The Q4 Earnings Season for the Gold Juniors Index (GDXJ) is nearly over, and several companies are getting ready to report their preliminary Q1 operating results. One of the first names to report its results is Pure Gold Mining (OTC:LRTNF), the newest junior gold (GLD) producer in the sector following its first gold pour on December 30th. Unfortunately, while milling activities have ramped up smoothly, grades have been quite disappointing, suggesting a much weaker FY2021 than initially planned. These grade issues have led to selling pressure, and the stock is now down 43% year-to-date. While an oversold is rally is possible after this sharp decline, I would view any rallies back to US$1.65 as selling opportunities.
(Source: Company Presentation)
Pure Gold Mining released its preliminary Q1 results last week and reported gold production of ~4,000 ounces, a very disappointing result in the company's planned transition to commercial production. These underwhelming production results are due to significantly lower grades than planned from unplanned dilution, with grades coming in well below expectations of 5-6 grams per tonne gold. This issue was exacerbated by a lack of mining flexibility due to a single ramp, resulting in significant low-grade stockpiles being added to feed to fill the mill. While results should improve materially over the course of the year, this disappointing start to the year has likely killed any chance of a ~50,000 ounce plus production year for the mine in FY2021. Let's take a closer look at the results below:
(Source: Company Filings, Author's Chart)
As shown in the chart above, it was a very mixed start to production for Pure Gold, with throughput ramping up smoothly, but a major disappointment from a grade standpoint. During Q4, Pure Gold processed ~3,500 tonnes and saw a very solid ramp-up to ~47,200 tonnes in Q1, with the mill operating at greater than 75% of nameplate capacity (600 tonnes per day) since late January. Normally, this material increase in throughput would translate to a massive boost in production, but we saw a sub 5,000-ounce quarter with grades slipping considerably. If we look above, we can see that grades slid from 7.8 grams per tonne gold in Q4 to 2.8 grams per tonne gold in Q1, which was well below the expectations of a 5+ gram per tonne feed grade in the quarter.
(Source: Company Presentation)
Pure Gold noted that this was due to excessive overbreak and that blasting practices will be modified going forward. Unfortunately, the following long-hole stope mined in March had a significant volume of non-mineralized dyke, which resulted in reduced grades relative to expectations, which didn't allow for an improvement in grade in the latter portion of Q1. Going forward, the plan is to utilize cut-and-fill mining to order recovery and minimize dilution, which is the primary method of mining in the mine plan, so this is not a deviation from the original plan but a change in strategy from the Year 1 mining method which was predominantly long-hole stoping [LH].
(Source: Company Technical Report)
Investors will understandably be confused by the results as a bonanza grade producer is mining sub 1/6 ounce per tonne grades, but it's important to note that Year 1 was expected to be a lower grade year anyways, with grades ramping up in Year 3 through 7. This is shown in the above mine production and development schedule, with feed grades ranging from 8.5 grams per tonne gold to 13.7 grams per tonne gold in years 3 through 7. So, while the feed grade of 2.8 grams per tonne gold in Q1 is undoubtedly a shock, it's not like this was a 10+ gram per tonne year, and we're seeing less than 30% of planned grades. Instead, it was a 7 gram per tonne year, and grades are coming in 50% below planned levels. This is still disappointing, but it's worth putting in context vs. the mine plan.
(Source: Company Technical Report)
So, what does this mean for FY2021 production?
In the event that we see continued solid results from the mill and a sharp improvement in mined grades, we should see over ~200,000 tonnes milled in the remainder of the year at a feed grade of at least ~5.50 grams per tonne gold. This would translate to over ~33,000 ounces of gold production, assuming that recovery rates come in at similar levels at 95% or better. While this would be a massive improvement from current levels, this would translate to a sub-40,0000-ounce year for production, which is a country mile shy of the ~50,000 plus ounces that many investors were likely expecting.
The upside case if unplanned dilution ceases would be 40,000 plus ounces in the remainder of the year, but this still won't push Pure Gold above the ~45,000-ounce mark for the year. This is because we saw just ~4,000 ounces of production in Q1, so Pure Gold will need over 41,000 ounces to get above the 45,000-ounce mark, and this looks highly unlikely. In fact, after this rough start, even 36,000 ounces in the remainder of the year would be a major improvement. Generally, sub-50,000-ounce producers trade at a massive discount to peers, especially if they're having teething issues during their ramp-up. If Pure Gold were trading at a major discount to Tier-1 producers, this would represent an opportunity to jump in and scoop up shares aggressively. However, this isn't the case.
(Source: Author's Chart)
Generally, a 50% plus correction leaves most stocks undervalued relative to peers, but if those stocks are priced for perfection ahead of their decline, the correction just brings them back to reality. This seems to be the case with Pure Gold, with the company still valued at ~$463.00/oz after its recent 50% correction. As we can see above, this is not cheap compared to other producers like Pretium (PVG), Victoria Gold (OTCPK:VITFF), and Kirkland Lake Gold (KL). In fact, Pure Gold is trading at a premium to all of these names, with these names having larger production profiles, suggesting that they should trade at a premium. The largest discrepancy is Victoria Gold vs. Pure Gold, with Victoria falling to a valuation of barely $225.00/oz after a weak ramp-up, but Pure Gold trading at twice the value despite this added dose of uncertainty.
(Source: TC2000.com)
It's important to note that even if Pure Gold isn't overly cheap here, especially when compared to peers at a valuation of ~$463.00 per reserve ounce, it is down by more than 50% in less than four months. This selling has accelerated after the recent news, and an oversold bounce would not be surprising at all. However, Pure Gold now has strong resistance near US$1.67, and this could be a difficult spot for the stock going forward unless it can blow out expectations at the mine. Therefore, if we were to see an oversold rally, I would view any rallies above US$1.65 back into this resistance level as selling opportunities. A rally to this area would place the stock back at expensive levels, at a market cap of ~$660 million or over $650 per reserve ounce.
Challenges early on in mining are not that unusual, and these disappointing Q1 results are not a deal-breaker for the investment case. In fact, it's certainly possible that Pure Gold could double its feed grade for the remainder of the year with grades of 5.6 grams per tonne gold, which would result in closer to ~35,000 ounces of gold production over the next three quarters. Unfortunately, this is still well below expectations of 50,000 ounces of production in FY2021. In summary, I would not be surprised by an oversold bounce and support for the stock at the US$0.95 - US$1.00 level if this weakness continues. However, with strong resistance now overhead, I would be using any rallies above US$1.65 as selling opportunities.
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