November 18, 2021
Gold was flat this week at US$1,863/oz, maintaining the new range it entered last week in a significant ramp up, as concerns over persistently high inflation boosted gold and offset fears that a Fed taper would pressure it to the downside.
This week Great Bear Resources is In Focus, with its share price picking up in recent weeks on strong drilling results and gold recovery tests, and we back out what the market is baking in for its initial mineral resource, which is expected for early 2022.
The producing and junior miners declined moderately as the gold price held firm, with the GDX down -1.3% and GDXJ down -1.9%, while the Canadian junior miners were mixed as gold consolidated at its new level after the jump last week.
Gold was flat this week at US$1,863/oz, maintaining a new range entered after the
significant rise last week, with the market's concerns over inflation offsetting fears of
a Fed taper putting downward pressure on gold. We believe that inflation will continue
to surprise to the upside, and that while rising prices have been exacerbated by
supply chain problems, the real root of the issue is the massive monetary expansion
over the past year. We expect that this wave of liquidity will wash over markets well
into 2022, overwhelming any attempts by the Fed to stem the tide with its taper,
especially with no rate hikes expected until 2023. This could lead investors looking
for a safe haven to protect against the devaluation of fiat currency to move more into
gold and continue to drive up the price well into next year.
US macroeconomic data continues to send mixed signals. To the downside was US consumer confidence, which came out at nine-year lows of 72.8 in September 2021, down from a post-crisis peak at 85.5 in June 2021 (Figure 4). This seems to conflict with the ongoing 'great resignation' with many workers leaving jobs voluntarily for better options. However, this could indicate a split in the market, between workers unemployed because of the crisis in many sectors driving down the consumer confidence, but some sectors, especially those where remote work has been possible, still seeing high employment demand.
US retail sales are another indicator that contrasts with weak consumer confidence, growing an extremely strong 14.5% yoy in October 2021, which, while down from the peak at 48.0% in April 2021, is far above the average since 2005 of 3.9%. While some of this will be from inflation it is also being propelled by strong underlying real growth. This could be driven by a low base, with the world much more open than a year ago, and many consumers likely looking to go out and enjoy the holidays and spending more. However, it remains to be seen if strong growth will continue into 2021.
The producing gold miners were mostly down with gold flat (Figure 5). Newmont reported that it would redeem $492.1mn in principal of its March 2022 3.5% Senior Notes on December 15, 2021, and Agnico-Eagle and Kirkland Lake reported that both Institutional Shareholder Services and Glass, Lewis & Co, two leading independent proxy advisory firms, recommended that the two firms vote in favour of all matters related to their proposed merger. Pretium reported its Q3/21 results, and Alamos reported drill results from the Island Gold Mine (Figure 7).
The Canadian juniors were mixed this week as gold maintained its level (Figure 6). For the Canadian juniors operating mainly domestically, Pure Gold reported Q3/21 results, with production of 9,620 oz Au, up 54% over Q2/21, and New Found Gold reported that its non-brokered private placement to Eric Sprott would qualify as flowthrough shares, and that it had entered three royalty purchase agreements for $3.9 mn cash and 458.8 mn shares (Figure 8). For the Canadian juniors operating mainly internationally, there was no major news flow for the week.
Great Bear Resources' share price has picked up considerably over the past month,
a combination of strong drill results and gold recovery test results in October 2021,
catalyzed by the strong rise in the gold price over the past two weeks. The most
recent drill results released on October 4, 2021 from it Dixie Project were its strongest
since the first quarter of 2021, based on the g/t times the width in metres, coming in
at 188, the highest since 452 in March 2021 (Figure 10).
The October drill result highlight had a grade of 157 g/t, which was strong compared to the company's reported assays over the past two years, although it had a relatively small width of 1.2 m. This left it below the company's most outstanding finds so far in terms of grams x width, with 897 in April 2020 and 853 in August 2020. The stock was further propelled by news on October 25, 2021, that gold recoveries were very strong even from what the company viewed as the most difficult domains to extract gold from at the LP Fault, the main zone of the Dixie project, as well as the Dixie Limb and Hinge Zones. This has indicated to the company that processing material through the same extraction circuits from all three of these zones could be possible.
