Description

Mayfair Gold (TSX-V:MFG)

Base Case Target Price: C$6.40/sh (18-months) – 233% upside (P/NAV; 0.3x US$1,800/oz Au mineplan NPV)

Risk Price: C$1.14/sh – 40% downside (P/NAV; 0.1x US$1,600/oz Au risk-case NPV)

Bull Case: C$11.37/sh – 492% upside (P/NAV; 0.4x US$1,800/oz Au upside-case mineplan NPV)

Summary

Mayfair Gold is a new explorer/developer that controls 100% of the Fenn-Gib gold project in Ontario, Canada. Mayfair acquired the asset, with a land package from Pan American Silver in 2020 and is currently conducting an accelerated exploration program to prove out economics and scale. Originally acquired with 2.2mm Au Oz of deposits, Mayfair has steadily increased this to 3.5mm AU Oz. We believe that delivery of a favourable Prefeasibility Study (PFS) in CQ3 of this year, along with an updated resource in CQ4, will drive the stock price significantly higher. Historical precedent demonstrates that the majority of exploration/development mining companies transact at the PFS stage, and we expect that to be the outcome here, particularly with the new major shareholder described below. 

Recent Developments

What piqued our interest in this story was that very recently, on June 8th, Mayfair Gold announced the closing of its most recent equity financing, along with the news that Muddy Waters has become a strategic shareholder, owning approximately 11% of the company. The two founders, Carson Block and Freddy Brick, have both expressed strong support for the quality of the company's assets, management, and future plans. What makes this announcement particularly interesting is that historically, Muddy Waters has primarily focused on short-selling, with only one previous venture into the mining sector where they acted as an activist investor in another Canadian gold company, GT Gold, owning over 10% of that company. In that case, they significantly raised awareness of the company's story and quickly facilitated its sale to Newmont Gold for C$393 million, resulting in a control premium of 38%.

While we believe that Muddy Waters is a supportive shareholder on this occasion, their investment is likely to generate more attention for the company's story and amplify the impact of upcoming hard and soft catalysts. We anticipate that this will lead to a narrowing of the valuation gap between the market price and our assessment of fair value. This will also further constrict the active float, which we now believe to have rotated into strong hands.

Investment Thesis

• Under appreciated, high-quality asset with notable deposit potential

  • Tier 1 Jurisdiction: the Timmins area is a world class gold belt, with over 110 million ounces of historical production and resources. Newmont, Kirkland Gold, and Pan American have all had key mining operations there.

  • Deposit Expansion: Currently hosts 3.5mm Au Oz deposit, with notable expansion potential both laterally and at depth

  • Incremental Bluesky Targets: Horseshoe claims and Southern region; potential for a new discovery

  • Unique Asset Characteristics: Low strip, good regional infrastructure, easy labor, and strong native relations

    • Asset has both a core through-cycle Marathon-like deposit, with the regional exploration potential of a Great Bear

    • These positive characteristics are illustrated through the grade/tonnage curve of recent resource report

• Holds scarcity value; one of only a few domestic assets of scale with growth potential

  • Intermediary and Majors are starved for new acquisitions, and there are few standalone assets in Canada left, post Marathon and Artemis

  • As the resource grows, will quickly become a "must own" asset for many strategics

• Financial growth story; marginal economics are very attractive

  • Given the nature of the deposit, incremental ounces defined will have in very high contribution margins to the model

  • The implied NPV/AuOz (US$200-300/oz) compared to cost basis/AuOz (~US$37/oz) are favorable

• Purpose built management team with a track record of success 

  • Led by Patrick Evans, a serial mining executive with a track record of successful development and exits

  • Supported by two local world-class geos with a history of regional discovery 

  • Ron Clayton, who serves as a Advisor, used to own the asset when he held CEO position of Tahoe and Doug Cater, who was VP Exploration for Kirkland (regional expert)

• Valuation and asymmetric return potential; Re-rating potential 

  • Peer Discount: Currently trades EV/Resource multiple in-line with peers. With economic study release, we view PNAV re-rate potential of 2-3x from current levels 

  • Provides a notable margin of safety and unique value growth profile through continued development and exploration

