June 15,2021

Transition to Production

A look at large junior gold companies, both those recently at production and with new TSX-listing...

...and those still in mid to late development or exploration stages and listed on the TSXV

Which TSXV gold junior hits production next?

In this report we look at the larger junior gold explorers that are currently listed on the TSXV, as well as those that have made the shift both to production and a TSX listing in 2020, with the group overall outlining the path from the middle stages of exploration through to commercial output. The group shows the market can attribute as much or more value to juniors still in the drilling phase, if they indicate high grades, than some developers and producers, all else equal.

Victoria and K92 made shift to TSX listings in 2020 and are in production

Pure Gold at tipping point, with first gold pour at end 2020 and production targeted by 2021

Victoria, K92 shift in 2020, Pure Gold in transition

Both Victoria Gold and K92, which began commercial mining in 2020 and 2018, rspectively, shifted to the TSX in 2020 but have seen lower price gains compared to some of the developers and explorers, as much of their potential is already 'locked in'. While Pure Gold is at the tipping point of commercial production, targeted for 2021, after its first gold pour at end-2020, its share price has underperformed the group as the market awaits some further de-risking.

Artemis has reached a PFS for huge potential deposit, but at a low grade

Great Bear, Rupert and New Found Gold are reporting strong drill results but yet to release resource estimate

Great Bear, Rupert, Artemis, New Found on deck

Artemis, at the PFS stage, has a huge potential deposit but at a low grade and has seen a strong performance. However, it has been outpaced by the surge in New Found Gold and Rupert Resources, which have not even released mineral resource estimates, but continue to deliver outstanding drill results over the past year. Great Bear has underperformed these three other early-stage firms, as the market awaits the release of an initial resource estimate expected this year.

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Who's next for the transition to production and TSX?

The shift from junior explorer to junior producer and from the TSXV to the TSX In this report we look at developments among gold companies that have relatively recently transitioned to commercial production and from the TSXV to the TSX, and also the larger TSXV-listed junior gold developers and explorers who might be next to make such a move. Junior producers K92 Mining and Victoria Gold, which are both in full commercial production (K92 started in 2018 and Victoria only in 2020) have most recently both made the shift to the TSX in 2020 (Figure 1).

Two companies have begun mine development, but are not at full commercial production yet. Pure Gold is right on the verge of the transition to production, having reached first gold pour as of end-2020, and targets production by 2021. Artemis is at the PFS stage for its Blackwater project and has recently secured a debt facility to begin mine construction, which is planned for Q2/22. The remaining three are still pure explorers without even an initial mineral resource yet, but with a strong series of drill results having been released over the past year, including Rupert Resources and Great Bear Resources which have been listed on the TSXV for some time, and New Found Gold, which was only listed in August 2020.

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New Found Gold, Rupert Resources and Artemis leading gains since 2020

While all these stocks have had reasonable gains since 2020 on the rising gold price, there are significant relative differences. The biggest outperformer by far has been New Found Gold, shooting up 782% since its August 2020 listing on a series of strong drilling results at its Queensway project in Newfoundland (Figures 2, 3). The province is recently becoming a hotbed of gold exploration, although historically it has been more focused on iron ore, nickel and copper. While the consensus target price points to some downside after the huge run, using a grams-thickness measure of the drill results versus its market valuation places it around the middle of its peers.

The second-best performer, Rupert Resources, has a similar story of very strong drill results from its Ikkari target at the Pahtavaara project in Finland, which has driven its price up 668% since 2020. The next strongest performer is Artemis, up 413%, which has a huge project, Blackwater in British Columbia, which is at an advanced stage of development, with a PFS, both debt and equity financing for mine construction secured this year, permitting ongoing, including a recent impact benefits agreement with local communities, and mine construction is expected to begin by Q2/22.

Relatively light gains for K92 and Victoria after the hype-to-reality shift

The two stocks in the group that are fully de-risked and have entered production, while still strong in absolute terms, have had relatively low share price gains since 2020, with K92 Mining up 194% and Victoria Gold up 125%. This is for two reasons, one is that these earlier stage companies are passing through a hype and hope period common to explorers with strong drilling results. The second is because of a base effect where the earlier stage companies are much smaller in size and therefore can see much larger potential percentage gains.

There is great hope and hype when companies like New Found Gold and Rupert Resources start producing outstanding drill results consistently over a several month period. There is the possibility at this point that the company could become 'the next big thing', and a lot of froth can start to get priced into share prices because of this. However, as development goes on, mineral resources estimates are released, which tend to 'anchor-in' the market's valuations of the company, at which point the blue-sky potential period has ended. As preliminary economic assessments, pre-feasibility studies and feasibility studies are later released, increasing clarity on the economics of the projects eliminates most of the hope-based element from the share prices.