The company has now completed 300k m of drilling at Dixie, comprising a first phase of 440 holes along the LP Fault completed in July 2021, to support a mineral resource estimate along 4 km of strike length to a depth of 450 m. The second phase expansion drilling targets significant expansion of the confirmed mineralization at the LP Fault by late 2022, and is fully funded, with the company holding cash of $77.3mn as of Q3/21.
While releases of drill results from Phase 2 may continue to drive the stock price
through the end of the year, with the winter season starting, exploration activity will
be slowing down, which can lead to a seasonal lull for the prices of junior miners in
more northern regions. Beyond the drilling results, the big catalyst for Great Bear will
be the release of an initial resource estimate expected in early 2022.
Great Bear has held off on releasing an initial resource estimate, given its continued strong drilling results, as such an estimate can become a limitation for a junior miner if released too early, and it tends to become an 'anchor' for the company's valuation. Also, junior miners can have issues releasing an initial resource estimate when its share price is in a particularly frothy period following a series of strong drill results, with a resource estimate that is not inline with the market's exuberance potentially driving a significant decline in the junior miners' share price
We saw a recent example of this with Rupert Resources, which had been enjoying a
major run in its share price, rising eight-fold from May 2020 to a peak in August 2021
on drill results from its Pahtavaara project in Finland, even under the pressure of a
falling gold price for the latter half of this period. However, the share price declined
by 21.0% in the eight trading days following the release of its initial mineral resource
estimate in early September, which the market apparently viewed as underwhelming
especially in light of the previous excitement over the series of strong drill results.
However, in contrast to Rupert, which had seen a quite extreme ongoing ramp up in its share price, with only a brief pause between January and March 2021, Great Bear has already passed through a long period of consolidation, trending down from July 2020 to September 2021. This likely has had the effect of driving out much of the speculative froth, meaning that the company could release its mineral resource estimate next year with a stock less backed by overexuberant short-term buyers, reducing the risk of a major downward shock. While Great Bear has picked up over the past month to all-time highs, the move has been rooted in company fundamentals, catalyzed by the jump in the gold price.
This leads us the consider the potential level of mineral resource that the market is
currently baking into the share price of Great Bear, which in turn implies the resource
that would need to be shown not to disappoint the market. To back out the implied
resource, we take the average Enterprise Value (EV)/Resource (with EV comprising
the market cap and net debt of the company, or the cost to purchase the entire firm)
of the larger listed TSXV gold juniors which have already released a mineral estimate,
shown in Figure 12.
The group has an average EV/Resource of $CAD103.1/oz, with the average of the four at the lower end of the group (excluding exceptionally low Lumina and Chesapeake) at CAD$82.3/oz, and the four at the higher-end, CAD$191.8/oz. We then divide Great Bear's current EV by each of these three, for an implied mineral resource of 13.9mn oz Au, 11.1mn oz Au and 6.0mn oz Au, using the low, average and high estimates of EV/Resource (Figure 13). Which one might be most appropriate of the three? Looking at the price to book valuation for the top fifteen TSXV gold juniors by market cap, we can see that the market is definitely affording a premium valuation to Great Bear, at 10.2x, the second highest of the group (Figure 14).
We could therefore reasonably assume that the EV/Resource estimate afforded to Great Bear by the market is similarly towards the top end of the group. We therefore use the higher EV/Resource average, which implies the market is currently looking for around a 6.0mn oz Au resource. This suggests that anything significantly above this would be viewed favorably by the market, and of course an estimate substantially below this level would likely be viewed as a disappointing.
The jump in Great Bear's price over the past two months has brought it close to the market consensus target price, with a moderate 26% upside, compared to most of the rest of the group, with over 100% upside, and several with over 200% upside (Figure 15). However, while this latter group, which includes Chesapeake and Lumina, have large resource estimates and therefore high theoretical value, there are huge hurdles in extracting them at a reasonable cost. In comparison, Great Bear appears to have better near-term potential, given its high grade and potentially low cost, to successfully move into production or be acquired. It has thus has seen its share price converge closer towards its theoretical value than many of the comparables, which struggle with potentially high cost, or are lacking short to medium-term catalysts.
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.