Gold Standard Ventures: Valuation Remains Attractive After The Drop

Summary

• Gold Standard Ventures is one of the worst-performing juniors over the past four years, down more than 80% from its 2016 highs.
• This significant underperformance has finally led to a material improvement in the valuation, with the stock trading at less than 0.55x its After-Tax NPV (5%), and less than $70.00/oz.
• Fortunately, this improved valuation is combined with a major management shake-up, a stronger treasury, and a company much further along the development curve.
• Based on recent developments at Gold Standard, and a likely re-rating on ounces following its Feasibility Study, I continue to see the valuation as compelling at current levels.

It’s been a frustrating few months for the Gold Juniors Index (GDXJ), with even the best developers in the safest jurisdictions being thrown out with the bathwater. One name that’s continued its multi-year decline without respite is Gold Standard Ventures (GSV), a junior looking to develop its South Railroad Project in Nevada. Recently, the company has seen a significant shake-up in management and is on track to complete a Feasibility Study [FS] later this year. At a current valuation of barely $68.00/oz and roughly 0.53x its After-Tax NPV (5%), the valuation is becoming quite reasonable, especially if it can add ounces to the project.

(Source: Company Website)

Gold Standard Ventures has had a busy few months since Q4 with a massive management shake-up, a capital raise to bolster the treasury, and several key appointments with a wealth of Nevada mining experience. The most significant change was a new CEO for the company, Jason Attew, who has a wealth of experience in the sector. On the capital markets side, Attew spent time in investment banking at Bank of Montreal (BMO) Metals & Mining, and most recently, he was the Chief Financial Officer of Goldcorp. This change, combined with a much stronger treasury, has led to a significant investment thesis upgrade since my most recent article. Let's take a closer look at recent developments below:

(Source: Company Presentation)

Gold Standard Ventures has had the right address for years and a solid project for one amenable to heap-leach mining. However, the one missing ingredient was a team capable of moving this project into development, with significant operating experience in the mining sector. Fortunately, this has all changed in the past few months, with a new CEO, three major appointments in January, and a Feasibility Study that's now just around the corner. The most significant appointment made to Gold Standard's senior leadership team was the addition of Lawrence Radford, who has taken the role of Chief Operating Officer as of early January. Radford has significant experience in the sector with over 35 years in the industry, and importantly, experience with both heap-leach projects, and time spent in Nevada with Barrick (GOLD).

(Source: Company Presentation)

Most recently, Radford was the COO of Hecla Mining (HL), one of the largest primary silver producers globally, with multiple North American operations. Meanwhile, Radford also managed the construction of the Fort Knox heap-leach operation in Alaska, which has now been in production for over 23 years. It's worth noting that he also spent time as a General Manager at Fort Knox. Finally, Radford spent 18 years with Barrick, which included 14 years at the Goldstrike Mine in Nevada, with time spent at the massive Cowal Mine in Australia, currently held by Evolution Mining (OTCPK:CAHPF). This combination of heap-leach experience, Nevada experience, and a very long track record makes him a huge asset to Gold Standard Ventures and a perfect fit. For those unfamiliar, Gold Standard has the 2nd largest land position in Nevada and is looking to build a heap-leach operation assuming the receipt of a positive FS.

Outside of Radford, Gold Standard also hired Michael McDonald as VP of Corporate Development & Investor Relations, another addition with a background in Nevada. Previously, Michael McDonald worked with SSR Mining (SSRM) during its acquisition of the Marigold Mine in Nevada and started his career in investment banking. Finally, Gold Standard hired a new Chief Financial Officer, Jordan Neeser, who should be beginning his role this month. These three appointments, complemented with a new CEO, have added significant depth and experience to the Gold Standard team, which is a huge deal for a company looking to transition from explorer to developer.

So, what's so special about the project?

For those unfamiliar, Gold Standard has a massive 208-square kilometer property in the #1 ranked mining jurisdiction globally, with this land position second only to the Nevada Gold Mines Joint-Venture between Barrick and Newmont (NEM). The company is sitting on ~1.25 million ounces of gold reserves and ~2.96 million ounces of gold resources in Nevada, with the most recent Pre-Feasibility Study [PFS] showcasing solid project economics. Based on the Q3 2019 PFS, the South Railroad Project is expected to produce over ~115,000 ounces of gold per year, with ~146,000 ounces for the first five years. Costs are expected to be exceptional and well below the industry average (~$1,010/oz) and are projected to come in at $707/oz.

(Source: Company Presentation)

Typically, a low-grade operation with an average grade of 0.82 grams per tonne gold would not work, but heap-leach projects can work at grades as low as ~0.40 grams per tonne gold as SSR Mining's Marigold Mine has shown for years. The upfront capital expenditure to build Railroad Pinion has been estimated at ~$133 million, but the company has noted in recent discussions that we could see some cost escalations as the project moves from PFS to FS, given that contingencies may have been on the low end for the project. However, even if we assume a 15% cost escalation to ~$153 million, this is still a very low-cost project relative to other small to medium-scale gold projects. As shown below, this combination of low upfront costs and industry-leading all-in sustaining costs leaves Gold Standard in the 'most attractive' group among undeveloped projects, whether we see minor cost escalations or not.

