Gold Developers At A Discount

It’s been an exciting year for the Gold Miners Index (GDX) with the index up 12% year-to-date and significantly outperforming the S&P-500 (SPY) for a second consecutive year.

This strong performance can be attributed to the recent strength in the gold price, with the metal launching 10% higher over the past month to hang out near psychological resistance at $2,000/oz.

The recent strength is a big deal for the average producer, which up until January suffered from considerable margin compression with a flat gold price since 2020 yet inflationary pressures across the board.

Unfortunately, for investors hanging out in the gold developer space, the returns have been dismal. Not only have the developers massively lagged the producers and many are scraping along the lows of their multi-year ranges, but they’re under-performing this year despite already lagging by 2000+ basis points last year as well.

This is obviously quite disappointing for investors and in some cases it may be leading to some irrational or forced selling as some investors are tired of not participating in the gold price move and choose to dump their shares.

In this week’s update, we’ll look at two names that continue to trade at massive discounts to fair value that offer a way to get leverage to gold without chasing names already up substantially year-to-date.

i-80 Gold (IAUX)

i-80 Gold (IAUX) is a $840 million market cap gold developer that has a resource base of ~15.0 million ounces of gold in the state of Nevada.

This is an enviable position to be in given that Nevada is one of the top-ranked jurisdictions globally for mining with an abundance of resources, access to a considerable workforce, and favorable permitting historically.

The company differentiates itself from its peer group for several reasons, with the main one being that it has the #1 growth profile sector-wide, with a plan to grow its production profile from ~30,000 ounces in FY2023 to ~250,000 ounces by H2 2026, with the potential to grow to 400,000 to 450,000 ounces long-term.

This profile is near unheard of in the sector, and producers of this size (400,000+ gold-equivalent ounces) in Nevada can command market caps north of $3.5 billion.

Today, partially due to a large share sale by a majority owner that spooked some investors and due to the depressed sentiment sector-wide for juniors, i-80 Gold is trading at just a fraction of its long-term potential, and well below my 2-year target price of US$4.70.

Some investors might argue that while this points to nearly 100% upside from current levels, there’s no clear path to a re-rating when sentiment for juniors remains in the gutter.

I would strongly disagree with this statement, with i-80 having nearly a dozen catalysts on the horizon and catalysts that will de-risk the story materially.

Plus, while i-80 is technically a “junior” or developer given that it’s busy drilling out and completing studies on the multiple mines in its portfolio, it’s actually already a producer and generating free cash flow, with one of its five potential mines already in production: Granite Creek Underground.

For those unfamiliar, the company’s five mines include Ruby Deeps (plus polymetallic potential at its Ruby Hill Project), Granite Creek Open Pit, Mineral Point, and McCoy Cove.

In regards to these catalysts, i-80 is drilling at multiple properties, and investors can look forward to drill results from Granite Creek, McCoy Cove, Ruby Deeps (gold), and different polymetallic deposits at its Ruby Hill Project which include Hilltop, Hilltop East, Blackjack, and the larger Hilltop Corridor plus the FAD deposit to the south (recently acquired).

This should provide a steady stream of news flow, and any new major discoveries to result in a sharp gap higher in the stock given that the stock is seeing little value for its high-grade polymetallic discovery made last year at Hilltop.

Additional catalysts for the company this year include a maiden resource estimate at its Blackjack deposit, a reserve estimate and Feasibility Study at Granite Creek, an updated resource estimate at its Ruby Deeps/426 Zone at its Ruby Hill Project, the possibility of a maiden resource at its new discovery at Granite Creek (South Pacific Zone) and a ramp-up to full production by year-end at its Granite Creek Underground mine.

In my view, these updated resources are likely to push i-80 Gold’s resource base to ~17.0 million gold-equivalent ounces, with upside to 20.0 million gold-equivalent ounces long-term from Hilltop and other polymetallic resources separate from Blackjack.

Despite gold sitting at $2,000/oz today, investors are able to get exposure to these resources for just ~$40/oz today. Obviously, not all of these ounces will go into production, and some ounces are more valuable than others if they are high-grade.

