i-80 Gold (TSX: IAU)

1) An asset swap with Nevada Gold Mines (NGM) via which the company’s 40% stake in the South Arturo project plus US$50M of “contingent consideration” will be exchanged for other gold deposits and mining plant.

2) The acquisition of the Ruby Hill gold-silver mine from affiliates of Waterton Global Resource Management.

3) Equity financing of up to $50M provided by NGM.

4) A financing package of up to $240M provided by Orion Mine Finance.

The stock market liked this deal, but from our perspective it makes IAU impossible to value. Therefore, given that we don’t expect a major gold rally to begin before the first half of next year we will take the opportunity presented by this week’s surge in the IAU share price to remove the stock from the TSI List. The result was a 54% gain during a 5-month period in which GDXJ (the Junior Gold Miners ETF) was down by more than 10%.

We may revisit IAU after the dust has settled on this complicated deal and evidence has emerged that the economic landscape has shifted in gold’s favour.

There should be a steady stream of news from Granite Creek over the next few months as the company attempts to increase resources, advances permitting to facilitate open pit mining and prepares for underground test mining.

IAU produced about 5K ounces of gold during the quarter, which was in line with 2021 annual guidance of 15K-20K ounces. This production generated revenue of US$10.3M and mine operating income of US$3.4M. After taking into account exploration expenses, corporate-level costs and a restructuring cost of US$4.4M (associated with the separation from Premier Gold), the company recorded a bottom-line loss of about US$7M. This was largely as expected.

The company ended the quarter with no debt and about US$60M of working capital, so its balance sheet is healthy.

IAU’s progress was roughly as planned during its first quarter as an independent public company, although completion of the Granite Creek PEA has been delayed from the June quarter to the current quarter. This is expected to be the next major news event for IAU and will prompt an update of our valuation.

This news is neutral. It slightly decreases both risk and potential reward.

IAU’s share of Q1 production was 6,300 ounces of gold at an AISC of US$926/oz and its share of 2021 production is expected to be 15,000-20,000 ounces of gold at an AISC of US$1100-$1200/oz. South Arturo is a small-scale underground operation at this time, but it should grow over the next couple of years due to development of the “Phase 1” open pit.

“The acquisition of these properties represent a major milestone for the Getchell Project, further consolidating mineral ownership of one of Nevada’s highest-grade development-stage deposits while also securing critical surface lands that will allow i-80 to pursue the development of an open pit mining operation contained within our property.”

The cost of the acquisition was US$10M in cash ($7.5M of which was paid in December-2020) plus 2.4M IAU shares.

We view this news as negative, but not of major significance. It is negative because as far as we can tell there previously has been no mention by the company of the requirement to make additional payments to “secure mineral and surface interests at the recently acquired Getchell Project”. We assumed that the US$50M paid to Waterton to purchase the project included the purchase of all required mineral and surface interests.

The Getchell project contains an underground resource (the Pinson mine) and an open-pit resource. The total resource is about 2M ounces of gold.

The company intends to immediately commence a 22,000m drilling campaign aimed at advancing the high-grade Pinson underground mine to a production decision within the next twelve months. At the same time it will move forward with permitting of the open pit mining opportunity. A PEA for the project is scheduled to be completed this quarter.

The PEA will provide us with information about the potential value of the Getchell project and will prompt an update of our IAU valuation.

We estimate that IAU will have 168M shares on issue and cash of C$65M (after completion of the Getchell project acquisition at a cost of US$23M).

Based on last Friday’s closing prices for EQX (C$10.95) and PG (C$2.97), the market is currently valuing IAU shares at C$2.05. We think that the shares would be reasonable candidates for new buying near this price (say, in the C$2.00-$2.20 range). Although this price is only a small discount to our C$2.30/share rough valuation for IAU, the fact that the company’s pre-listing financing was done at C$2.60/share suggests that the stock will be well supported in the low-C$2 area.