This is what is often occurring when junior producers, which are far safer given their production and cash flow, trade well below junior explorers that are entirely risky, assuming a similar size and grade of project. The question of 'who knows how big this project really could be?' for the junior producers has already been resoundingly answered, and share price gains become more about measurable operational progress or a moderate expansion of the deposit.

The other issue limiting the percentage gains for the two producers is that they started from much higher market caps given their advanced stages, being mostly de-risked, with K92 Mining starting 2020 at $614mn, and Victoria at $373mn. However, Rupert's market cap was at just $83mn at the start of 2020 and Artemis at just $63mn, while New Found Gold was not even listed yet (Figure 3).

The 'special cases' of Pure Gold and Great Bear Resources

Pure Gold, while still strong in absolute terms, has had the third weakest performance of the group, up 93%, as the effect noted above can particularly kick in as the company makes the transition to producer. At this point the hype from great drilling results is subsiding, but high risk remains as the shift to production can take years. The market can be quite skeptical at these times, as the management team great at exploration is not always the best suited to take a mine into production, and financing and permitting need to be successfully completed. A junior miner can thus see pressure at this turning point, before it is clear that the transition will be smooth. This probably explains much of Pure Gold's weakness since H2/20, but with it on the verge of production, there is potential for a pickup later this year.

Great Bear, up a relatively muted 90% since 2020, is also an interesting case; it is similar to New Found Gold and Rupert Resources in that it continues to have a series of strong drill results, but different in that its best results may already be past, but it has yet to release its initial mineral resource estimate. This suggests that if the kind of hype and hope boost from drill results like those at New Found Gold and Rupert Resources goes on too long without advancing to the next phase, this premium can contract, as the market eventually starts to want clearer progress. As Great Bear continues to hold off an initial mineral resource estimate, which is their next critical stage, one of H1/20's big stories has underperformed versus the new drilling stars.

For the rest of the report we look more specifically into the detail for each of these companies, starting with the two junior producers K92 and Victoria, moving to the two developers, Artemis and Pure Gold and finally the pure explorers, Rupert, New Found and Great Bear.

Victoria and K92 make the move to TSX in 2020

K92 sees relatively weak Q1/21 but major pickup expected for rest of 2021 K92 mining has been generating 22.2k oz Au per quarter on average since 2019, and saw a decline in production in its most recent quarter both year on year and quarter on quarter to 18.7k oz Au (Figure 4). This was from issues with an underground loader which interrupted production for three weeks and a shortage of bulk emulsion explosives as the global health crisis interrupted global supply chains. However, this production has been deferred to Q2/21, which is expected to offset the Q1/21 decline. The company is guiding for 115k-135k oz AuEq of production for 2021, pointing to a pickup back to levels of 30k oz Au or more per quarter for the rest of the year. The company also began a Definitive Feasibility Study for its Stage 3 Expansion of the Kora Deposit at Kainantu, expected to be issued by H2/21, that outlines a jump in the LOM average output to 258k oz AuEq.

Victoria and K92 make the move to TSX in 2020

EBITDA was low in Q1/21 at $8mn (Figure 5), on the fall in production but also from a rise in sustaining capital expenditure, which increased AISC to its highest in the past two years (Figure 6), but EBITDA should pick up along with the expected rise in production over the next few quarters. K92's EV/EBITDA valuation stands out from a group of peers on the TSX with similar levels of market cap. First, it has shot up to an annualized 'artificial' high of 46.7x in Q1/21 (Figure 7), but we expect this to decline in Q2/21 as EBITDA picks back up. However, even after factoring this in, its forward EV/EBITDA is still considerably above the group at 12.6x. This is likely because the market is already starting to give weight to some of the upside from the Stage 3 Expansion of Kora. The company is targeting 8% upside for K92 Mining to its target price, the third lowest expected gain of the group.

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Victoria Gold sees seasonally low Q1/21, but major pickup year on year

Victoria Gold's production declined quarter on quarter to 26.8k oz Au, as Q1/21 is seasonally low given that first quarter is the depth of winter at its Eagle mine in the cold Yukon climate, which limits operations. However, production more than doubled year on year from Q1/20 when 10.5k oz Au were produced, as the company was still ramping up to commercial production, which started in July 2020, at this time last year. Production should also gain significantly over the rest of the year, with the company guiding for 180k-200k oz Au for 2021.

While revenue at $63mn and EBITDA at $57mn were down quarter on quarter (these figures are so close because of a large capitalized sustaining capital expenditure), this was up from no revenue and a -$47mn net loss in Q1/20. The company's AISC looks very high versus K92 Mining, averaging $1,740/oz Au over the past three quarters, but this is because these are very early periods of commercial production, which will tend to have higher costs. The AISC should come down considerably in the coming quarter, with the company guiding for a $1,050-$1,175/oz AISC, and even further longer-term given the Eagle Mine technical report estimating an AISC of just $929/oz (US$774/oz) and cash cost of $692/oz (US$577/oz) over the mine's life.

