Capricorn Metals: Making The Leap From Explorer To Producer
Summary
- Capricorn Metals is months away from its first gold pour at its Karlawinda Project, which will transform the company into Australia's newest gold producer.
- The Karlawinda Project is expected to produce upwards of ~105,000 ounces per annum at all-in sustaining costs below US$925/oz over 12-year mine life.
- Based on current reserves, Capricorn trades at a significant discount to mid-tier producers, but a premium to other junior producers.
- Given the projected industry-leading margins at Karlawinda and the potential to increase the mine life with a ~2.15 million-ounce resource, I see Capricorn as a name to keep an eye on going forward.
It's been a rough start to the year for the precious metals sector (GLD), and few miners have been spared, with nearly all explorers, developers, and producers all down considerably from their August 2020 highs. One name that's corrected more than its peers is Capricorn Metals (OTCPK:CRNLF), an Australian developer that's set to graduate to producer status later this year. Despite getting ready to make this leap, the stock has fallen more than 45% year-to-date, falling from A$2.37 to A$1.30. Given the projected industry-leading margins at Karlawinda and significant reserve life with an opportunity to increase the reserve base, I see Capricorn as a name to keep an eye on going forward.
Capricorn Metals trades significant volume each day on the Australian Stock Exchange (ASX: CMM) but trades minimal volume on the OTC Market. Therefore, the best way to trade the stock is on the Australian Stock Exchange. There is a significant risk to buying on the OTC Market due to wide bid/ask spreads, low liquidity, and no guarantee of future liquidity. All conversions are based on an Australian Dollar/US Dollar exchange rate of 0.76 to 1.0.
(Source: Company Presentation)
Capricorn Metals was one of the top-performing juniors last year, with the stock soaring to a valuation of more than US$550 million last fall, pushing the stock to a large premium relative to peers. This was a lofty valuation for a company that had barely begun construction on its Karlawinda Project in Western Australia, with the stock trading at more than US$260.00/oz. Since then, however, the company has made considerable progress, and Karlawinda is set to produce its first gold in the June quarter of this year. Let's take a closer look at the company below:
(Source: Company Presentation)
As shown above, Capricorn's Karlawinda Project is 60 kilometers southeast of Newman, in an area that's known for its iron ore, not gold. The company has a ~2,000 square-kilometer property, and Capricorn has barely scratched the surface in terms of exploration, with more than 90% of drilling in a 50-square kilometer area on the property. This suggests there could be significant potential to build on the current resource base of ~2.15 million ounces, with eight targets identified within 15 kilometers of its processing plant set to be tested this year with a ~6,000-meter drill program. Assuming gold prices stay above US$1,600/oz, Capricorn should generate significant free cash flow to aggressively drill regionally and near-mine, without any worry about share dilution, given that gold sales can fund exploration.
(Source: Company Presentation)
If we look at the image above, we can see that the Bibra deposit sits in the southern portion of Karlawinda's large land package. This area alone is home to ~2.15 million ounces of gold at an average grade of 0.80 grams per tonne gold, with ~1.2 million ounces of this resource being classified as reserves. Assuming the company is successful in drilling out new targets, the company has the potential to build on its already impressive 12-year mine life at Karlawinda, which already stacks up quite well against many of its Australian peers. It's worth noting that the reserve base that supports the mine life is based on a gold price of A$1,600/oz (US$1,216/oz), so it looks quite conservative, given that this metals price assumption is well below the industry average.
(Source: Company News Release)
As of the most recent update, project construction is on time and budget, and 45,000 meters of grade control drilling have been completed that's in line with the reserve model in areas drilled. Meanwhile, mining activities have also started, with the mining contract, power supply agreement, and gas transportation agreement in place. The most recent positive development was modifying the plant design to a three-stage crushing circuit and ball mill, increasing plant capacity from ~3.0 million tonnes per annum to 4.0 to 5.0 million tonnes per annum. At 4.0 million tonnes per annum with a 92.6% recovery rate, this should allow for gold production of at least ~105,000 ounces per annum, with the company's goal being 110,000 to 125,000 ounces per year.