However, even if focus on just the higher-grade subset of i-80 Gold’s resource (which I believe could come in at 8.5+ million gold-equivalent ounces by 2025), i-80 Gold is trading at less than $80/oz on high-grade resources when peers have been acquired for north of $200/oz for high-grade resources that are still years away from production. Examples include Great Bear Resources, Fronteer Gold, Ventana Gold, Spectrum Metals, and several others.

So, I would argue that i-80 Gold is dirt cheap at current levels and if it stays at these levels, it could be a takeover target.

To summarize, I see multiple catalysts for an upside re-rating for i-80 and this could end up being the busiest year in the company’s life from a news flow standpoint with what’s likely to be a steady stream of news every other week for the next thirty weeks.

For investors looking for an undervalued producer flying under the radar of the average investor that focuses on the larger producers, I see i-80 Gold as a steal at US$2.30 or lower.

Liberty Gold (LGDTF)

Liberty Gold (LGDTF) has been one of the worst-performing gold developers since the Q3 2020 peak, declining over 75% from its highs at US$1.82 per share.

However, unlike most juniors, Liberty Gold has very carefully managed its capital. This has included ensuring its drilling only the holes it needs to vs. super regional targets that are less likely to hit, paying the right price for securing key land and water rights at its Black Pine Project, and divesting non-core projects to ensure it can continue to drill and operate without having to go raise capital in a soft equity market.

The result is that it has seen limited growth in its share count, which is exactly what investors want to see from a gold developer: capital discipline and putting shareholders first.

For those unfamiliar with the company, Liberty Gold owns two oxide gold projects (amenable to heap-leach) that are located in Idaho and Utah, two very favorable mining jurisdictions that rank just behind Nevada for investment attractiveness.

The company’s flagship project is Black Pine (Idaho), a project that’s home to a resource of 3.1 million ounces of gold with favorable metallurgy from recent testwork, with the company confident that 80% of leachable gold can be extracted within ten days.

Notably, the gold recovery at Black Pine is less sensitive to crush size suggesting the potential for a run-of-mine heap leach operation, which is one of the cheapest mines to build and operate.

The real story for Liberty Gold, though, is the fact that while Black Pine is home to ~3.1 million ounces of gold, there looks to be the potential for 5.2 - 5.5 million ounces here long-term as Liberty has barely scratched the surface on several targets.

This includes the Back Range Zone (northwest of main Discovery Zone), the Rangefront South Zone (southeast of the Discovery Zone and just south of Rangefront), the M Zone, filling in gaps between zones, and lowering cut-off grades to 0.17 grams per tonne of gold.

Assuming Liberty was able to prove up 5.5 million ounces of gold and we see a ~60% conversion rate (resources → reserves), this would translate to a ~3.05 million ounce reserve base and 15 years of production at 200,000 ounces per annum, with an operate of this size in a safe jurisdiction easily able to command a $500+ million valuation (which doesn’t even include its Goldstrike Project in Turkey).

Today, Liberty Gold sits at a valuation of just $142 million, suggesting it’s trading at one-third of its long-term potential, and I would argue that a $500 million valuation on Black Pine is conservative. In fact, we’ve seen suitors pay upwards of $100/oz for heap-leachable ounces in the United States.

I would argue that give progress securing water rights and the fact that there’s no fish-bearing streams or timer values in addition to favorable metallurgy, Liberty’s Black Pine is one of the better projects out there.

So, I see two paths to a considerable upside re-rating for Liberty. These include progressing towards the Feasibility stage where ounces tend to command a much higher value or being taken over given that this is an extremely profitable mine even at a $1,7500/oz gold price, let alone a more bullish scenario like $1,850/oz to $2,050/oz gold (range thus far this year).

To summarize, I see Liberty as a Speculative Buy at US$0.375, and I would view any sharp pullbacks in the stock as buying opportunities.

Many investors are busy chasing the names that have already doubled off their lows and while this may work, I prefer hated stocks that are still well below their highs that are being thrown out with the proverbial bathwater.

Liberty Gold and i-80 Gold are two such examples, and I believe both are likely to be outperformers in the developer space over the next two years as they have strong management teams aligned with shareholders, exceptional projects in favorable jurisdictions, and relatively simple operations that investors can be confident will be permitted in a timely manner.

Disclosure: I am long IAUX, LGDTF

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.