For TSI record purposes, we will assume that the EQX shares are exited immediately and that the IAU shares are retained. The entry price for IAU will be the calculated price mentioned above (C$2.05).

After completing the Getchell acquisition and taking into account the C$15M of cash that it should receive as part of the agreed spinout, i-80 Gold should begin its life as an independent company with about C$65M of working capital. This means that the new company will have ample cash to fund its exploration work and mine development over the coming 12 months.

PG subsequently announced that i-80 Gold had arranged to issue 34M shares at C$2.60 per share to raise C$88M (US$70M). We had pegged the initial value of i-80 at C$2.25/share, so the price of this financing looks good from the viewpoint of existing shareholders.

We think that PG would be a good candidate for new buying at around C$2.60, or about 10% below the current price.

The results included 25.9 m of 13.33 g/t Au, 18.3 m of 26.76 g/t Au and 3.1 m of 55.73 g/t Au.

This is obviously good news.

1) The company reported the results of an updated PEA for its 100%-owned McCoy-Cove gold project in Nevada. The PEA estimates that at a cost of US$82M the project could be developed into a mine with average annual gold production of around 100K ounces, and that the project has an after tax NPV(5%) and IRR of US$306M and 53%, respectively, at a gold price of US$1680/oz.

The project currently has a defined gold resource of about 1.7M ounces, the bulk of which is in the “Inferred” category. The company plans to build a ramp to facilitate aggressive underground drilling in order to upgrade and expand the resource in preparation for a future FS.

The McCoy-Cove project will be part of i-80 Gold, which will be spun out of PG as part of the merger with Equinox Gold (EQX) announced last month (PG shareholders will receive EQX and i-80 Gold shares in exchange for their PG shares).

2) PG reported revised resource/reserve estimates and the results of a PFS for its 40%-owned South Arturo gold project in Nevada. Cutting to the chase:

a) PG’s share of the project’s M&I resource is now around 1.1M ounces.

b) The PFS, which takes into account the in-production El Nino underground mine and the proposed Phase 1 open-pit mine, arrived at an after-tax NPV(5%) of US$115M for PG’s 40% stake at a gold price of US$1680/oz.

3) PG reported Q4-2020 and annual 2020 gold production of 16K and 58K ounces, resp. About 60% of the annual production came from the Mercedes mine in Mexico, which will become part of EQX after completion of the merger. The rest of the production came from South Arturo, which will be part of i-80 Gold after completion of the merger.

Based on the figures mentioned above, we estimate that i-80 Gold is worth about C$2.25/share. Under the proposed PG-EQX deal, each PG share will be exchanged for 0.1967 shares of EQX plus 0.40 shares of i-80 Gold. Based on Friday’s closing price for EQX and the aforementioned i-80 valuation, EQX’s takeover bid is currently worth about C$3.40 per PG share.

Our intention at this time is to sell the EQX shares and retain the i-80 shares after the takeover is complete, unless PG trades at C$3.70 prior to then in which case the PG position will be exited and we will look for an opportunity to buy i-80 Gold on the market.

The first announced that Orion Mine Finance had agreed to purchase Centerra Gold’s 50% stake in the Hardrock gold project (Ontario) for US$225M plus some contingent payments estimated to be worth US$75M. PG owns the other 50% of the project, so this deal places a value of US$225-$300M (C$1.20-$1.60 per share) on PG’s stake in the project.

The second advised that an updated FS for the Hardrock project had estimated an after-tax NPV(5%) and IRR of US$1.8B and 29%, respectively, for the project at a gold price of US$1800/oz. Applying a 50% risk discount, this suggests a current value of about US$450M (C$2.40 per share) for PG’s 50% stake in the project.

