Vista Gold Corp. (VGZ:NYSE.MKT; VGZ:TSX, US$0.78) has released, on schedule, an updated prefeasibility study (PFS) for its Mt. Todd gold project. The updated study shows significantly improved economics over the May 2013 study, partly due to processing design changes and partly to a weaker Australian dollar. This improved study comes despite a lower gold price. The study shows lower operating costs, improved recoveries and a significantly lower capex, down 20% to $839 million.
Using a $1,300 gold price and $0.80 Aussie dollar, the project shows an after-tax NPV (with 5% discount rate) of $679 million, and an IRR just over 20%. Mt. Todd will produce an average of 382,211 ounces of gold per year over 13 years, with much higher production in the first five years. Cash costs for the life of mine are $645/oz, again with lower costs in the first five years. The higher production and lower costs at the beginning of the mine will help with capital payback (of just over three years).
The major risk?
The mine has strong leverage to a higher gold price. Unfortunately, it is also sensitive to the Australian dollar: each $0.05 increase reduces the IRR by two percentage points, and the NPV by $72 million based on higher operating costs. The estimate does not take into account the impact on initial or sustaining capital costs. A $50 increase in the gold price increases the IRR and NPV by approximately the same amounts, and a higher Australian dollar is likely to be accompanied by a higher gold price.
Vista also announced it had received the last of its major environmental permits for the project.
What's not to like?
So Mt. Todd is a robust project at current prices, now significantly derisked, in an excellent jurisdiction, the largest undeveloped gold project in Australia.
Yet Vista languishes at $0.77, less than half the price it was in mid-2016, with a market cap of $76 million; ex-cash, the market cap is less than one-tenth Mt. Todd's net present value. This is one company and one project that can't seem to get respect.
Old concerns should be put to bed
There are widely held concerns about Mt. Todd. This was the mine that bankrupted the high-flying Pegasus Gold in the late 1990s. Concerns revolve around the metallurgy, and a view that the project requires much higher gold prices to be economic. I asked several analysts and managers what they thought of Mt. Todd and the answer was invariably the same: bad metallurgy and needs a much higher gold price. It's time to take another look at the project.
The company, with numerous metallurgy tests and sorting process improvements has put to rest the first concern, though the proof of the pudding is always in the eating. The company has consistently updated the market on these tests, though I suppose rock-sorting processes do not get most investors' juices flowing. And the PFS clearly destroys the myth that the project needs higher gold prices. Yes, it is highly leveraged to higher gold prices, but it is unquestionably economic at today's prices.
In my view, Vista is not going to build the mine itself; someone will buy the project, though the company would clearly like to negotiate from a higher stock price. As it tells the story, and converts the skeptics, the price should slowly move higher. Well financed, with over two years' of expenses in the bank, Vista is a strong buy.
Company with Super Project Struggles
Nevsun Resources Ltd. (NSU:TSX; NSU:NYSE.MKT, US$2.03) owns the Upper Zone at Timok, one of the highest grade base metals projects around, with an IRR of 50% and a payback of less than two years. Yet the stock price has slumped to a new low since the takeover of Reservoir Minerals. The company last week announced its 2018 outlook.
• Improvements at Bisha (the mine in Eritrea) with a 10% increase in zinc production
• A full PFS on the Timok Upper Zone along with a resource estimate is expected this quarter
• A delay in receiving a permit for a decline ramp, expected in November
• Suspension of the dividend
Mostly this is bad news. Even the improvements in Bisha follow much weaker plans for the mine, and are below most analysts' estimates. But Bisha is not the main story now and the company would, in my opinion, be better off without it (recognizing the tremendous cash flow it has thrown off over the years).
Why the delay?
The permit delay is worrying, even though the company says that there is a lot of slack in its schedule. Particularly worrying is that the company does not know why the permit has been delayed. The company said, "(we) are collaborating with the State of Serbia to
understand the source of the delay." Some suggest that the delay could be a reflection of the lack of high-level, permanent representation in the country and, if so, would be more worrying.
As for the dividend, it should have been suspended first time around, instead of first slashing it, and then suspending it, giving the market two opportunities to react negatively. The stock fell 17% in the last week from an already soft level.
The company is advancing financing activities for the $630 million capex (with another $45 million payable to former partner Freeport upon a production decision). Nevsun has $151 million cash. This year it plans to spend $50 million to $60 million to advance the Upper Zone. The real key is in execution, including relations with the government, and crucial land acquisitions, now underway. The market will be looking for receipt of the permit and a strong PFS to trigger a recovery.
Eventually, it is possible that another company makes an offer to buy Nevsun (and divest Bisha), though Nevsun itself shows no indication of wanting this.
If we did not already own Nevsun, we would be buyers here. But given we own it, and given the current difficulties, we would buy more only if underinvested.
Current Top Buys
Vista Gold (0.78), Franco-Nevada Corp. (FNV:TSX; FNV:NYSE, US$74.21), Ares Capital Corp. (ARCC:NASDAQ, 15.73), Gladstone Investment Corp. (GAIN: NASDAQ, 9.62).
Adrian Day, London-born and a graduate of the London School of Economics, heads the money management firm Adrian Day Asset Management, where he manages discretionary accounts in both global and resource areas. Day is also sub-adviser to the EuroPacific Gold Fund (EPGFX). His latest book is "Investing in Resources: How to Profit from the Outsized Potential and Avoid the Risks."
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Disclosure:
1) Adrian Day: I, or members of my immediate household or family, own shares of the following companies mentioned in this article: Vista Gold, Nevsun Resources, Franco-Nevada, Ares Capital and Gladstone Investments. I personally am, or members of my immediate household or family are, paid by the following companies mentioned in this article: None. My company has a financial relationship with the following companies mentioned in this article: None. Funds controlled by Adrian Day Asset Management hold shares of the following companies mentioned in this article: Vista Gold, Nevsun Resources, Franco-Nevada, Ares Capital and Gladstone Investments. I determined which companies would be included in this article based on my research and understanding of the sector.
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