ASX gold developers – how cheap are they?

Gold Market

Let’s start by talking about the gold price. A lot of the froth and excitement has come out of the gold market since it peaked in around mid September IMO. Talk has died right down and with it has gone the share price of producers and what I am calling developers (exploration companies with existing JORC resources capable of supporting an operation that are embarking down the route of doing studies).

However despite this reduction in sentiment and bullishness the gold price is still $200 higher than it was only 6 months ago and has held up quite well. Given where the $A is currently even a pullback into $1,400 support sees A$ gold sitting at around $2,000

Development Plays

With the backdrop set I am going to look at valuations on some of these development plays. Today I will analyse 4 companies, 2 I own (MZZ and DEG) and one I don’t but am watching (CAI).

Below is a graphic showing valuation metrics for producers currently. This is from SAR’s recent presentation with regards to their super pit acquisition:

You will notice that they have peer valuations currently at A$264 per resource ounce for producers. As such I am going to be using this metric when looking at these developers in an attempt to value them.

MZZ – Matador Mining

I am going to start with Matador Mining.

Based on available data it is looking like MZZ will have approximately 1.2Moz of resources by the end of the current field season. They have a current valuation of approximately A$22.5. This works out to be A$18.75/oz.

I am going to assume that they need to raise about another $5m at 25c to further progress drilling and studies and 16m options will be exercised at 20c next year for a further $3.2m. This should get them through the bulk of the next spending period and will increase the register to approx 136m SOI

Now I am going to value these on an EV first and then work back based on funding assumptions. I am going to assume 30% equity and 70% debt across these projects.

So if we take a valuation of A$264/oz for 1.2Moz that gives a valuation of A$316m. Now I am assuming $150m of capex expenditure required to become a producer. So we will subtract this from the total. That gives A$166m. Now as I said I will assume 30% equity funding which means raising $45m. I am going to estimate this gets done at 40c. for another 112.5m shares.

This takes total SOI to ~250m. So $166m/250m SOI gives us a valuation of 66.4c/share. This is relatively close to a recent valuation run by Cannacord and gives some validation to the methodology.

66c represent ~200% TSR from current prices

DEG – De Grey Mining

DEG are aiming for 2Moz by the end of the current calendar year and 3Moz by the end of next calendar year.

I estimate they should still have about $4-5m in the bank by the end of this year so we will use that and 2Moz as our starting point.

The current bank will go a long way to funding studies but they will need funds for the extra 1Moz and general costs. For this exercise I am going to assume 80% of funds go into the ground. DEG have disclosed that over the last 2 years their cost per resource ounce defined has been $12. This means they need $12m for drilling and at 80% spent in ground this means they need about another $15m to get to their target. I am going to assume they raise $20m over the next 12 months at an average price of 6c. That’s approx 333m shares which will increase SOI to 1.33bn.

Now 3Moz at $264/oz gives a valuation of A$792. I am going to assume $250m capex based on them building a minimum of a 2Mtpa plant and working pre-production across 3 mining centres. This may prove to be a conservative estimate and can be done cheaper but that is ok. So again taking this off the valuation this gives. A$542m.

This means DEG would need to raise $62.5m of equity. I am going to assume this can be done at 10c. and will result in 625m new shares taking the register to c. 2bn SOI (pending any consol).

So we have $542m/2bn = 27c/share or a TSR of 400%.

Obviously being a holder I have some bias but I am bullish DEG as a MT proposition clearly.

CAI – Calidus resources

CAI have done a PFS so this can be a little quicker.

CAI has a resource of 1.25Moz, but I think by the time they reach production this will be a minimum of 1.5Moz.

They have announce capex of $100m. I think this might be on the low-side and am going to estimate $150m

They currently have what I expect to be $5mish in cash at the end of the calendar year.

I assume $10m of extra spending between now and looking for project funding. Assume a raise price of 30c (post consol). This will take SOI to 250m.

Then $37.5m of funding at 40c or 93.75m extra shares for final SOI of ~340m

Now 1.5Moz at $264/oz is a valuation of $396m. Less capex of A$150m is $244m.

$244m/340m SOI = 71.76c/share (or 7.2c current equivalent) for a TSR of approx 250%


Now my thesis might be wrong as the market clearly doesn’t agree with me currently but in my opinion there is money to be made in these gold juniors that are looking to move to production over the next 2-3 years.

Note: This is obviously based on current gold prices. If we see lower prices then these margins will compress but should still offer some upside. If we see prices rise then that goes straight to the bottom line and we could see some of these stocks offering 5-10x current valuations.

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