New Gold: The Blackwater Sale Raises Several Questions
Summary
- New Gold will sell its world-class Blackwater gold project to Artemis Gold.
- New Gold will receive $142 million in cash, $15 million in Artemis Gold's shares, and an 8% gold stream on the Blackwater mine production.
- The value of the total consideration can be estimated at $350-400 million (depending on the future gold price and Artemis Gold's ability to develop the mine).
- The markets like the deal, shares of both companies grew significantly, moreover, Moody's increased New Gold's credit rating.
- Several important questions have arisen: what will New Gold do with the stream? Isn't Artemis Gold too small to build the mine? Didn't New Gold sell too cheaply?
Yesterday, New Gold (NYSE:NGD) announced the sale of its Blackwater gold project to a small and relatively unknown company named Artemis Gold (OTCPK:ARGTF). New Gold will receive C$190 million ($142 million), consisting of a C$140 million ($105 million) payment upon closing of the transaction and C$50 million ($37 million) payment 12 months after. New Gold will also receive shares of Artemis Gold worth to the lesser of C$20 million ($14.94 million) or 9.9% of the issued and outstanding Artemis common shares as at closing of the deal. More importantly, New Gold will receive an 8% gold stream on the Blackwater mine (to be reduced to 4%, after 280,000 toz gold is delivered), with a transfer price equal to 35% of the spot gold price. And there are also some penalty payments. If Blackwater doesn't reach production targets by the 7th, 8th, and 9th anniversary of the transaction closing, New Gold will be entitled to receive additional C$28 million ($21 million) on each of these three anniversaries.
Just a reminder, Blackwater is a world-class gold project located in British Columbia. It has reserves of 8.2 million toz gold and 60.8 million toz silver. At a gold price of $1,300/toz, silver price of $22/toz, and USD/CAD exchange rate of 0.95, the after-tax NPV(5%) was estimated at C$616 million ($585 million). Obviously, at the current metals' prices, it is much higher, as can be seen in the chart below. And what is important, the mine is in advanced stages of the permitting process. The problem is that the initial CAPEX was estimated at C$1.963 billion ($1.865 billion - at the current exchange rate, it would be closer to $1.5 billion, on the other hand, the feasibility study is 6 years old which means that some growth in costs should also be taken into account), which is clearly out of New Gold's reach. Ironically, it is even more out of reach of Artemis Gold.
Source: New Gold
The deal is surprising for several reasons. It was expected that New Gold will hardly be able to develop Blackwater, the majority of investors probably expected that a joint-venture will be formed and New Gold will develop the project together with a stronger partner. However, New Gold decided to sell the whole project. It will only retain an 8% gold stream and it will get shares of Artemis. But the shares will definitely get diluted notably, as Artemis will need a lot of money to develop the mine.
Maybe an even bigger surprise is the acquirer. Artemis Gold is a relatively unknown company. It has no coverage and only 59 followers here on Seeking Alpha. Its market capitalization was only $65 million, the day before the acquisition was announced. What is interesting, although the company states that "an equity financing is planned to finance some or all of the Initial Payment over the next several weeks", its share price jumped by 29% (market capitalization to $83 million) after the deal announcement. It means that the market likes the acquisition, despite the huge share dilution.
The huge jump in Artemis Gold's share price indicates that the market believes that the deal is really good for the company. What is surprising, the market indicates that the deal is also good for New Gold, as its share price jumped by 9%. And Moody's improved New Gold's credit rating from negative to stable. In the case of Artemis, the optimism should be attributable to the fact that the company acquired a world-class project located in a safe jurisdiction. Moreover, according to the news release, the management that owns approximately 45% of Artemis right now wants to commit to approximately half of the equity financing (up to C$70 million). It is a huge statement of confidence in the deal and in the future of the company. By the way, the management team of Artemis also stood behind the success-story of Atlantic Gold that got acquired by St Barbara (OTCPK:STBMF) for C$802 million, last summer. Actually, Artemis itself was created as a spin-off from this transaction. The market seems to believe that the Atlantic Gold's success may be replicated by Artemis Gold.
Artemis, obviously, cannot afford to finance CAPEX of more than $1.5 billion. Its plan is to develop the mine in stages in order to reduce the initial CAPEX. The cash flows generated by stage I will subsequently help to fund the stage II and stage III expansions. Artemis also wants to focus on optimizing the mine plan. It especially wants to focus on the higher-grade zone located near the surface in the southern part of the proposed pit. Artemis intends to prepare an updated PFS over the next three months. It will be interesting to follow its approach to Blackwater development.
