Description

Investment Summary

A gold exploration and development company with property (Atlanta Gold & Silver Project) located in mining friendly jurisdiction of Nevada, U.S. Nevada is prolific in gold and offers excellent infrastructure and facilities for mining companies. The property has established significant NI-compliant gold and silver resources and is gearing up for further exploration aimed at delineating the existing resource and expanding it. The property has a long history of production and thus has necessary infrastructure in place. It has excellent upside potential and the royalty rate is low. The company raised over $1 million in May 2013 for the next phase of exploration at a time when it is very difficult for junior miners to raise funds. This is a macro speculative play for those who think that gold prices have bottomed out and junior gold companies are at the lowest end of their valuation cycle with more upside than downside risk from here on.  For those who hold this above mentioned macro view about gold prices and juniors, finding quality juniors in attractive jurisdiction is a good investment thesis to look at this time.  While no one knows when this cycle will turn and it is always hard to predict the bottom, times like these are more closer to the bottom in our view and MAY is likely to be a survivor given the quality of project, management and jurisdiction and if it can continue its exploration success a potential acquisition target.   

Company

Meadow Bay Gold Corp. (TSX: MAY) (OTCQX: MAYGF) is a gold exploration and development company focused on Atlanta Gold Mine Project, located in Lincoln County, Nevada. The Atlanta project has established significant NI-compliant resources and has a long history of production. The company completed a drill program in 2011, discovered Porphyry-hosted Gold deposit and reported NI-compliant resources estimate in January 2013.

Competitive Advantage of Meadow

• NI 43-101 compliant mineral resource and significant upside potential:The Company has 572,100 ounces of measured & indicated and 544,300 ounces of inferred resources of gold in its Atlanta property. Apart from gold, the property also hosts significant silver resources and has an excellent upside potential. The company has already identified several untested exploration targets for its next phase of drilling campaign. At a 0.015 opt Au cutoff, the Company has reported a measured and indicated resource of 15.5 million tons grading 0.037 ounces per ton (Au) for 572,100 ounces of gold and inferred resources of 18.5 million tons grading 0.029 ounces per ton (Au) for 544,300 ounces of gold. In addition, the resource also contains 5.8 million measured and indicated and 3.9 million inferred ounces of silver.  Most of the resource is ~ 200m from surface which is attractive.    
  • Favorable jurisdiction: Nevada is an excellent location for mining activities. It is prolific in gold resources and offers excellent infrastructure for the mining companies. In 2011, 6.1M ounces of gold were produced which accounted for 80% of U.S. production. Between 1835 and 2008, 152M oz of gold was mined in Nevada. The state has 22 major processing facilities and over $6 billion is invested in the infrastructure. Besides, social license for mining is easy to obtain.
  • Past Producing mine with existing infrastructure: Previously, several companies such as Standard Slag/Bobcat JVGold Fields Resources, Kinross Gold have owned the Atlanta mine. Around 110,000 oz gold, 800,000 oz silver has been produced from the mine in the past. Consequently, the property has an excellent infrastructure which includes 3-phase electricity to the mine, roads and water supply.
  • Experienced management team: Meadow has a technically accomplished management team with decades of experience in mineral property exploration and development, mineral processing, geology, financial and resource industry. At the helm is Robert Dinning – CEO, President & Chairman, with over 40 years of experience in financial and resource industry. He is also President and CEO of Simba Energy Inc, an Oil and Gas exploration company listed on the TSX Venture, and is Chairman of Paramount Gold and Silver Corp, an AMEX and TSX listed exploration company. He also holds the post of director in three other publicly traded companies.
  • Nominal royalty burden: The company is liable to pay only 3% NSR royalty which is capped at 4,000 ounces gold.
  • Financing: The company raised a total gross proceed of $1,041,095 in two tranches of non-brokered private placement closed on April 29, 2013 and May 31, 2013. The financing will be used for exploration works at Atlanta Gold Mine project.
  • Valuation: Given that this is a junior exploration company with no revenues, a resource valuation based on insitu valuation method is a better approach in our view.  A rough back of envelope calculation using 5% of resource (measured+indicated+inferred) at $1000 per ounce gold price will give this a $1 per share value. 

The Next Step

Going forward, the company’s next steps are:

• To complete plan of operation from BLM for second-phase drilling and to start some baseline studies for long lead-time permits
• To incorporate all existing databases into a 3D database
• To continue step-out and in-fill drilling along the Atlanta Fault and Atlanta Porphyry and begin drilling to further explore the property
• To start scoping study for mine planning and estimate capital and operating costs

Gold Outlook

I believe sophisticated investors know all the reasons for bullishness and bearishness as it is tirelessly debated. So not repeating it here.   This idea is for those who view gold favourably and believe at this point in valuation cycle juniors represents good risk-reward tradeoff. ie., upside leverage is higher in juniors than producers for any turn in valuation cycle.  

Capital Structure and Shareholding

As of March 31, 2013, MAY had approximately 47.7 million ordinary shares outstanding. The company also had 4.3 million options outstanding at an average exercise price of approximately $0.46 and approximately 3.6 million warrants at an average price of $0.55. After the financing it should have ~52 milllion shares.  

As per Bloomberg, some of the insiders that own company’s shares are: Dinning Robert G (1.22%), Reed Charles Willia (0.26%) and Margetson Keith R (0.21%); Badgley Phelps & Bell Inc., an Institutional investor, own 0.04%.

Cash & Cash equivalent

The company has over $0.3 million in cash and cash-equivalents as of March 31, 2013. The company raised $1Million at $0.20 cents in May 2013. 

Why the recent decline in share price?

The major reason for the recent decline in share price is the fall in the gold price as can be seen in Chart 1. Between June 03, 2013 and August 13, 2013, the share price fell from $0.325 to $0.18. Gold price fell from $1,400 level to $1300 level between June and July. Since then price has climbed to $0.23 cents on Aug 16, 2013.

Risks

Like most of the junior mining companies the company is exposed to commodity price, environmental, capital raising, regulatory and personnel risks. But the biggest risk for MAY is that the company does not have any proven-probable reserves. Though the company has established significant amount of resources, there is no guarantee that it will establish reserves in future.

Catalyst