Advanced Stage Gold Junior Receives Investment from Yamana · Page 3 ©2020 Fundamental Research...
Transcript of Advanced Stage Gold Junior Receives Investment from Yamana · Page 3 ©2020 Fundamental Research...
Analysts' Ideas of the Week Advanced Stage Gold Junior Receives Investment from Yamana
June 15, 2020
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Weekly Mining Commentary Last week, we had mentioned that we were getting concerned about equity valuations
as most global markets had already recouped a significant portion of the losses from
COVID-19, and that there is no indication that the current fundamentals are better than
pre-COVID levels. Our concerns were justified as stock markets across the globe
experienced a significant sell-off in the first half of last week. The S&P 500 was
down 7.1% in the first half of last week, but has since gained 2.1%. The TSXV (good
proxy for resource companies), which fared better, was down 3.7% in the first half, and
then up 2.9%.
The sell-off was a result of rising concerns of a second wave of the pandemic.
Beijing reported its highest number of new infections since February; almost all of them
were from a single wholesale food market. In the U.S., Florida and Texas reported an
increase in new cases, as shown below.
Source: https://www.worldometers.info/coronavirus/
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On a positive note, except for India, all other countries that we were closely
monitoring, have started reporting a steady or declining number of new cases. As
India has only tested 4k per one million population, we believe that India will continue to
report increasing new cases.
Source: https://www.worldometers.info/coronavirus/
Despite the sell-off in equity markets, copper and gold prices strengthened last
week.
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Barring the risk of a second wave, we believe that increasing activities, as indicated by
the following data, continue to support base metals’ demand.
1. Industrial production in China increased 4.4% YoY in May, up from 3.9% YoY in April.
Chinese Industrial Production
2. Retail sales in China were only down 2.8% YoY in May versus 7.5% in April.
Chinese Retail Sales
3. Consumer confidence is increasing, as indicated by rising property sales in China, and record high mortgage applications in the United States. Canadian home sales increased 57% MoM in May.
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4. The inventory levels of copper on the LME and SHFE (Shanghai Futures
Exchange) continue to decline WoW.
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We remain cautiously optimistic on the current recovery, and continue to be positive on base metal prices. We have not made any changes to our near-term or long-term price forecasts.
As for gold, four out of the fix factors in our model (presented below) were favorable for gold in the past week, which explains why gold prices strengthened. We believe that these four factors continue to support a short-term spike in prices, followed by a decline to our long-run average of $1,400/oz.
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Valuations – Despite the increase in gold and copper prices, due to the sell-off in equity markets, the valuation of gold producers stayed flat, and that of base metal producers declined last week. All seven base metal producers in our list reported weekly declines.
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The next few weeks will be very critical as we will know if a second wave is on the
horizon. That said, as most nations have been able to contain the first wave, we
believe that a second wave can also be contained if and when stricter lockdowns are
imposed. Beijing is reintroducing strict lockdown measures, and is implementing large
scale testing. Although we remain positive on metal prices, we expect equity
markets (across all the mainstream metals) to be very volatile in the coming
weeks.
In the following section, we review companies that announced key developments in the
past week.
Mining / Exploration
Company
Name:
Ticker
Symbol
Current Share
Price:
FRC Fair Value
Estimate:
Date of PR:
Monarch Gold
Inc.
TSX: MQR $0.27 $0.60 June-8-2020
PR Content Received a $5.42 million investment from Yamana Gold (TSX: YRI), Alamos Gold Inc. (TSX: AGI) and other investors. Yamana subscribed for $4.2 million and will be entitled to have a representative on MQR’ board of directors. The company had recently sold its Fayolle property to IAMGOLD Corporation (TSX: IMG) for $11.5 million.
FRC Opinion Positive – This strategic investment from Yamana is a major vote of confidence on MQR’s portfolio. Monarch is in an excellent cash position with $25 million in the treasury and short-term investments. Their properties hold measured and indicated resources totaling 3.16 million ounces (“Moz”), and inferred resources of 0.42 Moz. MQR had recently entered into a MOU with Glencore (LSE: GLEN) to potentially use Glencore’s concentrator in Timmins, Ontario, for the treatment of ore from MQR’s flagship Wasamac gold property. A toll milling option will allow MQR to advance this asset into production quicker and at a lower CAPEX.
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Company
Name:
Ticker
Symbol
Current Share
Price:
FRC Fair Value
Estimate:
Date of PR:
Thor
Exploration
Limited
TSXV: THX $0.18 $0.50 June-12-2020
PR Content Raising up to US$15 million.
FRC Opinion Positive – The funds will be primarily used for exploration drilling on the flagship Segilola project in Nigeria, and the Douta gold Project in Senegal. THX is fully funded to advance the Segilola gold project into production in 2021. At a grade of 4.2 gpt, Segilola is estimated to host the highest grade known open pit gold deposit in West Africa. The average production is expected to be 80,000 oz per year, with an all in sustaining cost of US$662 per oz. We expect a number of catalysts for the share price over the next 12 months as the company advances to production.
Company
Name:
Ticker
Symbol
Current Share
Price:
FRC Fair Value
Estimate:
Date of PR:
Kootenay Silver
Inc.
TSXV: KTN $0.31 $0.57 June-11-2020
PR Content Recommenced drilling at its Columba high-grade silver project, and the never drilled Copalito silver-gold property in Mexico, following a temporary suspension due to COVID-19. Drilling at Columba is the continuation of a 7,000 m program.
