In this bulletin, we look at the recently released feasibility study on Almaden Minerals Ltd.'s (AMM:TSX; AAU:NYSE) Ixtaca project. Separately, our somewhat aggressive sell limit for Nevsun Resources Ltd. (NSU:TSX; NSU:NYSE.MKT) has not been hit, so we will publish another bulletin specifically on this company. The deadline for tendering shares at various brokerage firms with which we are familiar are Dec 26, 27 or 28, so we shall provide our final advice prior to those dates. We also plan another bulletin with brief updates of many more companies, including good candidates to pick up in the year-end tax-loss sell-off.
Almaden Minerals (0.58) has released its feasibility study (FS) on the Ixtaca project in Pueblo State, Mexico, prior to year-end as promised. Initial capex is significantly higher than in the prefeasibility study (PFS), while the economics over the life of the mine have actually improved. It is a very strong study.
The study indicates an 11-year life for the conventional open-pit mine, with an average of 90,000 ounces of gold and 6.2 million ounces of silver per year. The after-tax NPV is $310 million, with an IRR of 42%.
A FS is produced by outside consultants, and includes competitive bids on many items, normally conducted with far more vigor than a PFS or preliminary economic assessment. Because of this, a FS usually shows higher costs and reduced economics from the PFS. Other than the initial capex—on which, see below—the full study did not depart in many respects from the PFS, a credit to the Almaden team for the quality of the work they had already done.
Why has the initial capital increased so much?
The capex is up over 50% to $174 million (from $117 million), still a reasonable number with a pay back of less than two years. The increase is due to a reworking of the mine plan and two significant additional items of capital. First, the ore-sorting equipment, which the company had already discussed, adds approximately $15 million up front, but will increase the recoveries and life-of-mine (LOM) economics.
Second, the company has opted to use dry stack tailings, which adds another $15 million up front. Though the risk from conventional tailings ponds is extremely low, dry stack tailings remove that risk and more practically remove some potential obstacles to permitting and non-governmental organizations (NGO) opposition. Over the LOM, dry stacks tailing could be modestly cheaper, while the mine footprint and water usage are both reduced. (The plan includes a water storage reservoir to capture water during the short rainy season—the local area is currently without any water storage facility—and this will benefit both the mine and the community.)
In addition, a small ball mill has been added up front, while more stripping will be required up front to send ore to the mill. (If you are keeping track of the numbers, the partial offset is from costs in the FPS associated with dismantling Almaden's mill in Alaska already spent. The mill is now ready for shipping to site in Mexico after ice break-up.
Aggressive assumptions?
There has been some comment on the price assumptions used in the study, $1,275 for gold and $17 for silver, both meaningfully above current prices, with a 5% discount rate. However, a study looks at the LOM economics, so the price assumptions are for the entire period. On that basis, the price assumptions do not look overly aggressive; certainly, gold and silver prices have been above these price assumptions for the majority of the previous 11 years, even including the last six years since the price peaks. As usual, the FS provides a table showing mine economics at different price assumptions. For gold at $1,200 and silver $15.50, the mine still has a 34% IRR.
What's next for Ixtaca and Almaden?
Now that the FS has been released, the mine permit application is expected any day. This could take six to 12 months before a final decision. Once the complete FS has been published—within 45 days—other mining companies can study all the details and perhaps decide if this is a project they would like to acquire. With a new Mexican administration, however, it is possible that a company would wait until the permit has been received.
In the meantime, Almaden is moving full steam ahead. Earlier in the year, it hired Lawrence Morris, a mining engineer, who oversaw the production of the feasibility study but importantly has mine-building experience. Then, a couple of days ago it engaged a firm to assist with project financing.
The stock fell under $0.50 on tax-loss selling, and shot up as high as $0.67 following the release of the feasibility. Now, at $0.58, it is at a good time and price. More importantly, the company, debt-free and without other liabilities, has a market cap of $65 million, barely a fifth of the value of the Ixtaca project. However you look at it—unless you decide that Ixtaca will not be permitted—this makes it remarkably undervalued. Now with the FS published, and tax-loss selling ending, Almaden is a strong buy at this level. There is no need to be overly aggressive chasing it, since the period ahead, winding through the permitting process and arranging financing, is typically a boring period for mining stocks. But do buy and accumulate it.
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."
[NLINSERT]Disclosure:
1) Adrian Day: I, or members of my immediate household or family, own shares of the following companies mentioned in this article: Nevsun Resources. 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: Almaden Minerals and Nevsun Resources. I determined which companies would be included in this article based on my research and understanding of the sector.
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