(Source: Company Presentation)

(Source: Author's Chart)

So, how does the project look from a financial standpoint?

Using a relatively conservative gold (GLD) price of $1,600/oz, the South Railroad Project has an After-Tax NPV (5%) of $387 million, but this is based on only ~923,000 ounces of recoverable gold. While this makes up the majority of reserves, there's a good chance that we can see a lift in reserves in the Feasibility Study, which should push the reserve base and ounces in the mine plan up to ~1.48 million ounces, or ~1.08 million ounces of recoverable gold at a 73% gold recovery rate. This would likely push the After-Tax NPV (5%) closer to $400 million. This assumption of higher ounces in the mine plan is based on the fact that Gold Standard should be able to convert at least 55% of the ~400,000 ounces of resources outside the mine plan currently at Pinion into reserves.

(Source: Company Presentation)

As shown above, the total measured & indicated resource [M&I] at Railroad South is ~1.56 million ounces, with the company sitting on another ~1.20 million ounces of inferred resources. If we include the Lewis Project, which is home to ~0.21 million ounces, this means that the current After-Tax NPV (5%) and mine plan is based on only 46% of the total resource (ex-Lewis), with just ~1.26 million ounces in the mine plan. Therefore, there is certainly some upside to this After-Tax NPV figure (5%) and 8-year mine life. Using only the current After-Tax NPV (5%) from the PFS, Gold Standard is trading at 0.53x its NPV.

(Source: Company Presentation)

The other point worth mentioning is that Gold Standard's Virgin deposit (~210,000 ounces) at the Lewis Project is sitting inside the pit outline at Nevada Gold Mines' [NGM] Phoenix Mine, and this land and small resource could be of strategic value to NGM. Recently, we saw Orla Mining (NYSE:ORLA) pay ~$63 million to Fresnillo (OTCPK:FNLPF) to access resources that extended on its property, so it's certainly possible that NGM could pay Gold Standard to either pick up a portion of the Lewis Property or pay to gain access to these resources, so it doesn't have to amend its current pit boundary. I have placed minimal added value (outside of ounces) on Lewis in the valuation for Gold Standard as these ounces lie outside of the South Railroad Project, but it looks like this valuation could be conservative.

So, how's the valuation look?

At a current share price of $0.57, Gold Standard Ventures is trading at a market capitalization of ~$204 million based on 358 million shares outstanding. If we divide this market cap by 2.96 million ounces of resources, we come up with a valuation of $68.92/oz. This is below the average price paid for ounces in Tier-1 jurisdictions of $80.51/oz, and Gold Standard should get a premium given that it's in a Tier-1 jurisdiction. I believe the fair value for these ounces is $95.00/oz, which would translate to a current fair value for Gold Standard of ~$281 million or US$0.78 per share. This calculation assumes zero value for Gold Standard's cash position of $46 million, which, if included, would translate to a price target closer to US$0.90. I have purposely not included cash in the price target, given that a good chunk of it will be used for development studies, early development work, drilling, and G&A.

(Source: Author's Notes)

Based on the recent insider buying we've seen, it looks like insiders agree that the stock is cheap, with shares acquired from prices ranging from US$0.59 to US$0.90 in the past seven months. This confidence from the management team is a great sign, with total insider purchases amounting to over $1 million. These figures and share prices shown in the below table are in Canadian Dollars, but I have adjusted them to US Dollar figures at an exchange rate of 0.80 to 1.0 Canadian Dollars to US Dollars.

(Source: SEDI Insider Filings)

The biggest two issues for Gold Standard Ventures over the years have been overvaluation and significant share dilution, but after an 80% decline, the former problem has been fixed. The latter issue is also no longer an issue, given that Gold Standard is sitting on ~$46 million in cash. With a new team in place, a project sitting in the #1 mining jurisdiction globally, and a Feasibility Study that's on the way in 2021, Gold Standard looks like a solid bet for a small speculative position. Currently, there are a few names that offer more upside and more attractive projects. Still, at a ~$204 million valuation for Gold Standard, I see the stock as medium-risk high-reward, a material improvement from high-risk, high-reward from 2018 to 2020.

Analyst’s Disclosure: I am/we are long GLD, NEM. 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.

Disclaimer: Taylor Dart is not a Registered Investment Advisor or Financial Planner. This writing is for informational purposes only. It does not constitute an offer to sell, a solicitation to buy, or a recommendation regarding any securities transaction. The information contained in this writing should not be construed as financial or investment advice on any subject matter. Taylor Dart expressly disclaims all liability in respect to actions taken based on any or all of the information on this writing.