It's been a tough year for the Gold Juniors Index (GDXJ), and one name that's been punished more than most by the extreme pessimism is Gold Standard Ventures (NYSE:GSV). This is evidenced by the stock's ~40% decline year-to-date vs. the GDXJ's 20% decline. However, this has little to do with the company fundamentals, with Gold Standard continuing to hold an enviable land position in the #1 ranked mining jurisdiction and its robust project. Given the very attractive valuation and the fact that the stock is becoming a takeover target at these prices, I see the stock as a Speculative Buy here at US$0.43.
Gold Standard Ventures ("Gold Standard") has taken a beating over the past several years, with the stock down more than 85% from its 2016 highs and more than 40% year-to-date. One reason for the significant decline is that the company drilled its best holes and made a new discovery during a roaring bull market for gold juniors (albeit brief) in 2016, and future drill results could not measure up. Given that no significant new discoveries were made, the stock languished for years, returning to a more realistic valuation.
Based on the difficult drilling comps, an arguably unnecessary acquisition by previous management (Lewis), and without taking full advantage of the high share price to raise more capital, the stock suffered immensely. However, with a new management team, the stock left for dead at US$0.43, and the project much more advanced, this has created an opportunity. It's also important to note that while post-2016 drilling didn't live up to the hyped-up expectations from drill-hole DS-16-08 (126.2 meters of 3.95 grams per ton gold), this is still a very attractive project. Let's take a closer look below:
In late 2020, Jason Attew replaced Jonathan Awde as President & CEO. Jason Attew has over 25 years of experience in the mining sector, both in investment banking at the BMO Global Metals & Mining Group and as the Chief Financial Officer of Goldcorp. In early 2021, he made several new appointments to the management team with a focus on Nevada experience, adding Lawrence Radford as Chief Operating Officer and a new CFO, Jordan Neeser, who spent time at Conifex Timber and First Quantum Minerals. Gold Standard has also recently added a new geological team to get a fresh set of eyes on the company's massive #2 land-holding (~12,000+ hectares) on the Carlin Trend, south of Nevada Gold Mines massive Carlin Complex (1.5+ million ounces of annual gold production).
The new COO, Lawrence Radford, has significant Nevada experience as part of the initial Goldstrike team at Barrick (GOLD) and has held senior operational roles at Hecla Mining (HL) and Kinross (KGC) as well. He held operational and technical services roles at Kinross, which included managing the construction of the Fort Knox heap-leach operation, which will come in handy when building the smaller-scale South Railroad Project for Gold Standard, assuming a positive construction decision.
In addition to Lawrence Radford, the company also added Jeff Feurstneau as Process Manager, with 35 years of experience and previously General Manager of the Mesquite Mine, a heap-leach operation held by Equinox Gold (EQX) in California. On the technical side, Gold Standard added Sergey Konyshev as Senior Geologist, who was with Coeur Mining (CDE) as part of their North American exploration team.
Finally, the team has done an excellent job of minimizing share dilution in a very difficult junior market and has continued to add to the project's upside, with a new near-surface oxide discovery that lies three kilometers northwest of South Railroad. The focus of the previous Pre-Feasibility Study and upcoming Feasibility Study has been on a fraction of this project, showcased by the yellow border below.
Based on drilling to date, Gold Standard has defined a resource base of ~1.56 million measured & indicated ounces and ~1.32 million inferred ounces. This resource spreads across multiple deposits (Pinion, Dark Star, Jasperoid Wash, North Bullion), but the focus is on just Dark Star and Pinion, where the company has outlined a reserve base of ~1.25 million ounces, supporting a more than 8-year mine life. Based on these reserves, the mine is expected to produce ~140,000 ounces of gold per year for its first five years at all-in sustaining costs of $707/oz.
