Description

Quick thesis: Gold exploration company with a $20mn market cap stumbles upon potentially one of the most valuable and highest grade mineral sands deposits that could be worth over $1bn. Announcement hit the ASX yesterday and almost no one is following it.

We apologize for the quick/summary nature of this idea as we wanted to get this out as soon as possible. The news hit last night and has not been socialized given the tiny market cap and is creating a highly asymmetric opportunity for anyone who can play in micro caps.

Falcon Metals is a gold exploration company in Australia’s Victoria region. Falcon holds over 5000 sq kms of land in the Bendigo Zone of Victoria, a region which hosts one of the worlds highest grade and most profitable gold mines : Fosterville (Kirkland Lake which was then acquired by Agnico Eagle).

Tim Goyder (founder of Liontown which Albermarle tried to acquire last year) is also the founder here and the third largest shareholder.  

As is common practice, Falcon had purchased additional buffer land around its core gold prospects. A mineral sands exploration company (WIM Resources) then announced a sizable hit (223mt at 3%) only a few kms away from one of these buffer zones. Falcon then decided late last year that it was worth sending a rig to the area called Murray basin, just in case something pops up.
In March, the company announced initial drilling and assay results from a 77 hole aircore drill program which produced spectacular results with 10-15% grades (Zircon, Rutile, Ilmenite) at 20 meter depth across a 5km by 1km stretch open in all directions. Iluka which is the largest player in Australia also has a very large mineral sands project operating only 100kms away.

The company decided that the initial results were exciting enough to pursue a more substantial drilling program which culminated in an announcement last night on the ASX.
The follow-up drilling program consisting of 91 holes showed even more spectacular results. 33 holes had a grade of greater than 10% and 11 holes had a grade greater than 20%. The deposit remains open in three directions and at this time just the high grade resource appears to be 1.2km long, 600m wide and 10m thick.
Bottom line, at a minimum the high grade component is currently at 18mt (using specific gravity of 2) and with additional drilling we think there is potential for it to be in the 50mt-100mt range at a 10%+ grade.

Using a 20% discount to spot prices, we calculate a $70-$90 per tonne value in ground using average reported grades.

The cost of operations/processing should be in the $15-$25 per tonne range which places pre-tax cash flows at $50 per tonne.

At the very low end, a 2mt operation could generate $100mn of cash flows annually. We think the project could be 2x or even 3x the size. The NPV of such a project could be between $1bn-$2bn.

Grade is king here as all the other projects in the surrounding areas are between 3-5% and are generating very low (10% sub) margins. The value creation is exponential with higher grades due to the fixed costs of operating these mines.

The capex needed for mineral sands is also very low as these are found very close to the surface. We expect around $100mn of capex to build a 2mt a year mine. Additionally, Iluka has processing and refining operations just a couple hours away. There is some good information about the current state of the mineral sands market in Iluka’s most recent presentation at the Macquarie conference, although we don’t think the near-term dynamics of the market are really relevant here. 

PowerPoint Presentation (iluka.com)

Falcon management has made it clear that it will continue to view the mineral sands outcome as non-core and pursue the best monetization strategy in the near to medium term.

The play here is likely to be a sale of the mineral sands resource to a larger mining company (Rio and Iluka being the top two contenders).
Additionally, the core gold exploration continues and we think there is substantial option value there given the highly prospective location of the land. Drilling results are expected in the next two months.

Disclaimer: This write-up is intended for informational purposes only and you should not make any financial, investment, or trading decisions based upon the author's commentary. Although the information set forth above has been obtained or derived from sources believed to be reliable, the author does not make any representation or warranty, express or implied, as to the information's accuracy or completeness, nor does the author recommend that the above information serve as the basis of any investment decision. At any time, the author of this report may trade in or out of any securities that are mentioned in the write-up without disclosing this information. This is not an offer to sell or a solicitation of an offer to buy any security.

Catalyst

Resource announcement in 4Q

Sale of the mineral sands business 

Update on the gold drilling program