While the major market averages have taken a beating over the last week, gold (GLD) has been one of the few asset classes to stage a sharp rally, with the metal up 2.5% for the week and over 5% since Thursday’s close.
The outperformance can be partially attributed to the belief that the Federal Reserve may have to rethink its rate-hike plans because of the fragility of the Financial Sector (XLF) with two banks already failing and several other regional banks down over 50% from their highs in a one-week span.
The sharp move higher in gold has fueled a major rally in the Gold Miners Index (GDX) which has soared 11% off its lows with the gold producers providing leverage to the metal, especially costs for the group rose materially last year.
In fact, the $110/oz move in gold has led to a temporary ~20% increase in margins for the producers, partially explaining the powerful performance of the group.
However, a couple of names were left in the dust during this rally, providing the opportunity to add exposure to miners without paying up for names that have already headed into overbought territory.
In this update, we’ll look at two names that have lagged their peers, and why they look like long-term outperformers vs. the index.
I-80 Gold (IAUX)
I-80 Gold (IAUX) was one of the best-performing gold developers in 2022, putting together a 15% return vs. 20-30% declines for many of its gold developer peers.
Unfortunately, the stock has since given up considerable ground to start 2023, down 26% for the year which has placed it near the bottom of the pack among its peers.
The disappointing performance for this junior producer with a ~$700 million market cap (assumes 350 million fully diluted shares) is partially attributed to a ~$65 million financing earlier in the year that led to an increase in its fully diluted share count and the announcement of a bought deal secondary offering by its largest shareholder because of a funding gap as it builds a massive mine in Canada, Greenstone.
Finally, i-80 Gold announced the acquisition of its southern neighbor in Nevada, and we often see weakness following M&A when the payment is in shares.
However, the initial convertible debt financing was done at a conversion price ~70% above current levels ($3.38), the secondary offering by Equinox Gold (EQX) had nothing to do with i-80 Gold (related to improving Equinox’s balance sheet instead), and the acquisition was a very positive development.
Not only does i-80 Gold add over 1,400 hectares of land directly adjoining its flagship Ruby Hill Property with the acquisition, but it paid a very attractive price of just ~$25/oz assuming that Paycore has at least 2 million gold-equivalent ounces [GEOs] on its property.
Given that there’s a historical resource on the property of ~1.4 million GEOs at industry-leading grades on a gold-equivalent basis, I certainly wouldn’t rule out potential for 2.0 million GEOs, and this will add critical mass next to where the company plans to have its flotation plant just 2 kilometers north.
However, despite the addition of significant land that increases its probability of delineating multiple polymetallic deposits and a stronger balance sheet that has set i-80 up for an aggressive drill season and development of two mines, the company has shed ~$350 million in market cap, with the market basically saying that the Paycore ground (2.5 kilometers of strike with historic mines) is worthless, as are the new targets presented to the market which sit east and south of its new high-grade Hilltop discovery.
I see this as a huge disconnect, and one that is not likely to remain in place for long, especially as i-80 grows its global resource base closer to 20 million GEOs over the next 18 months (~14 million GEOs currently).
Based on an estimated net asset value of ~$1.41 billion and a conservative estimate of ~352 million fully diluted shares plus a 1.1x P/NAV multiple to reflect its exploration success to date in a top mining jurisdiction, I see a fair value for the stock of $4.46, translating to 118% upside from current levels.
However, this assumes no new major discoveries are made on the property or at its Granite Creek Project, and I’m assigning a very conservative $250 million to its polymetallic potential in this price target.
Given the grades of this discovery, it ultimately looks like it could command a value north of $600 million, with a NPV (5%) for Hilltop/Blackjack of $400+ million alone using conservative tonnage targets, so I would argue that I am undervaluing the potential here, but prefer to err on the side of caution without resources in place yet.
While i-80’s short-term goal is to become a 250,000 ounce producer and grow production by ~400% from FY2023 levels, I ultimately see the company having the potential to become a 450,000-ounce producer in Nevada which could easily command a market cap of $3.2+ billion.
