- Gold Mountain Mining is one of the top-performing gold stocks this year, up more than 250% in the past four months.
- The company is working towards making the leap from explorer to producer, with a toll-milling agreement in place with New Gold, and plans for a mill on-site long term.
- However, at a current market cap of ~$161 million on a fully-diluted basis, the stock is no longer cheap, trading at 0.9x NPV based on a preliminary study.
- While the stock could go higher based on momentum, I don't see a favorable reward to risk proposition chasing the stock here at US$2.22.
It's been a tough start to the year for most gold juniors, with more than 70% trading below their 200-day moving averages and many down as much as 40% year-to-date. One name that's managed to buck the trend is Gold Mountain Mining (OTCQB:GMTNF), a gold explorer based out of Merritt that's sitting on a high-grade resource at a past-producing gold mine. However, with a more than 250% rally over the past four months, the stock is no longer cheap, trading a value per measured & indicated ounce of more than ~$295.00. Therefore, I see no reason to chase the stock at current levels, and I would view rallies above US$2.50 before July as an opportunity to book some profits.
(Source: Company Presentation)
Gold Mountain Mining is one of the most recent companies to IPO in the junior gold space. The company is focused on beginning production at its Elk Gold Project south of Merritt, British Columbia. The company currently has ~73 million shares fully diluted, which gives the company a market cap of ~$162 million at US$2.22 per share, which is a relatively high valuation for a producer with a sub 1 million-ounce resource base. However, given the high-grade nature of Elk's resource, and the project's proximity to infrastructure, located just off Highway 97C, a premium valuation makes sense. Having said that, after a 250% rally in less than four months, the stock looks to be more than fairly valued short-term. Let's take a closer look below:
(Source: Company Presentation)
As shown above, the Elk Gold Project couldn't have a better address, sitting 2 kilometers from an all-season highway, barely 30 minutes away from workforces in Kelowna and Merritt, with the project benefiting from no need for a camp. The weather conditions in this area are much less harsh than the Golden Triangle in British Columbia, which allows for year-round drilling and more favorable conditions for operations, and Gold Mountain's long-term goal is to build its own mill on-site to support the production of up to ~50,000 ounces of gold per annum. With more than 16,700 hectares of land and a high-grade resource in just one zone, the company certainly has a promising future.
(Source: Company Presentation)
The Elk Gold Project is currently home to a total of ~549,000 gold-equivalent ounces [GEOs] at an average grade of ~5.50 grams per tonne gold, with ~454,000 GEOs in the measured & indicated category. Generally, a resource of this size would hardly even justify a ~$50 million market cap, but as noted earlier, Gold Mountain benefits from solid grades and a great location, which makes the resource much more impressive. Based on a Preliminary Economic Assessment completed on the project, Gold Mountain envisions toll-milling (trucking ore to an already active mill in the area) in Year 1 through 3 of the projected mine life, with plans to build a 324,000 tonne per annum mill on-site, which will be used to process ore beginning in Year 4.
Recently, we got the news that the company has an agreement to deliver material to New Gold's (NGD) New Afton Mine, which is 130 kilometers north, which has significantly de-risked the plans in the PEA. The agreement states that New Gold will receive 70,000 tonnes of ore per annum, and New Gold will pay Gold Mountain at the end of each calendar month the value of gold (GLD) and silver (SLV) net of the agreed metallurgical and recovery and concentrate selling costs. This deal has the potential to transform Gold Mountain from a run-of-the-mill explorer to a revenue-generating junior and should allow Gold Mountain to drill out its property with minimal share dilution in an aim to build on its current resource.
(Source: Company Technical Report)
As shown in the above table, the expectation is that Gold Mountain will produce (through toll-milling) an average of ~18,000 ounces of gold in its first three years, with production set to increase materially in Year 4 with production at its own mill. The company will require permits for the construction of this mill and an expanded mining plan, but if all goes as planned, the company would start producing an average of ~50,000 ounces of gold per year from FY2025 to FY2032. However, it's important to note that this study is based solely on resources and not reserves. Therefore, it is less reliable than a Feasibility Study which would give us higher confidence since we could rely on a reserve base.
So, why not buy the stock here with the company having the potential to start generating revenue before year-end?
Based on the current PEA, the After-Tax NPV (5%) is $188 million, using a gold price of $1,800/oz. It's worth noting that this gold price is above spot currently and is not overly conservative. This leaves Gold Mountain trading at ~0.86x NPV based on its current fully-diluted market cap of ~$162 million. While a valuation of 0.86x NPV is not that elevated, it is quite elevated for an NPV figure that is based on a gold price above current levels and on a study that holds no reserves and is based strictly on resources.
(Source: Company Presentation)
Typically, I would assign a multiple of 0.50x - 0.70x for a PEA level study, and this is where many Tier-1 developers with more attractive projects currently trade. For example, Marathon Gold (OTCQX:MGDPF) trades at 0.70x NPV for a Feasibility Study that's based on a more conservative gold price of $1,650/oz. This doesn't mean that Gold Mountain can't go higher, but it does suggest that the stock is no longer cheap unless the gold price is set to go much higher or the company is set to increase its resource substantially.
If we look at Gold Mountain's valuation on a per ounce basis, the ~$162 million market cap divided by ~549,000 GEOs in the measured & indicated category leaves Gold Mountain trading at $295.00/oz, which is more than double the going rate for developers in the sector currently. By comparison, Marathon Gold trades at $110.00/oz, Ascot Resources (OTCQX:AOTVF) trades at barely $85.00/oz, and Skeena Resources (SKREF) trades at barely $100.00/oz. If we assume a 75% conversion rate for resources to reserves for Gold Mountain in a Feasibility Study, the company is trading at close to ~$393.00/oz. This calculation is based on 549,000 GEOs x 0.75 = 412,000 GEOs, divided by the current market cap of ~$162 million.
As noted earlier, this doesn't mean that Gold Mountain can't head higher because stocks often overshoot fair valuation. However, after a 250% rise in the share price in the past four months, the stock is now trading more than 60% above its 100-day moving average. Often, this is an area where stocks will run out of momentum given that they're overbought short-term. So, with a valuation that looks above fair value and a technical picture that looks stretched short-term, I don't see a low-risk entry into the stock here.
Gold Mountain Mining is one of the better IPOs we've seen over the past year. Most new issues have limited resources, at least five years until they generate any revenue, and are often hyped up considerably. Gold Mountain is a rarity as it has a relatively easy path to revenue generation based on the toll-milling agreement with New Gold, but the recent rally looks to have priced this into the story. This suggests that there are better reward to risk propositions elsewhere in the sector, especially given that the stock is extended short-term. Therefore, I don't see any reason to chase the stock here above US$2.20. In fact, if we were to see this rally continue, I would view any moves above US$2.50 before July as an opportunity to book some profits.
This article was written by
Analyst’s Disclosure: I am/we are long GLD, 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.
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.
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