Gold Miners Index Starting The Year Strong

2022 was a year to forget for most sectors and certainly the major market averages, with the S&P 500 (SPY) declining 19% for the year and the Nasdaq Composite suffering an even more disappointing 33% loss.

While most investors certainly didn’t have the Gold Miners Index (GDX) in their cards to be an outperformer in 2022 after it found itself down 30% for the year in October with one quarter to go, the sector managed to recover and has started off the new year strong as well.

The strength in GDX can be attributed to the rally in gold prices ($1,650/oz → $1,850/oz) but also sentiment being the worst in years as of Q3, with many names trading at their cheapest valuations since 2015.

This gave the sector the fuel to significantly outperform gold if we saw any positive change in sentiment, and this is exactly what we’ve seen with the gold price back above key support at $1,800/oz.

While this rebound in the GDX is certainly positive from a momentum standpoint, it has made things a little more difficult from a stock-picking standpoint.

This is because many miners have already made 40-50% moves off their lows, and it can be dangerous to chase the lower-quality miners or sector laggards with them hovering well above key support levels.

In this update, we’ll look at two of the better buy-the-dip candidates sector-wide and highlight why these two names have the potential to outperform in 2023, making them attractive names to keep near the top of one’s watchlist if we see further weakness.

I-80 Gold (IAUX)

I-80 Gold (IAUX) is a $730MM company in the gold sector with multiple projects in the state of Nevada, including its Ruby Hill, Granite Creek, and McCoy-Cove projects. The company also has a processing facility with over $1.0BB in sunk costs in northern Nevada.

The company plans to employ a Hub & Spoke model and feed material from its three mines to its central “hub” or processing facility at Lone Tree.

Assuming i-80 Gold is successful, the company would enjoy an industry-leading production growth rate, with it aiming to increase gold production from 20,000 ounces in FY2022 to 250,000+ ounces by 2026.

Based on this current model alone, i-80 Gold can easily justify a $1.0BB market cap [US$3.65 per share], given that producers in Tier-1 jurisdictions typically command a premium, as do producers with industry-leading margins (50% or higher) and organic growth.

However, we saw multiple developments last year that changed the i-80 Gold story for the better, and they are as follows:

  1. The company has delineated a new zone at its Granite Creek Project that it’s calling South Pacific. This zone dwarfs its current Granite Creek Underground deposit in size and could triple the resource base on the property with a new resource estimate due by Q2 2023 (~600,000 ounces to 1.6+ million ounces).
  2. The company’s drilling at its Ruby Hill Project has continued to intersect much higher grades than those in its historical resource base, suggesting that the company could see a significant increase in resources and grades at this project (8.5 grams per tonne gold grades vs. 6.0 grams per tonne gold grades), leading to higher margins.

Notably, both of these discoveries are sitting right next to existing infrastructure, allowing for easy access to these high-grade ounces, a similar setup to Kirkland Lake Gold in 2017 at its Swan Zone, which allowed the stock to return over 1000% over the next five years.

However, the game-changer for i-80 Gold was the discovery of the Upper Hilltop Zone, a polymetallic discovery (zinc, lead, silver, gold) that lies just south of its previously mined-out open-pit deposit on its Ruby Hill Project. This zone appears to have gold-equivalent grades above 16 grams per tonne of gold.

The discovery is a game-changer because the company could build a processing facility at its Ruby Hill site for relatively modest capex (~$200MM) and process this high-grade material which could support a production profile north of 240,000 gold-equivalent ounces per annum.

This would double the company’s future production profile to ~500,000 ounces per annum, and a company with that production profile in Nevada could easily command a market cap of $2.5BB [$9.10 per share].

In addition, the company believes it may have a porphyry beneath its mined-out open pit, which could, in a best-case scenario, end up being similar to Bingham Canyon or Robertson.

These two mines have been producing for decades in Nevada and Utah and have been company-makers for their operators.

So, with multiple discoveries made in 2022, the potential for a new discovery at depth, and the ability to fast-track this polymetallic opportunity, I believe that i-80 Gold is significantly undervalued and isn’t getting anywhere near the respect it deserves.