Victoria Gold has traded an average EV/EBITDA of 4.9x for the past three quarters, and at a forward 2021 EV/EBITDA of 6.8x, towards the top of the group, as the market sees good prospects for 2021. However, it trades at a considerable discount to K92, as even though it is starting a major exploration program new Raven target at Dublin Gulch, it is only in the very initial drilling phases, compared to K92's Kora Stage 3 expansion, which is near a Definitive Feasibility Study with a major Resource expansion expected. With the market expecting just 2% upside for Victoria to its target price, and 8% for K92, this suggests that market consensus is viewing both these junior producers as quite fully valued currently.

Victoria Gold sees seasonally low Q1/21, but major pickup year on year

Pure Gold and Artemis at advanced stages

Pure Gold expecting commercial production by mid-year 2021 Of all these companies, Pure Gold is the only one right on the verge of the transition to junior producer, with first gold pour having been reached at the end of December 2020 and the ramp of the mine occurring since, with commercial production targeted by mid-year 2021. The company recently completed an oversubscribed financing of $17.3mn and in past few weeks has reported that the milling facility was completed in Q1/21 and the focus over Q2/21 has shifted to ramping up high-grade ore production from the mine. The company reported that head grades had significantly increased this quarter compared to Q1/21, with 6.3 g/t Au achieved from April 20 to May 10, 2021. Metallurgical recoveries have been between 95%-99% with the company expecting ore production rates to continue towards 800 tpd with the goal to sustain this rate by mid-2021.

From July 2020 to December 2020, Pure Gold's share price was relatively flat, averaging $2.30/share. It then declined along with the gold price through to a trough in early May 2020 of $1.22/share, but has picked since up as gold recovered. Similar to Victoria and K92, Pure Gold's project value is quite clearly outlined, with 2.6 mn oz in Resources, the smallest of this group (Figure 9). The share price will likely mainly be driven by moves in the gold price for now, with a boost possible on the start of commercial production. Pure Gold currently trades at an EV/Resources of $213/oz Au, putting it between the two junior producers K92, trading at $350/oz, and Victoria Gold, at just $174/oz. The move to production could boost the EV/Resource valuation and make it a candidate for a TSXV to TSX transition, and the market does appear to expect material progress this year for the company with 32% upside to its target price.

Pure Gold and Artemis at advanced stages

Artemis advancing the very large, but lower grade, Blackwater project

Artemis listed on the TSXV only relatively recently, in late 2019, with its share price only really taking off in June 2020 after its acquisition of the Blackwater project. This project is very large compared to the group, with 11.32mn in Resources, more than twice the size of K92 Mining's Kainantu and over four times the size of Pure Gold (Figure 8). However, the grade of the project is quite low, at 0.75 g/t in its PreFeasibility Study, compared to the very high 9.0 g/t grade outlined in Pure Gold's Feasibility Study (Figure 9). This likely explains much of the lower EV/Resource being paid by the market for Artemis, at just $91/oz Au, or about 42.7% of that being paid for Pure Gold, 52.2% of Victoria and 25.7% of K92. In addition to the lower grade, Blackwater likely also faces a discount given that it is at an earlier phase than the junior producers, and its EV/Resource could pick up on upbeat permitting news, and if it reaches its Q2/22 target for beginning of mine construction.

Artemis' Blackwater also has large capital costs

Another issue is Blackwater's very large capital costs, with $592mn in initial costs, five times Pure Gold's $95mn, and expansion costs of $1,526mn, compared to just $232mn for Pure Gold. This leaves providers of capital open to considerable risk in the event of a major gold price decline, especially given the long 23-year mine life, which could see a range of economic outcomes. That said, with the outlook for the gold price looking strong in our view, the company successfully secured a $360mn Project Loan Facility in April 2020 and a $171mn private placement was completed in May 2021. This increased its cash balance to $204mn, covering most of the initial capital cost for Blackwater. The current market cap of Artemis is just 53.5% of the the $US2,247mn NPV of the project, at a $US1,541/oz gold price, and the market is currently targeting 76% upside to the consensus target price, the highest of the group.

Artemis' Blackwater also has large capital costs

Great, Rupert and New Found still drilling

Three companies in the drilling phase with strong results Three companies are still in the drilling phase, with a series of strong results over the past year, Great Bear, Rupert Resources and New Found Gold, but no initial mineral resource estimate, or 'anchoring,' yet for the valuation. While production, PEA/PFS/PS or Resources data for the four stocks above make it easier to consider relative valuations, it is less clear for companies still at the drilling phase. However, one (admittedly crude) method can be used to compare drilling results across companies. This takes the grams per tonne multiplied by the metres of a drilling result, for a 'grams-thickness' measure that could be compared to the EV across companies. We show these measures across the companies in Figure 10, and below show the individual drilling results that comprise these averages by company.

