a weighted average grade of 4.25 grams per tonne gold proven up by the end of 2021. However, it's worth noting that the company does not even have a 1-million ounce resource filed yet, as we're still roughly 12 months away from proving this up. Therefore, while I would give a small premium to Wallbridge Mining to account for a higher gold (GLD) price versus past acquisitions and a resource that stacks up extremely favorably against peers, this is not fair given that the company does not have a NI-43-101 defined resource yet. Let's see how the valuation stacks up against peers:
(Source: Author's Chart)
Based on a C$960 million enterprise value, or US$701 million, Wallbridge Mining is currently being valued at US$194.72/oz as a non-producer that's at least nine months away from proving up its resource and a minimum of 12 months away from production. Therefore, with Wallbridge valued 28% above the peer average of $151.50/oz paid during takeovers, most of the upside is priced in here. To put in perspective how lofty this valuation is, Pure Gold Mining (OTC:LRTNF) is trading one province over from Fenelon, in Red Lake, Ontario, and will be pouring its first gold in 6 months and producing 100,000 ounces next year. Pure Gold is currently valued at US$134.78/oz, 30% below Wallbridge Mining's valuation, despite a high-grade resource of its own.
(Source: Company Presentation)
While Pure Gold does not have the same exploration upside that Wallbridge has, and Wallbridge clearly has an incredible property on its hands, it's hard to justify paying 30% more for a non-cash flow producing asset when one can buy an asset that will be generating nearly $50 million in cash flow next year at current gold prices. Does this mean that one should rush out and sell Wallbridge and plow the money into Pure Gold? Absolutely not. The comparison is merely to point out that the valuation is getting frothy here on a comparative basis to even gold producers, with Wallbridge worth US$701 million and Pure Gold worth US$341 million, and the latter being much closer to pouring gold.
Momentum might carry Wallbridge Mining's stock a little higher short term, but paying US$700 million for a non-producing asset, no matter how great it is, is buying with zero safety margin. Based on the valuation headwind we've now got at C$1.35 and a US$701 million enterprise value, I believe investors would be wise not to chase Wallbridge Mining here above C$1.35. In fact, I would view any rallies above C$1.48 before August as an opportunity to book some profits. Wallbridge Mining has clearly unearthed a world-class asset at Fenelon, but paying nearly US$200/oz for a non-producing asset is taking on unnecessary risk. Those that are patient will likely find a better buying opportunity over the next couple of months than overpaying at C$1.35, just as they did by not chasing the stock at C$0.95 as I warned in December.
