November 11, 2015 - 5:50pm EST by
2015 2016
Price: 5.95 EPS 0 0
Shares Out. (in M): 82 P/E 0 0
Market Cap (in $M): 489 P/FCF 0 0
Net Debt (in $M): 120 EBIT 0 0
TEV (in $M): 609 TEV/EBIT 0 0

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I will forgo the pitch for gold as I have nothing to bring to the debate that hasn’t been discussed on VIC ad nauseam.  In brief, I agree with Paul Singer and other prominent investors that gold has a role to play in the portfolio of an investor concerned with ballooning central bank balance sheets and the stability of fiat currencies.  In addition to owning some physical gold, I have been once again trolling in the murky waters of gold mining equities.   This had been fertile ground for short ideas, including my former favorite scam Tanzanian Royalty Exploration, but with this and other promotion driven peers trading sub $1, my focus has been finding attractive longs.  One of my favorites is TMAC Resources (TSX: TMR), which is developing the Hope Bay gold project in the Nunavut Territory, Canada.

History: The Hope Bay project was previously owned by Newmont Mining, which placed the project on care and maintenance in early 2012 due largely to now-resolved issues with obtaining long-term land tenure agreements with local Inuit communities.  Newmont had acquired the project through its $1.5 billion acquisition of Miramar Mining in 2007 and altogether, over $1 billion has been spent on the project between Newmont and its previous owners Miramar and BHP Biliton.  In one of the more impressive examples of taking advantage of the sector downturn, TMAC acquired the project in March 2013 with no cash payment and an initial split of the then private TMAC between Newmont 80% and management 20%.  Currently Newmont owns 29% of the public company and the mining focused PE firm Resource Capital owns 35%, so TMAC’s float is quite small for its size (fully diluted market cap of $490mm).  One reason that Newmont was willing to structure the deal this way was the credibility of the management team, led by Terry MacGibbon, who previously led FNX Mining as it acquired shuttered assets from INCO, moved quickly to production and completed a successful sale to Quadra Mining. Following the IPO in July of this year, which raised $155mm and was done concurrently with arranging a $120mm loan facility, the company is fully financed to production, making it one of only a small number of projects expected to come online in the next two to three years.

Project: Hope Bay has robust economics due to the high-grade (3.5mm ounces at 7.7 g/t) nature of the deposit and the infrastructure and permitting work already completed. The project has an NPV5 of C$626 million and an IRR of 40% at US$1,250 per ounce gold and would produce 160,000 ounces per year over the 20 year mine life, with higher production in the early years and a global resource base of six million ounces. The project already has existing infrastructure including port facilities, a power plant, an existing camp, 3 km of underground development and initial ore stockpiles. It is our belief that Nunavut will represent one of the most significant development destinations in the next cycle. The prevalence of undeveloped, high grade deposits which include Back River, Ulu, Lupin, Three Bluffs and Meliadine in addition to Hope Bay make it a logical choice when capital spending is back on the table. Agnico Eagle Mines is going through the hard work of being the first mover and we expect others will use the infrastructure solutions and permitting legwork being created to move more projects forward as few regions contain this quantity of ounces without significant geopolitical risk. TMAC stands out as there are few mines currently fully funded and being built and even fewer that have the potential to produce more than 160,000 ounces per year with significant resource upside.


Valuation: At the current price of CAD$5.95 per share, I calculate that the stock is fairly valued if using the current  $1100 per ounce  gold price and a 7% discount rate (appropriate for a fully financed and permitted, long-lived project in a geopolitically attractive location).  This assumes no value for ounces to be added through additional exploration.  Using $1500 gold and a 5% discount rate (and again excluding exploration) the NPV per share is CAD$15.  Of course if gold goes lower, or if the cash costs/ore grade/remaining capex outlined in the feasibility study prove optimistic (or generally that MacGibbon and his team aren't as good as advertised) then the stock goes lower.

I do not hold a position with the issuer such as employment, directorship, or consultancy.
I and/or others I advise do not hold a material investment in the issuer's securities.


mid 2016 mill installation

commencement of commercial production expected in early 2017.

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