Given the inflationary pressures we've seen and the fact that a silver stream was sold to Orion, the company will see an increase in costs when it releases its Feasibility Study next year. When adding in inflationary pressures and the potential for a higher strip ratio, I would expect all-in sustaining costs to increase to a figure closer to $850/ozs. However, even if Gold Standard has a 10-year mine life at ~125,000 pls ounces per annum at all-in sustaining costs of $850/oz, this is still a very attractive project. This is evidenced by the chart below, which shows how South Railroad stacks up to other undeveloped gold projects globally.
In the chart above, I have shown Gold Standard at a ~140,000-ounce production profile, with estimated costs of $850/oz. It's important to point out that all of the other undeveloped projects globally shown on this chart are based on dated economic studies. Therefore, their operating costs would likely increase 5% - 10% higher in most cases if these studies were to be completed again today and done to the Feasibility Study level with more conservative assumptions. So, while my assumptions for South Railroad at the Feasibility Study level come in above the trend line today, it would be at or below the trendline if I were to adjust for a cost increase across the board on less advanced projects/dated studies.
Now that we've established that this is a very attractive medium-scale project with projected costs 20% below the industry average, it's worth looking at the exploration and production upside. As noted, the reserves are based on just ~40% of the ounces at both North and South Railroad, and there are no ounces attributed to the LT Target, POD / Sweet Hollow, Jasperoid Wash, North Bullion, or southern extensions to Pinion in the current mine plan. This points to a much longer mine life than is envisioned today, and significant upside from refractory ore.
As noted earlier, Gold Standard lies 65 kilometers south of the Carlin Complex, where Nevada Gold Mines has roasters capable of processing refractory material, while the Jerritt Canyon Mine has significant idle processing capacity, which could also process refractory material. These are two areas that Gold Standard could explore when it comes to processing 1.0+ gram per ton sulfide material from Dark Star and high-grade material from North Bullion (759,000 ounces at 3.1 grams per ton gold). A toll-milling agreement would allow Gold Standard to significantly increase its revenue from ounces that are not in the current mine plan and aren't factored into the ~$350+ million NPV (5%) for the South Railroad Project.
Finally, it's worth mentioning that while the low-hanging fruit in Nevada that's very economic to mine is the near-surface oxides, the real potential lies at depth, where grades can increase significantly. To date, Gold Standard has not had the capital to explore underground potential, but given Dark Star's oxide grades that are well above the industry average, I would not rule out a high-grade sulfide component at depth. This is also an opportunity at North Bullion, where grades are exceptional. Given that Gold Standard is chasing after the low-hanging fruit and hasn't explored this possibility, this isn't even contemplated in the mine plan nor the current valuation but could provide a significant opportunity long-term for toll-milling as well.
In addition to ounces not included in the mine plan, Gold Standard holds the Lewis Project, home to ~21 square kilometers of land on the Battle Mountain - Eureka mineral trend and adjacent to Nevada Gold Mines' Phoenix Mine. The deposit is home to a small resource base of 7.74 million tons at 0.83 grams per ton gold and 14 grams per ton silver, translating to just over 250,000 gold-equivalent ounces. Previous drilling by Barrick and Homestake on the Lewis property intersected deep skarn gold-silver-copper mineralization, and Phoenix remains in operation but is one of Barrick's smallest assets.
One way to increase the resource base here and add exploration upside would be to acquire Lewis, which has been shown to contain similar geology based on historical drilling. This is non-core to Gold Standard and could provide a way to raise additional capital without share dilution if the company were to look into divesting this asset. I would not expect a significant sum from a possible divestment. Having said that, it could help to increase the current ~$20 million cash position closer to ~$30 million, and possibly more, allowing the company to go more than a year without any additional share dilution, and support a more aggressive 2021 drill program.
As it stands, Gold Standard has ~358 million shares outstanding at US$0.44, translating to a market cap of ~$158 million and an enterprise value of ~$138 million. Given that most of the cash position will likely be spent between now and Q1 2023, I believe it's best to value the company on a market cap vs. an enterprise value basis. I would not rule out some share dilution over the next year, but I would expect it to be minimal. However, it's also possible that the company could look at a small royalty deal project to avoid further share dilution or aim to monetize the Lewis Project, which is a strategic asset for Nevada Gold Mines.
