Generation Mining Ltd. (GENM:TSX; GENMF:OTCQB; 9GN:FSE) released an updated feasibility study (FS) of its Marathon palladium-copper project in northwest Ontario, Canada, reported Research Capital Corp. analyst Adam Schatzker in an April 4 research note.
"The study is fairly robust as it relies more on actual quoted prices rather than estimates and reflects more than 40% of the detailed engineering drawings having been completed," Schatzker wrote.
Notable Potential Gains
After incorporating the changes between the previous 2021 FS and the new, revised version, Research Capital lowered its target price on Generation to CA$1.95 per share from CA$2.55. In comparison, the metals explorer is currently trading at about CA$0.58, the price difference reflecting a material projected return of 236%. Generation is rated Speculative Buy.
"Overall, we continue to believe Marathon is a good copper-palladium project, in a top-tier jurisdiction, that is mostly permitted for construction," Schatzker commented.
The analyst presented the key takeaways from the updated Marathon FS.
Differences Between Studies
The new FS reflects several differences from the 2021 one. In the new iteration:
- Capital costs are CA$224 million ($224M) higher
- The assumed palladium price is higher, at US$1,800 per ounce versus US$1,725
- Life-of-mine operation costs are 23% higher
- The Canadian dollar to U.S. dollar exchange rate is 5.5% lower
Research Capital revised its valuation model to reflect the increased costs but maintained its estimates for the metals prices and the exchange rate, noted Schatzker. This resulted in a lower NPV discounted at 6%; it is now CA$747M, down from CA$1,174M. The internal rate of return is 18%.
Effects of Inflation
All of the cost increases associated with Marathon are due to inflation, a phenomenon all mining project developers are facing, Schatzker wrote.
Given recent inflation, we think there is some logic to considering higher metal prices, especially for copper in this case," he added.
For instance, he pointed out, a mere US$0.25 per pound increase in the copper price assumed, to US$3.75 per pound from US$3.50, what Research Capital is using, would add CA$70M to the NPV.
Derisking is Noteworthy
Generation has already derisked much of Marathon. It has done this, in large part, explained Schatzker, by entering offtake agreements for concentrate and by publishing a higher-quality FS. Given the derisking, Research Capital raised its target price:NAV multiple to 0.65 times from 0.50 times.
Unfinanced Amount a Challenge
The biggest persisting risk the Canadian mining firm faces with Marathon is "a financing gap," Schatzker wrote, CA$270M of cash needed for construction, which financing secured to date does not cover.
"This is the most significant obstacle for Generation in the near term as the company has a fairly aggressive schedule to develop the project," wrote Schatzker.
Generation is working on this, having discussions with lenders and private equity funds. Some lenders, management indicated, "may consider the CA$240M stream arrangement as an equity contribution which could leave more room for additional debt," relayed Schatzker.
He concluded his report with this: "While Generation is going down the path of financing, building, and operating the Marathon project on its own, we cannot rule out a partnership or takeover of the company, both of which could be beneficial to shareholders."
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Disclosures For Research Capital Corp., Generation Mining Ltd., April 4, 2023
Analyst Certification I, Adam Schatzker, certify the views expressed in this report were formed by my review of relevant company data and industry investigation, and accurately reflect my opinion about the investment merits of the securities mentioned in the report. I also certify that my compensation is not related to specific recommendations or views expressed in this report.
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