• Delineation of new resources additive to model

  • Current cost of discovery from recent drilling work undertaken is ~C$5-6/oz and stock trades at ~C$55/oz (providing 9-10x value creation on each dollar spent)

• Robust 12-month Catalyst profile; multiple upcoming events 

  • Ongoing: Drilling results (exploration; additive)

  • CQ3: Prefeasibility (we expect >US$1.2bn of NPV)

  • CQ4: Updated resource (we expect >4mm AuOz)

  • H1’2024: Permitting progress and potential acquisition interest

• Lack of financing need; no overhang

  • No looming overhang. Asset purchased outright, with no payments. There will be no need for further financing until post a PFS which will cause a re-rating to the equity

Fundamental Value Path and Catalyst Path (12-months):

In the upcoming 12 months, we anticipate a series of both hard and soft catalysts from the company and industry that will bring about a structural re-rating of its equity by market participants. Now that the company is fully funded to execute its business plan for the next year, the market will shift its focus to these events, considering the previous "overhang" to have passed.

Before delving into the specific events, fundamental shifts, and re-rating factors, it might be helpful to first understand how we perceive the trading patterns of development-stage mining stocks. There are a few key drivers that influence our analysis of catalysts and how the market will come to recognize the value of this particular company.

Valuation methodologies – background reading: 

The guiding principle in mining has been, and will continue to be, the assessment of risk-adjusted present value of future cash flows. The most effective valuation approach is a Net Asset Value (NAV) model that incorporates a risk multiple (P/NAV). In simple terms, the pricing of development stocks will adjust when there are changes in hypothetical cash flows, typically due to factors such as resource size or improvements in mining/process methods. Similarly, adjustments may occur when there are impacts on the time value or probability, often this is related to permitting or mine planning considerations. The different core forms of valuation are outlined below.

• Book (replacement cost):

  • The Price-to-Book (P/Book) ratio is typically used as an approximation of replacement cost. As expected, this generally sets the lower end of the value spectrum, as it is commonly utilized when it is not possible to assign economic value to the orebody or when there is insufficient deposit continuity to size the resource or employ other valuation methods.

• EV/Resource:

  • The EV/Resource ratio is commonly used as a shorthand for evaluating most development stage assets. Its simplicity makes it easy to calculate and apply, but its underlying rationale is slightly different. This ratio is typically employed for deposits where a resource has been defined, but economic studies such as Preliminary Economic Assessments (PEA), Prefeasibility Studies (PFS), or Feasibility Studies (FS) have not yet been completed and thus an NPV has yet to be defined. The concept behind this approach is that the market will assign an Enterprise Value (EV) per unit of metal as a proxy for the Net Present Value (NPV) of that unit elsewhere. In other words, if Mine A trades at $10 per ounce of gold (auoz), and Mine B is similar in terms of size, grade, and location, one could argue that they have comparable values based on in-situ resources. However, this relationship between the comparable deposits will disconnect when the deposit experiences notable growth, providing additional scale economics, or when there are different engineering outcomes that yield a materially higher NPV per unit between the deposits. 

• P/NAV:

  • The P/NAV ratio is often considered the gold standard and is calculated once a comprehensive mine plan has been developed through a Preliminary Economic Assessment (PEA), Prefeasibility Study (PFS), or Feasibility Study (FS), resulting in a mine's Net Present Value (NPV). This NPV is then adjusted by various factors on the corporate balance sheet to arrive at a net asset value (NAV). Corporations and large, long-term investment funds strive to analyze projects at this level as it encapsulates all aspects of the project into a single metric (NPV).

  • The multiple assigned to the P/NAV ratio tends to vary across the development space, typically ranging from 0.2x to 0.6x on average. The higher end of this range is usually associated with assets that are further along the development curve, such as those that have completed feasibility studies, where permitting can be more easily determined, and the asset is closer to generating cash flow. Additionally, assets with higher profit margins generally trade at higher multiples due to lower risk (lower probability) of the asset being "out of the money" at any point during its future mine life. The same applies to fully funded assets, which command a premium due to the certainty of production outcomes.