Either of these options could pad the balance sheet, which currently sits at $21 million, allowing the company to move towards making a construction decision without any additional share dilution in the interim. The good news is that Gold Standard is in a very enviable position when it comes to project financing. This is because Orion Mine Finance has agreed to provide up to $200 million of financing to help finance the construction of the South Railroad Project once certain milestones are met.
Assuming a higher capex bill than the Pre-Feasibility Study (~$175 million vs. $133 million), this would easily fund project capex. So, while many juniors are in a very difficult position when it comes to financing their projects, especially when we're seeing cost estimates revised higher, Gold Standard appears much lower risk given the support from Orion. It's also worth noting that even if we do see cost creep to ~$175 million, this is still well below the average among Tier-1 jurisdiction peers. Let's take a closer look below:
The chart directly above shows Tier-1 undeveloped gold projects with their projected production profiles and their upfront capex estimated based on inflationary pressures. The chart on top of this shows projected production profiles for Tier-1 undeveloped gold projects as of summer 2021 and without any impact from inflationary pressures.
In both charts, and especially the chart directly above, where I have adjusted capex to account for higher labor and materials costs, we can see that Gold Standard is well below the average (blue trend line), and stacks up very well from a production vs. upfront cost standpoint. This is great news for investors for two reasons. The first is that Orion's agreed-upon project financing should cover project construction, minimizing share dilution. The second is that for suitors sniffing around in the world's most attractive mining jurisdiction, they can potentially nab a ~130,000-ounce per annum producer for less than $400 million, making Gold Standard a potential takeover target. Gold Standard's production profile is shown on a first five-year basis, with estimated production of ~137,000 ounces.
While there are few recent comparables, given that we haven't seen a ton of junior acquisitions in the United States recently, Corvus Gold (KOR) was recently acquired for over $170.00 per measured & indicated ounce, and ~0.50x P/NPV ($1,600/oz gold). While the company's measured & indicated resource grade was higher than Gold Standard (above 1.20 grams per ton gold), operating costs were expected to be only slightly lower (~$700/oz).
Assuming an acquisition at a similar valuation, Gold Standard would trade at approximately between US$0.60 to US$0.75 using a per ounce valuation basis or a P/NPV basis. These calculations are based on Gold Standard's estimated After-Tax NPV (5%) of $387 million at $1,600/oz gold and its ~1.56 million-ounce M&I resource base.
Moving over to the valuation below, Gold Standard appears to be a clear outlier, ranked 2nd last among Tier-1 jurisdiction peers on a consensus P/NAV ratio. This is even though Gold Standard is one of the more advanced projects among the peer group, given that it has a Feasibility Study on deck, a PFS in hand, and is already well advanced in the permitting process. As the chart below shows, Marathon Gold (OTCQX:MGDPF) currently trades at a consensus P/NAV ratio closer to 0.80x, highlighting the re-rating potential once a Feasibility Study is in hand and a company is near fully-permitted and ready to begin construction.
Given that both projects are similar in scale and estimated operating costs (130,000+ ounces per annum for the first five years at sub $860/oz AISC), a ~0.75x P/NAV for Gold Standard is more than reasonable when it comes to a possible re-rating. Once in production, a ~120,000-ounce single-asset producer in Nevada with industry-leading costs could easily command a multiple of 0.90x P/NAV. This would translate to ~100% upside from current levels, even after factoring in a final capital raise for construction.
The hurdles to achieving this valuation are complete permitting, financing construction with minimal dilution, and a robust Feasibility Study. In the case of permitting, there are always risks, but this is a very small project from an environmental footprint standpoint, and Nevada ranks very well from a permitting standpoint. In terms of financing, Orion agreed to provide up to $200 million and is a shareholder, and I would expect upfront capex to come in at $180 million or less. Finally, from an economics standpoint, there's no denying that the economics are robust, as discussed earlier.