Although the above-mentioned developments are positive, from our perspective they were made largely irrelevant by the announcement that the company has agreed to be purchased by Equinox Gold (EQX, EQX.TO). Under the proposed deal, each PG share will be exchanged for 0.1967 EQX shares plus 0.40 shares of a new company called i-80 Gold. The new company, which initially will be focussed on gold in Nevada and will be owned 70% by existing PG shareholders and 30% by EQX, will own the South Arturo and McCoy-Cove properties. Also, the plan is for i-80 to complete Premier’s previously announced acquisition of the 2M-ounce development-stage Getchell project.

The market currently is valuing the deal at C$3.15 per PG share, which is about 25% above the price immediately prior to the announcement.

We view the deal as a short-term plus because a) it has boosted PG’s stock price to a 2-year high and b) the promotion associated with the deal and the institutional support that EQX will garner if the gold price resumes its multi-year advance could enable PG to do relatively well during the next several months. However, we think the deal is a long-term minus for PG because it exchanges assets that are very under-valued (primarily the 50% stake in the Hardrock project) for EQX shares that appear to be fully valued.

We estimate that after completion of the deal and prior to a proposed equity financing, i-80 Gold will have 136M shares and a rough value of C$250M (about C$1.80 per share). Consequently, at EQX’s closing share price of C$13.14 on 18th December we think that PG’s shares are worth roughly 0.1967*C$13.14 + 0.40*C$1.80 = C$3.30.

We therefore view the shares as a hold (at best) near Friday’s closing price of C$3.15. At the current gold price they would be a clear-cut sell near C$4.00 and a clear-cut buy near C$2.50.

We will leave PG in the TSI Stocks List for now, but unless advised otherwise we will remove the stock from the List if it trades at C$3.70.

During the latest quarter PG’s net cash position (working capital minus long-term debt) increased by about US$6 — from US$3M to US$9M, meaning that the company’s two operating mines generated more than enough cash to cover all expenses. This is good news that stemmed from a large reduction in the production cost at the Mercedes mine in Mexico. It is the first time in a long time that PG has improved its balance sheet during a quarter without doing an equity or debt financing.

PG will have to make a cash payment of US$23M during the current quarter to complete the acquisition of the Getchell gold project. The company had US$34M of working capital at 30th September so it probably could fund the purchase without raising additional money, but we suspect that it will do a debt or equity financing within the next two months to cover the bulk of this payment.

PG’s press release states that the Mercedes mine is now a smaller and far more efficient operation, the positive effects of which will be evident in the upcoming quarterly report.

This is good news.

The results were from step-out drilling and should contribute to a significant increase in the project’s mineral resource when the next estimate is done. Therefore, this is positive news.

Currently the Hasaga project has a total resource of 1.7M ounces. The project could be valuable, but at this stage it is being assigned minimal value as part of PG’s large portfolio of assets.

Last Tuesday the company reported the following mineral resource estimate for Getchell:

Open-Pit: 1.275M-oz Measured & Indicated resources at 0.057 oz/t (1.95 g/t) Au.

Underground: 0.19M-oz Measured & Indicated resources at 0.305 oz/t (10.49 g/t) Au plus 0.58M-oz Inferred resources at 0.347 oz/t (11.90 g/t) Au.

As we stated previously, we think that the Getchell acquisition makes sense as long as PG’s management goes ahead with the spin-out of the company’s US mining assets.

The Getchell project contains the high-grade Pinson underground gold mine, which a small company called Atna Resources attempted to put into production about 6 years ago (at a much lower gold price) before going bust. Pinson has been on “care and maintenance” since 2015.

Depending on the costs associated with putting the Pinson mine into production and/or developing a new open-pit mine at Getchell, this potentially is a good acquisition for PG on one condition. The condition is that the company goes ahead with the spin-out of its US-based assets mentioned in a press release during the preceding week. If the spin-out goes ahead, then Getchell will be part of the new US-focussed company. If the spin-out doesn’t go ahead, then the addition of Getchell will make a complicated and difficult to value company even more complicated and difficult to value.