Assuming the company delineates 12MM tons of material at Upper Hilltop, Lower Hilltop, and Blackjack (its polymetallic deposits), which I see as quite achievable, this project alone could support a US$4.50 share price with investors getting the Hub & Spoke gold production model for free.

To summarize, I continue to see IAUX as a top-3 producer sector-wide, and I would view any weakness in the stock as a buying opportunity.

For now, and assuming no major new polymetallic discoveries in its untested corridor, my 12-month price target is US$5.10.

Victoria Gold (VITFF)

The second name worth keeping an eye on is Victoria Gold (VITFF), a junior gold producer based out of the Yukon Territories in Canada with a market cap of $400MM.

Unlike i-80 Gold, Victoria did not have a great year, and this was the second year in a row that management disappointed the market by missing guidance.

In fact, Victoria looks like it will produce just ~150,000 ounces of gold in FY2022 at $1,450/oz+ costs, a massive miss vs. expectations of 180,000+ ounces at ~$1,200/oz costs.

That said, 2023 is shaping up to be a much better year. This is because the company is lapping very easy comps, which is a recipe for a strong recovery in the share price after a more than 70% decline from its highs at $17.00 per share.

For starters, Victoria had a very unfortunate conveyor belt failure last year that impacted its production.

Plus, its operating costs were much higher due to increased sustaining capital (truck shop construction, water treatment facility construction, mobile fleet rebuilds) plus a lower denominator due to fewer ounces sold.

The company’s costs were also impacted by much higher diesel prices which affected Victoria more than peers, given that it’s a low-grade and high-volume heap-leach operation that moves millions of tons of rock annually.

The result is that costs were much higher than expected this year and looked much worse than they should have, coming in well above the industry average.

However, 2023 has some benefits:

For starters, Victoria should have much lower sustaining capital in 2023 with lots spent on site in 2022, and it should have a much higher denominator as the company works on stacking more ounces in what’s typically a downtime period due to frigid weather in Q1.

Secondly, oil prices have pulled back considerably, which should positively impact its cost profile, and we’ve also seen some moderation in inflationary pressures, which could help its reagent costs.

Finally, Victoria should enjoy a higher price if gold stays above $1,825/oz.

The result is that we should see a strong recovery in margins and free cash flow generation, and I would expect this to improve sentiment for the stock and place it back in favor after two rough years.

To summarize, while Victoria is certainly not the best company in the sector and management has not met expectations, the 2023 expectations are so low after two disappointing years that I expect any positive news to allow for a strong rebound in the stock.

Based on what I believe to be a fair value of US$10.85, I see more than 80% upside from current levels, and I see Victoria Gold as a Speculative Buy below US$5.90 per share.

The kicker to the story is that this is an asset capable of producing 250,000+ ounces per annum at sub $1,000/oz costs once optimized.

For this reason, Victoria could be a takeover target if it stays at depressed levels. Hence, I see two paths to an upside re-rating.

The Gold Miners Index has had a solid run off its lows, but I don’t think this rally is over, and this suggests that any sharp pullbacks should provide buying opportunities.

That said, I see the most value in names like i-80 Gold and Victoria Gold if we do see a pullback, and I would view any pullbacks below US$2.81 on i-80 Gold and US$5.90 on Victoria Gold as buying opportunities.

Disclosure: I am long IAUX, VITFF

Taylor Dart Contributor

Disclaimer: This article is the opinion of the contributor themselves. Taylor Dart is not a Registered Investment Advisor or Financial Planner. This writing is for informational purposes only. It does not constitute an offer to sell, a solicitation to buy, or a recommendation regarding any securities transaction. The information contained in this writing should not be construed as financial or investment advice on any subject matter. Taylor Dart expressly disclaims all liability in respect to actions taken based on any or all of the information in this writing. Given the volatility in the precious metals sector, position sizing is critical, so when buying small-cap precious metals stocks, position sizes should be limited to 5% or less of one's portfolio.

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