- Treasury Metals to acquire the Goldlund project.
- ...at a very reasonable price.
- A long-awaited, and highly accretive move for Treasury Metals.
- This idea was discussed in more depth with members of my private investing community, Itinerant Musings. Get started today »
Treasury Metals (OTCQX:TSRMF) has just announced a move that will most likely accomplish what we predicted three years ago: namely, bring the company back into fashion with resource sector investors. Granted, little did we know the wait would be quite as long when we wrote the linked article back in 2017; but given the long-anticipated deal the company has just announced, there is finally a reason to re-visit this gold development junior.
Treasury Metals has been developing the Goliath gold project 20km east of Dryden in Northwest Ontario since the company was spun out of Laramide Resources (OTCPK:LMRXF) back in 2008. The 2012 PEA was not received with much enthusiasm by investors, and for good reason as the proposed project revolved around a large open pit with a very high strip ratio. It wasn't until Chris Stewart's leadership that this open pit was scaled back, and the underground portion emphasized instead. The 2017 PEA represented an important milestone to this regard, and incidentally triggered our interest in the company and the Goliath project. This PEA assumed production of ~100,000 ounces of gold per annum over a mine life of 13 years. The economic analysis in this report assumed a gold price of $1,225/oz and documented a post-tax NPV(5%) of C$306M and an IRR of 25.1%. At today's gold price the IRR would print north of 40% -- a highly attractive project in a highly desirable jurisdiction.
Mr Stewart's intentions of putting Goliath into production were short-lived and he left the company without too many friendly words exchanged. Comparatively little development activities have been performed since then; and one might speculate that the new CEO was more dedicated to his other job as VP Investor Relations at Laramide Resources. And even though Treasury Metals seemed to be slipping into obscurity, we couldn't quite bring ourselves to part with our position as we still liked the potential of the Goliath project.
And when we talk about Goliath's potential, we mean not only the project outlined in broad strokes in the mentioned 2017 PEA, but also the potential of the greater district including the nearby Goldlund project, which was acquired (and promptly shelved) by First Mining Gold (OTCQX:FFMGF) back in 2016. The data presented in the 2017 technical report for Goldlund is limited, but what's presented in this report seems to complement Goliath to the dot, as we have quipped on more than one occasion in various reports and chat board messages for our subscribers. In any case, it is the acquisition of the Goldlund project that was announced on June 3 that has re-kindled our interest in Treasury Metals, and prompted this missive.
(Source: company presentation)
The Goldlund Project
The mentioned technical report on the Goldlund project outlines a pit-constrained mineral resource of 560Koz in the indicated category at a respectable grade of 1.87g/t. Additionally, the report also lists 1.75M ounces in the inferred category at a slightly lower grade. This resource is located about 40km by road from the Goliath project (or 25km as the Canadian crow would fly). The resource pit shell uses a 0.4g/t cut-off grade, and suggests a strip ratio of 5.8. Metallurgical testing has been limited so far, but early results indicate metallurgical recoveries in excess of 90%, and tailings are likely non-acid generating. This resource has a good grade, should be simple to mine, and the ore should allow for straightforward processing.
All in all, a quality deposit without any obvious warts, and plenty of potential synergies when combined with the Goliath project. First and foremost, Goldlund adds critical size to the combined project; we anticipate an increase in annual output as well as a an increase in mine life in a combined development scenario. Additionally, the Goldlund open-pit resource will take the pressure off the development schedule for the Goliath underground mine. Plus there will be any number of advantages to be gained from Goldlund when it comes to shared infrastructure, mine sequencing, stockpiling, blending etc. In our view, the Goldlund project is a highly beneficial addition to Treasury Metals' portfolio, and will quite likely tip the scales when it comes to a future mine development decision. Of course, there is also plenty of exploration upside in the pro-forma land package, but at this stage, the value lies in the existing resource and its contribution to the combined project.
The Goliath project is much further advanced than the Goldlund project in terms of exploration, engineering, and also permitting. Finding a practicable timeline for the combined development of the two projects represents a challenge, and making good use of the existing permits for Goliath will be crucial in this respect.
The Goldlund project comes with a price tag of 130M Treasury Metals shares, 35M warrants, a 1.5% royalty, and finally, a C$5M cash payment if and when a future mine is built and starts production. Using the closing price of C$0.33 prior to the deal announcement the Treasury shares are worth C$43M. As for the present value of the warrants, the royalty, and the production payment: let's be generous and value the lot at ~C$7M and work with a round number of C$50M for the full consideration package.
Treasury Metals is, therefore, paying ~C$90 per indicated ounce, or just under C$22 per total resource ounce. In looking for comparables we point to market valuations for two Canadian peers: namely Skeena Resources (OTCQX:SKREF) (C$116 per indicated and C$73 per total resource ounce) or Ascot Resources (OTCQX:AOTVF) (C$116 per indicated and C$67 per total resource ounce). In other words, Treasury Metals appears to be paying a fair price for a quality resource, and as a Treasury Metals shareholder, we fully support the financial side of this proposed transaction.
First Mining Gold will own 43% of Treasury Metals shares, but will only keep 19.9% as it intends to distribute the rest to its shareholders. This article mounts an argument that this deal unlocks value for First Mining shareholders; but fails to mention that First Mining Gold paid C$72M for Goldlund back in May 2016 (using the share price at the time), and recorded a book value of C$99.9M against the project at the end of Q1 after paying for administrative and holding costs for several years. After owning Goldlund for 4 years First Mining Gold is getting just 50% of its value back on the Goldlund project, and all the while the gold price has increased by 40+%, and the Junior Gold Miners ETF (GDXJ) by 70%. Sorry, but unlocked value we detect not. (And that's before we start questioning the tax implications and administrative costs of the intended share distribution.)
Summary & Investment Thesis
The Goldlund acquisition represents an important milestone for Treasury Metals, and finally provides the company with a fresh angle to re-juvenate the development of the Goliath project. The company has a new and compelling story to tell in a market that's paying increasing attention to the gold mining sector. For this achievement, we commend Treasury Metals management team, and we also note that this milestone was accomplished at a very reasonable cost. Bravo!
Our greatest concern at this point is the seeming under-representation of technical expertise in the current Treasury Metals team. Given the increased size and scope of the combined Goliath-Goldlund project, we would really like to see technical expertise added to the team.
At a current share price of C$0.355, and a pro-forma market cap of C$100M the company is still lagging peers on most metrics. The lag is most likely caused by the mentioned lack of activity and associated news flow over the past years, and as such Treasury Metals represents an attractive investment proposition if you are looking for a Canadian development story.
Most certainly, this is a highly speculative investment idea, and the typical risks associated with junior exploration and development companies abound. Nevertheless, Treasury Metals does have a promising project, and it has a compelling story to tell with much upside to crystallize if things go well. The share price could easily double from here within a very short time frame if Treasury Metals can convince the market to price the company in line with peers. We are therefore considering adding to our position in the near-term.
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This article was written by
Itinerant is an engineer with over 30 years of international work experience and deep connections in the mining sector. He holds a PhD in engineering. Itinerant covers the resource sector, with a focus on precious metals, base metals and energy stocks of all sizes. His research explicitly includes small and micro-cap juniors, and he tries to manage the associated risks in a methodical manner.
He leads the investing group Itinerant Musings where he offers: Exclusive research on mining and energy metals stocks, access to his personal portfolio, real-time trade alerts, a network of industry contacts, community and author discussion via 24/7 chat, archived legacy Pro articles, and more. Learn More.
Analyst’s Disclosure: I am/we are long TSRMF. 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.
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