Even if we assume one more large financing in 2024 to fund this growth and a fully diluted share count of 400 million shares, this would translate to a fair value of $8.00, suggesting ~300% upside for i-80 Gold long-term even without any new major discoveries on its properties.
In summary, I am bullish short-term and long-term, and I see this ~35% correction in i-80 Gold as a gift, and I plan to continue to accumulate on weakness if this correction persists.
Wesdome Mines (WDOFF)
Wesdome Mines (WDOFF) has been a miserable performing stock over the past year, sliding over 65% from its Q1 2022 highs after missing FY2022 guidance not once, but twice, and struggling to complete necessary mine development to set itself up for a strong 2023.
Although the double guidance miss by a country mile was inexcusable and the company should have been more conservative given that it relied on efficient supply chains to ensure the receipt of key equipment, there’s little value in being negative on the stock when it’s already lost over $1.0 billion in market cap from its peak valuation.
It’s also worth noting that while the guidance misses were some of the worst sector-wide in 2022 with 113,000 ounces produced vs. a guidance mid-point of 170,000 ounces of gold,everything that could go wrong in 2022 went wrong, and it was a kitchen sink year.
This included the late delivery of mobile equipment (supply chain headwinds), delayed construction of the paste fill plant (supply chain headwinds), and the late delivery of mechanized bolters (supply chain headwinds).
Adding insult to injury, we saw some negative grade reconciliation at its flagship mine and a leach tank failure plus a hoist rope manufacturing detect.
These former three issues impacted development rates and left its new Kiena mine more than a year behind its planned schedule. The latter made for a weaker year at Eagle River.
Fortunately, the mechanized bolters are now on site, the paste fill plant has been commissioned, and the company has received all of its mobile equipment deliveries as well.
However, the unfortunate impact of these delays is that Kiena’s development is a year behind schedule, meaning that 2023 will be a weaker year than initially planned with planned head grades of 3.7 to 4.7 grams per tonne gold.
This means that even with all the equipment on site and issues out of the way, we will see a delayed recovery in production and another very high cost year in 2023.
So, with another year of costs well above the industry average and relatively flat production, it’s no surprise that the stock hasn’t been able to gain much traction.
However, among all of this negativity, the positives to this story have been forgotten.
For starters, both of its processing facilities have additional excess capacity, suggesting a path to a 250,000 ounce per annum production profile long-term in an upside case scenario (FY2023 guidance: 120,000 ounces).
Second, Kiena and Eagle River are two of the richest mines from a grade standpoint globally, and the negativity related to delays and weaker margins has drowned out all of last year’s exploration success.
Finally, I believe that the company may have sandbagged FY2023 guidance with an interim CEO in place and a brutal year behind it, with easy comps in place and a very low bar for expectations.
So, if we see progress in any of these three areas, the stock could wake up from its slumber and march back towards the US$7.00 level.
Based on ~145 million fully diluted shares and a share price of US$5.00, Wesdome trades at a market cap of US$725 million, which on the surface might seem high for a company with a ~120,000-ounce production profile with all-in sustaining costs [AISC] of $1,700/oz.
However, it's important to note that Wesdome has industry-leading grades and a path to sub $1,100/oz AISC, meaning that it’s a totally different company post-2023 once it gets into higher grades at Kiena.
Plus, the long-term opportunity here is 250,000+ ounces given that Kiena alone could do 120,000 ounces per annum with the addition of the Footwall Zone (much higher ounces per vertical meter) + using excess mill capacity. Using a P/NAV multiple of 1.05x, I see a fair value for the stock of US$7.30, translating to ~46% upside from current levels.
So, for investors willing to be contrarians, I would view any pullbacks in the stock below US$4.90 as low-risk buying opportunities to play for a rebound in the stock once sentiment improves over the next 6-18 months.
Ultimately, I would not be surprised to see the stock trade back above US$8.25 per share by Q3 2024 if exploration success continues and both operations get back to operating as expected with a sub $1,100/oz AISC profile.
Disclosure: I am long IAUX, WDOFF
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.