(Source: Company News Release)
Based on the 2018 study, Karlawinda was expected to produce gold at all-in sustaining costs of A$1,025/oz [US$779/oz] over an 8.5-year mine life, but this mine life has increased considerably with reserve growth to ~1.20 million ounces. Projected costs have increased to A$1,165/oz at the mid-point from A$1,025/oz previously, but this still translates to costs of US$885/oz, which is more than 12% below the industry average of ~$1,010/oz, and quite attractive relative to peers like Ramelius Resources (OTCPK:RMLRF) with cost guidance of A$1,340/oz in FY2021, and Karora Resources (OTCQX:KRRGF) with guidance closer to US$1,000/oz. Assuming the gold price stays above US$1,700/oz, this would translate to all-in sustaining cost margins for Capricorn of more than 45% once production fully ramps up.
So, how does the valuation look?
(Source: Company Presentation)
As discussed earlier, Capricorn is sitting on ~1.2 million ounces of gold reserves and currently has a market cap of ~$452 million based on ~350 million shares outstanding and a share price of A$1.70 [US$1.29]. This translates to a valuation per ounce of ~$376.00/oz on reserves or US$210.00/oz on resources. However, if we add in the company's net debt of more than US$60 million, this translates to a valuation per ounce closer to US~$425.00/oz on reserves and US~$238.00/oz on resources. If we compare this to other Australian producers below that are slightly more de-risked given that they're already generating free cash flow, we can see how Capricorn stacks up:
(Source: Author's Chart)
As shown above, Capricorn trades at a large premium to ~100,000-ounce gold producer Karora Resources (OTCQX:KRRGF), but a massive discount to ~260,000-ounce gold producer Silver Lake Resources (OTCPK:SVLKF). A small premium to Karora Resources makes sense given that Karora is producing at closer to US$1,000/oz, and Capricorn could produce gold at below US$900/oz. Meanwhile, a discount makes sense relative to Silver Lake, given that Silver Lake is more diversified and has reserves that makes up barely 22% of its total resource base (~5.3 million ounces). Therefore, I would argue that Silver Lake's reserve base of ~1.2 million ounces understates its true mineral endowment, which is why it looks overvalued at first glance.
So, what is a fair value for Capricorn?
Assuming Capricorn can produce gold at below US$900/oz and there are no hiccups as it starts mining, I believe the company could easily command a fair value of US$450.00/oz for its reserves. Given that the reserve base is at a relatively conservative gold price of US$1,216/oz and makes up mineralization down to just 250-meter vertical depths, it's certainly possible that Capricorn could increase this reserve base to closer to ~1.5 million ounces in the next two years after mining depletion by going after reserves that are down-dip of the current resource. However, with the stock already valued at above US$400.00/oz in the pre-production phase, it's hard to argue that there's a significant margin of safety here.
(Source: Company Presentation)
This doesn't mean that the stock can't go higher, but it does suggest that there might be more value in names likes Karora. This is because Karora is already in production, has more operational flexibility with multiple mining areas feeding to a central mill, and that mill is set for an upgrade in processing capacity this year. So, while Karora and Capricorn are both similar in scale once Karlawinda moves into production, I would argue that Karora has the easier path to ~150,000 ounces with two high-grade mines (Spargos and Beta Hunt) vs. Capricorn that's sitting on an exceptional deposit, but one that does have much lower grades.
Capricorn Metals is the next Australian junior to join the ranks of producers on the Australian Stock Exchange, but at a current share price of A$1.70, I don't see an exceptional risk/reward proposition. Obviously, a rising gold (GLD) price will lift all boats, including Capricorn, but I think there is better value in names like Karora and Silver Lake that are trading at valuations below US$200.00/oz, with clear organic growth potential. Having said that, if Capricorn Metals were to dip below A$1.40, where it would trade at closer to US$185.00 per resource ounce, I would view this as a low-risk buying opportunity.
This article was written by
Analyst’s Disclosure: I am/we are long GLD. 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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