Treasury Metals: Goliath Stirring

Summary

• 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 Deal

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.)

Data by YCharts

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.

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.

Comments

[sami92200]

Hi, is it worth adding TML at current price or still very speculative?

[Itinerant]

@sami92200 little has changed since this article was published, I'd say.

[andre171]

@Itinerant Yes, TML is even more undervalued, it seems to me!
TML's current capitalization represents US$4.99 per ounce of gold (2.964 M) and 5.97% of the NPV for gold at 1,750. If we deduct the 8 M in cash, we get $3.00 per ounce and 3.59% of NPV.
But I don't see a short-term catalyst. I'm surprised that at this price, TML isn't yet the target of a takeover, but I'm afraid for shareholders that it's far too low a price!

[sami92200]

@andre171 Thank you for your answer. I added at this price even thoguh I don't see how they can finance their project at current valuations. In fact, all these developpers have a lot of difficulties to find money unless gold goes to 3000$.

[andre171]

If cash is deducted, TML is valued at US$7.06 per ounce (Measured and Indicated + Inferred) and it is likely that new discoveries will add to the resources fairly quickly. What do you think?

[Darp Research]

@Itinerant Any thoughts here in 2022. Just bot tiny amount to keep an eye on it.

[andre171]

TML today reports strong drilling results for Goldlund. Do all these positive results published since the PEA of February modify your opinion on TML? The price is currently at its lowest, like many other mining companies! I hesitate between TML, ITRG and AUN, all three promising it seems to me!

[andre171]

The last presentation of TML contains a comparison with Atlantic gold. From the geographic and geological considerations on page 10, should we not first remember that Atlantic Gold had a NPV @ 5% of 527M for 72M for TML (for gold at $ 1300) or 7 times more. Of course, improvements are being considered, but the disappointment of the February PEA calls for caution and at least forces one to realize that at the current stage TML has a smaller production profile and much less profitable than Atlantic. What do you think ?

[Itinerant]

@andre171 The comparison with Atlantic Gold makes little sense to me, for several reasons. The project presented in the PEA is flawed; I don't think this project will be built anywhere near as described in the PEA.

[andre171]

@Itinerant May I ask you what are the errors and shortcomings of this PEA?

[Itinerant]

@andre171 Treasury Metals has a 65km long land package, and the mill is located at the very southern end of this package. The PEA calls for trucking of 21M tonnes of low-grade ore 25km to the processing plant. There are currently 3M tonnes of high-grade ore located proximal to the plant. I couldn't find a quote for trucking costs in the PEA but you can work it out - it comes to around C$4/tonne, or around C$125 per ounce sourced from the Goldlund open pit. If you put the mill at Goldlund instead of Goliath you could save around C$100 per ounce just in trucking cost. This will get even worse if they can find economic resources at Miller, or at any prospect even further to the North.
The reason they are putting the plant at Goliath is permitting, but it sure doesn't make sense economically.

[andre171]

43-101 has just been published.
The decrease in content (more than half for Mes + Ind and 346% for Inf) leaves me perplexed. Should we deduce from this that the previous PEA was not serious ?

[andre171]

Bad PEA today. I find the PEA published today very disappointing. The NPV @ 5% of 328M. is barely higher than that (306M) of the PEA of 2017 for the only Goliath mine whereas the price of gold went from 1225 to 1600 (+ 30%). At the same price of gold of 1200 $, the NPV @ 5% would have fallen to 47M for the whole - We can doubt the advantage of adding Goldlund + Miller!

The gold recovered of 1064M for the Goliath + Goldlund + Miller set is particularly low!

[andre171]

See new presentation under this link and more especially page 15 which suggests a strong under evaluation compared to peers!

PEA will be communicated in January and could result in a much better valuation of the Goliath + Goldlund set!

treasurymetals.com/...

[andre171]

TML announces new drilling results for Goldlund:

finance.yahoo.com/...

Are these results good and encouraging?

What can be deduced from the finding that these results go against the conventional theory, drawn from previous exploration work, that the Goldlund mineralization is mainly associated with granodiorite?

[andre171]

Do you have an AISC estimate for the new Goliath + Goldlund package?

[Chancer]

Price up a lot in less than past 30 days. On May 14 was US$.18. Now US$.30

[andre171]

Thank you for this very interesting publication.
1) -For Goliath, the 2017 PEA set gives a 5% NPV of 306M for a gold price at $ 1,225 per ounce. At the current price of $ 1,700 and the CAD / US $ rate, the NPV should almost double.
For Goldlund, there is no PEA and VPN calculated yet, but you may have been able to estimate it. Do you have an NPV rating for the new TML + Goldlund, taking into account the synergies between the 2 projects and economies of scale?
2) -Besides, the resources indicated by Goldlund are they not 809,200 ounces?

[Itinerant]

re: 1) I don't think it's appropriate to guesstimate the NPV of the combined project at this point in time. This needs serious work, and any number thrown out at this point in time has very little relevance in my view. I do however expect a significant improvement for an already attractive project.
re: 2) I used the numbers from the 2017 estimate, rather than the 2019 estimate.

[andre171]

Based on your estimate at 50M. CAN, don't you think that the price is better than fair for TML, that it is very advantageous since it corresponds to less than 62 CAN per measured ounce and less than 30 CAN per total ounce of resources for a comparison at 116 and + - 70?
We are almost half, while the price of gold is more favorable!

[Itinerant]

As always you could choose other comps and tell a different story. But at the end of the day, it's a good price in my view, with plenty of scope to add value.

[Bruster]

Good article and the inclusion of the first mining deal. Took starter long position a year+ ago sitting on 26% loss. Stock and company have gone nowhere. Fortunately the greater fool (as in the greater fool theory) First Mining has provided some future hope. I will continue to hold for now.

[Greg Ferron]

I have not worked at Laramide for 18 months. The focus and mandate was to complete EA on Goliath(done), expand resource and longer term exploration potential along strike (done IP, soils), advance PFS (almost done) and complete regional consolidation (done).

[Itinerant]

Congratulations on the deal, @Greg Ferron . Very well done.

[the Odd One Out]

well Mr Ferron...
Although I was initially not happy about it (I thought you overpaid for Goldlund) but I failed to see the complete picture. This deal's synergies should suffice to bring an open mine. The sooner, the better. Hopefully you can do a fine to to deserve a permanent role as CEO. We have been waiting for a long time and this is the first solid move in more than two years. Keep exploration rolling as well... :)
Thanks Itinerant for an excellent article. Looking to add to my position as well

[andre171]

Since the operation, the TML share price has gone down from 0.34 to 0.58 so that the price of Goldlund is increased by more than 31M.
Can we still consider that the recovery price was advantageous, that TML was a winner in this recovery?
With the cash payment of 5M and NSR of 1.5%, the price would approach 100M or 123 per ounce measured !