Interestingly, this measure does show a relatively tight range of valuations, from 2.03x for Pure Gold (although Pure gold is based on a much lower number of results, given limited recent drilling results as it focuses on moving into production) to 3.54x for Great Bear. It also shows that while New Found Gold has had a huge run up, this can be justified to some degree by its strong drilling results, with the EV/grams-thickness at 2.67x not particularly expensive versus the group, with Rupert at 2.80x.

Great, Rupert and New Found still drilling

How long can the drilling results hype support strong share prices?

This brings us to the question of how long can just strong drilling results, without a subsequent initial mineral resource estimate being released, continue to keep share prices of these explorers elevated? We could consider a fictional gold explorer where the drilling continues indefinitely; eventually it would become clear what the maximum grade could possibly be from that deposit, and share price gains would stop. However, there can be a long period where investors price in the very best recent results as if they will become the average, resulting in unsustainable share price gains.

We have a strong comparison test case for this kind of period where the market gets particularly excited about some strong drilling results in the recent share price performances of Great Bear Resources, Rupert Resources and New Found Gold. Great Bear Resources was the first to 'pop', with strong drilling results coming out from 2019, and the share price going for quite a run, but eventually losing steam in the second half of 2020. Rupert was next, with the discovery of its Ikkari target in May 2020, shooting up until October 2020 when gains started ebb.

New Found Gold's leap is the most recent, starting from its August 2020 listing, and clearly is still in its 'golden phase', with results continuing to improve by the month. However, the only analyst covering the stock is a bit dubious of these gains, with a target price pointing to -66% downside from the current price. The analyst's target was also maintained in April 2021, even after some quite impressive drilling results from New Found Gold. We cannot say which direction the stock is likely to go in long-term, but short to medium-term, the market 'consensus' target (admittedly not much of a consensus, with just one analyst) suggests that the surge has been a bit overdone.

Rupert Resources Ikkari target drilling driving its share price

Rupert had been exploring the Pahtaavara project in Finland since 2016, but the share price did not see major gains until the discovery of the Ikkari target in June 2020, which produced results with extensive widths, averaging 84m, and moderate grades, for a high average gram-thickness of 311 (Figure 11). Results were especially strong in September 2020 and November 2020, had a lull in December-early January 2021, and rose from late January, including the highest gram-thickness to date of 827 in April 2021. While the company closed $48.65mn equity financing in June, and continues to drill, the markets expect just 22% upside to its target, hinting that Rupert may need to move to more advanced stage to attain more of a premium.

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Great Bear Resources on the verge of mineral resource estimate

Great Bear has had strong drill results from its Dixie project in Red Lake Ontario going back to 2019, with a decent balance between a high average grade of 23 g/t and width of 14 m for a 241 average gram-thickness (Figure 12). The company has held back on releasing an initial mineral resource estimate to ensure that it is as high as possible (with such an estimate becoming an 'anchor' for a junior gold miner's valuation as outlined above). While peak results seem to have been reached around mid-2020 and trended down since, current drilling shows increased continuity, and on balance the market is expecting 56% upside to the target price, which probably implies that it expects an initial resource estimate to be released reasonably soon.

Great Bear Resources on the verge of mineral resource estimate

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New Found Gold soaring on results from Queensway

The grams-thickness for New Found Gold clearly shows why its share price has been soaring, with high grades and widths, and the strongest results so far being reported just over the past two months. The 1,881 grams thickness of April 21, 2021 and the 2,202 grams thickness of May 2, 2021, are more than double of the best results of the already very strong Rupert and Great Bear (Figure 13). However, as outlined above, the one analyst covering the stock seems to think New Found Gold's share price has gotten a bit ahead of itself, with -66% downside to its target price, the only stock in the group with an expected decline for 2021.

New Found Gold soaring on results from Queensway

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K92 Mining, Pure Gold and Victoria Gold drilling results

With K92 Mining already three years into production and Victoria Gold nearing a year of commercial production they have done limited exploration at their projects over the past year. However, with Victoria starting a major exploration campaign at a new target, Raven, we can expect a series of drill results this year, but may see limited new results from K92 as it is focuses on an FS for the Kora Stage 3 expansion. Pure Gold has also seen limited exploration results in 2020, having shifted its focus more to mine development, although it had one stand out result in October 2020, and we expect exploration results could be limited again in 2021.

K92 Mining, Pure Gold and Victoria Gold drilling results

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Disclaimer: This report is for informational use only and should not be used an alternative to the financial and legal advice of a qualified professional in business planning and investment. We do not represent that forecasts in this report will lead to a specific outcome or result, and are not liable in the event of any business action taken in whole or in part as a result of the contents of this report.