Based on the above table of insider buying over the past year, it appears that management and insiders see value in the stock as well, with more than 8.5 million shares acquired since November 2020. This includes 1.03 million shares purchased by President & CEO Jason Attew, 135,000 shares purchased by Chief Financial Officer Jordan Neeser, 223,000 shares purchased by Director Alex Morrison, 50,000 shares acquired by Cassandra Joseph, and 60,000+ shares purchased by directors Bruce Mcleod and Zara Boldt. The majority of the shares purchased by management and insiders have been well above current prices, with prices ranging from US$0.38 to US$0.68.
Looking at the current share structure, this has placed ~4% of shares in the hands of management and the board, ~13% of shares held by Sun Valley Gold, 7.0% of shares held by Fidelity Management & Research, 5% of shares that continue to be held by Newmont (NEM), and another 1.7% of the share count held by Sprott Asset Management. This is a significant vote of confidence in the project, and Sun Valley Gold's recent buying spree is not surprising and should pay off, with the stock now resting just above a multi-year support level heading into year-end, with additional selling pressure likely coming from tax-loss selling. Let's take a closer look at the technical picture below:
Finally, looking at the technical picture above, we can see that Gold Standard has come down to test a major support level, with this support area dating back to mid-2015. Meanwhile, the next strong resistance level for the stock doesn't come in until US$0.79, translating to a very favorable reward/risk ratio from a trading standpoint. This is because there's $0.35 in upside to potential resistance and $0.06 in downside to the strong support area at US$0.38, translating to a reward/risk ratio of 5.8 to 1.0.
It's easy to be negative on Gold Standard after a terrible 1-year performance and the fact that it's been in a steady downtrend for years. However, with the stock sitting at US$0.44, and sporting a market cap of ~$158 million, the entry point has never been more attractive. In fact, at these levels, one could argue that Gold Standard is a takeover target, with a suitor picking up a solid project with a nearly ~$400 million NPV (5%) at conservative gold prices, and able to become the 2nd largest landholder in Nevada with the acquisition.
This would make a lot of sense for a company like SSR Mining (SSRM) that already has a Nevada footprint at Marigold but much higher costs and might be looking to add a Tier-1 project to improve its jurisdictional and cost profile. Another potential suitor would be Coeur Mining (CDE), which is also in Nevada, and also has relatively high costs. Finally, if the stock gets any cheaper, it might make sense for either First Majestic (AG) or Nevada Gold Mines. Either company could scoop up all this land, look at a larger scale project that would support ~200,000 ounces per annum, and truck sulfide material (not currently in the mine plan) to their processing facilities which are always hungry for fresh ore.
Given the immense size of Gold Standard's land package, this could represent a new mining complex if multiple discoveries were made, assuming a suitor were to take a long-term vision for this asset. I would argue that a 5.0 million-ounce resource is possible here long-term when factoring in upside from multiple new discoveries and near-mine extensions. So, for companies with roasters like First Majestic and Nevada Gold Mines, this is a very strategic asset when we factor in the price it could be acquired for today. This is especially true for First Majestic, which needs to back-fill its valuation, with the stock trading at more than 3.0x P/NAV and Gold Standard available at ~0.40x P/NAV.
To summarize, multiple potential catalysts could increase Gold Standard's valuation, with these being a takeover, a deal signed for financing terms, or simply taking the project into production on their own. It's worth noting that if we assume a Record of Decision is made in Q1 2023, Gold Standard could be in production by Q2 2024 due to its short construction schedule, meaning it could actually get into production at a similar time to Marathon Gold at this rate. Given the clear upside potential and what I would argue is minimal downside from current levels, I see Gold Standard as a Speculative Buy at US$0.43.
This article was written by
Disclosure: I/we have a beneficial long position in the shares of GLD, NEM, GSV either through stock ownership, options, or other derivatives. 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.
Additional disclosure: 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.