In the case of New Gold, a big positive factor is that its net debt will be reduced further. The $105 million payment will reduce the net debt from $379 million as of the end of Q1, to $272 million. And further $37 million will be received next year. Moreover, New Gold will retain some exposure to Blackwater via the equity stake and especially via the gold stream. However, the equity stake is limited to the lesser of C$20 million ($14.94 million) or 9.9% of the issued and outstanding Artemis common shares at closing of the deal. At the latest closing price of $1.73, the $105 million equity financing would lead to the issuance of approximately 60.694 million new shares, elevating the overall amount of shares outstanding to nearly 109 million and the market capitalization to nearly $189 million. In this case, New Gold would receive approximately 8.636 million shares, which equals a 7.92% stake in Artemis Gold.
However, it is important to note that it is almost 100% sure that before Blackwater gets into production, New Gold's equity stake in Artemis Gold will be heavily diluted. This is why the gold stream is more interesting than the equity stake. New Gold will be entitled to receive 8% of gold produced at Blackwater, at a transfer price equal to 35% of the spot gold price. After 280,000 toz gold is delivered, the stream will be reduced to 4%. To estimate the value of the stream, several assumptions must be made. The 2014 feasibility study envisioned an average annual gold production of 485,000 toz gold between years 1 and 9, 423,000 toz between years 10 and 14, and 177,000 toz between years 15 and 17 (table below).
Source: New Gold
As Artemis intends to approach to a staged development, with probably 3 development stages, the production profile will be completely different. To be conservative, let's say that the production will start in 3 years, at a 1/3 of annual production volume outlined by the 2014 feasibility study, growing to 2/3 from year 3 and 3/3 from year 5, while also maintaining the three-stage productivity from the feasibility study (the production rate declines after 4.365 million toz gold are produced and after the next 2.115 million toz it declines again). As can be seen in the chart below, under these assumptions, the production should start at approximately 162,000 toz gold, growing to 323,000 toz in year 3, reaching the 485,000 toz level in year 5. In year 12, the production would decline to 423,000 toz and in year 17 to 177,000 toz. The mine life would be prolonged from 17 to 19 years. Of course, this is only a very rough estimate, Artemis will definitely try to optimize the mine plan and over the first years, the production will be probably higher. But also, this model can be used to come to at least a rough estimate of the value of the gold stream.
Source: own processing
Given the terms of the stream, New Gold would be receiving almost 13,000 toz gold in years 1 and 2, growing to 26,000 toz in years 3 and 4, and to 38,800 toz between years 5 and 9. In years 10 and 11, the attributable production would decline to 19,400 toz, and between years 12 and 16 to approximately 17,000 toz. Over the last three years, New Gold would be entitled to receive slightly more than 7,000 toz gold per year.
At a gold price of $1,700/toz, the transfer payment would equal $595, leaving New Gold with a cash flow of $1,105/toz. Using this gold price for the whole 19-year period, the cumulative cash flows would equal $460 million. Assuming that Blackwater gets into production 3 years from now, the NPV(8%) of the cash flows equals $216 million and NPV(5%) equals $281 million. This is only a very rough estimate, but it shows that at some very conservative assumptions, the value of the gold stream should be at least $200 million.
Conclusion
New Gold will sell the Blackwater project for a total consideration of approximately $350-400 million (maybe more, depending on the future gold prices and Artemis Gold's ability to put the mine into production). This values 1 toz of gold reserves at $43-49. The price is very good for Artemis Gold. It is possible to argue that New Gold could have asked for more. Or to approach to the staged development on its own. But given its indebtedness and the continuing expenses on the new Afton expansion, New Gold probably wouldn't be able to afford even the staged development. By selling Blackwater, New Gold has strengthened its balance sheet and it has also received a very valuable gold stream. Now, it's going to be interesting to follow future developments. How Artemis Gold will be able to develop the Blackwater mine, and whether New Gold retains the gold stream, whether it sells it (any streaming company would be interested in this asset), or whether it decides to follow the recent trend and establish a new royalty company. For now, the market (and also Moody's) seems to be optimistic about the deal.
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.
Analyst’s Disclosure: I am/we are long NGD. 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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The NGD debt bubble has finally burst.