Mayfair Gold Path – What do we think the stock will do:

I believe that stocks move (where alpha is generated) when events occur that fundamentally change the perception of value for market participants. To visualize this, imagine a Venn diagram with events on the left and fundamental value on the right. Stocks move when there is an event that structurally alters the perspective on fundamental value and cash flows (in the middle of the Venn diagram). Over the next 12 months, there will be significant fundamental developments related to the asset that will result in a distinctive shift in how investors perceive its potential earnings power and thus value.

Currently, the asset contains approximately 3.5 million ounces of gold (au oz), but there are no public economic studies available that demonstrate the high-margin and front-end loaded cash flows of the operation. Most of the necessary information to make this determination is already present, but it requires extensive technical knowledge to piece it together and form a value-based opinion. Given the size of the entity (C$210mm market cap) the various mining specialist funds that have that ability are not focused on the name, yet. 

With the year-end resource estimate expected to encompass active drilling (estimated between 4-5 million au oz) and the Prefeasibility Study (PFS) scheduled for late Q3, we anticipate a significant re-rating. In simple terms, investors will initially realize, based on the June resource estimate, that this is a large-scale deposit. As additional drilling data becomes available, the market will start to comprehend the growth potential of this asset. By the end of the year, we believe it has the potential to reach 5 million au oz or more. As the asset grows in size, investors will recognize the associated operating leverage and economies of scale. Moreover, with increased scale, mine planning can be conducted to accelerate production (particularly high-grade material) and enhance the Net Present Value (NPV). As a rule of thumb, around 60% of costs at the mine level are fixed, and as production scales, more costs can be spread across a greater number of units. With each increment in drilling, the market will begin to factor in a larger resource. Consequently, the EV/Resource multiple should expand, as each delineated ounce becomes increasingly valuable from a contribution margin perspective.

All of these developments will culminate in the release of the Prefeasibility Study (PFS) in late Q3 and an subsequent update in Q1'2024. During this stage, the company will present its initial asset-level Net Present Value (NPV), considering factors such as the high-grade starter pit, favorable off-take terms, larger resource, and mining-and-processing methodology. The outcome is expected to be a high-margin, low capital expenditure project with an attractive NPV and internal rate of return (IRR). At this point, investors will have the opportunity to value the asset based on a P/NAV ratio, which will emphasize the significant undervaluation of the stock when considering the high NPV per ounce and comparing it to similar deposits in terms of cost, capital intensity, and other relevant benchmarks.

To visually illustrate this point, I have provided a chart below that depicts a group of gold developers. The blue bar chart represents the P/NAV multiples of various assets, including Mayfair based on our calculations. Upon comparing Mayfair to the group, it is currently trading in line with the EV/Resource peer average ($41/oz). However, our analysis indicates that Mayfair's P/NAV ratio is only around 0.13x, representing a significant discount compared to its peers, particularly those with higher NPV per ounce ratios. If our assessment is correct, it suggests considerable upside potential through a re-rating from the EV/Resource to P/NAV multiple. In this example, it implies that the base resource alone has the potential for a 277% upside compared to the peer NAV multiple of 0.36x, and a 385% upside compared to peers with higher NPV per ounce ratios of 0.5x.

Catalyst

Key upcoming catalysts: 

• Soft catalysts 

  • Research coverage

    • Various initiations with target prices tied to NAV estimates

    • Includes bigger Canadian bulge brackets as company reaches scale (>300mm MCAP)

    • Update notes and increased target prices from existing boutique coverage 

  • TSX uplisting (feasible given >C$2/sh)

    • Currently trades on the TSX Venture. With uplisting, the stock is eligible for:

      • ETF inclusion (GDXJ and various long-only benchmarks)

      • Lowered cost of capital; regulatory entities will allow banks to provide better lending terms and margin rates

      • Institutional interest (>C$200mm MCAP) with enhanced ADTV 

  • Additional insider purchases 

    • Both Management and Muddy Waters

  • Muddy Waters research

    • Historically they have published research reports which drives notable awareness

• Hard catalysts

  • Drilling results (ongoing)

  • New resource (CQ4’2023)

  • Pre-Feasibility Study (August or September) and update in CQ1’2024

  • Acquisition target 

    • Majority of development-stage assets transact at the PFS stage