FRC Opinion Positive – Columba has consistently returned high grade values since the company started drilling the property in 2019. In 2019, the company had completed a 41 hole / 6,853 m drill program, which was very successful with multiple holes returning high grade silver intercepts on multiple veins. We expect a maiden resource estimate by year-end. No immediate plans on the flagship La Cigarra project, also in Mexico.
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Company
Name:
Ticker
Symbol
Current Share
Price:
FRC Fair Value
Estimate:
Date of PR:
Rockcliff Metals
Corporation
CSE: RCLF $0.07 $0.32 June-10-2020
PR Content Commenced a 3,000 m expansion drill program on the Tower property.
FRC Opinion Neutral – We are awaiting a Preliminary Economic Analysis (PEA) on Tower, which is expected to be completed next month. Note that Tower is one of RCF’s key assets, which includes three advanced stage copper projects (two high-grade copper and one gold-rich copper project), and a leased processing and tailings facility – all in the Flin Flon-Snow Lake greenstone belt in Manitoba. All three projects and the mill are strategically placed, offering the company an option to use a ‘hub and spoke’ strategy, and truck ore from all three projects to a centralized mill. A production decision is expected by Q4.
Company
Name:
Ticker
Symbol
Current Share
Price:
FRC Fair Value
Estimate:
Date of PR:
Skyharbour
Resources Ltd.
Azincourt
Energy Corp.
TSXV: SYH
TSXV: AAZ
$0.15
$0.03
$1.01
N/A
June-8-2020
PR Content Announced results from a phase two drill program at the East Preston uranium project in the western Athabasca Basin. The program (nine holes totaling 2,431 m) tested the A-zone and B-zone conductor corridors, as well as the Swoosh zone, located approximately five km along strike southwest of the A-zone.
FRC Opinion Neutral - Although the program did not result in a discovery, we were pleased to see potential for REE (rare earth elements) mineralization. The project holds multiple untested conductive corridors for additional drilling. AAZ is planning a ground geophysical targeting program to identify drill targets.
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Company
Name:
Ticker
Symbol
Current Share
Price:
FRC Fair Value
Estimate:
Date of PR:
Golden Arrow
Resources
Corporation
TSXV: GRG $0.17 N/A June-8-2020
PR Content Mapping and vein sampling at the Flecha de Oro gold project in Rio Negro, Argentina delineated a new high - grade gold target. Highlights from sampling include: ➢ 24.4 g/t gold and 13.6 g/t silver ➢ 5.23 g/t gold and 32.3 g/t silver over
0.30 m, and ➢ 4.3 g/t gold and 2.3 g/t silver over 0.30
m
FRC Opinion Positive – These results were encouraging, and the company is likely to follow this up with a trenching program. GRG’s portfolio includes early stage precious-metal projects in Paraguay and Argentina. The company holds 945,580 shares of SSR Mining (TSX: SSRM), which are currently valued at $24 million. GRG’s market capitalization is only $19 million; implying that the market is assigning zero value to any of its assets.
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Special Situations
Company
Name:
Ticker
Symbol
Current Share
Price:
FRC Fair Value
Estimate:
Date of PR:
CIBT Education
Group Inc.
TSX: MBA $0.45 $1.22 June-9-2020
PR Content Signed a binding agreement to purchase two apartment buildings in Metro Vancouver. If and when completed, this will be CIBT’s eleventh project in Metro Vancouver. The purchase price was undisclosed, but the company did disclose that the two buildings have a capacity to accommodate up to 245 students and other tenants.
FRC Opinion Neutral – Since the purchase price and other pertinent details (such as the cap rate) remain undisclosed, we are not in a position to comment on the deal’s attractiveness. That said, CIBT’s expanding portfolio size makes them increasingly attractive for institutional buyers of real estate. CIBT is now the largest privately funded student housing provider in Western Canada with a total projected cost of projects completed and under development of over $1 billion, and a capacity of over 1,500 students and other tenants. Our near-term outlook for student housing projects is weak due to a lack of international students. However, we maintain a long-term positive outlook on the sector considering that we believe B.C. will continue to attract foreign students once all the travel restrictions are removed. We will comment on CIBT’s latest transaction once additional details are disclosed.
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Company
Name:
Ticker
Symbol
Current Share
Price:
FRC Fair Value
Estimate:
Date of PR:
Siyata Mobile
Inc.
TSXV: SIM $0.11 $1.14 June 12, 2020
June 11, 2020
PR Content
Released year-end results, with 2019
revenue coming in at $13.02 million – a
year-over-year decrease of 8.4%. The
deterioration in revenue, according to the
company, was primarily due to lower 3G
device sales. The net loss in 2019 was
$10.16 million (EPS: -$0.09) versus a net
loss of $11.53 million (EPS: -$0.12) in
2018. The net loss in 2019 improved
year-over-year due to an impairment
charge of $1.95 million on intangible
assets in 2018.
Announced a related-party non-brokered
private placement of approximately US$1
million in unsecured convertible
debentures (12-month maturity, interest
rate of 10%, with a conversion price of
$0.30).
FRC Opinion
Negative – For 2019, we expected the
company to report revenue and a net loss of
$15.04 million and $6.72 million (EPS: -
$0.05), respectively. In the company’s
earnings call, management alluded to weak
3G device sales headed into 2020 as users
switch to 4G products. The company has
been delivering on its government tender
(valued between $3 million to $5 million) in
Q1-2020, in addition to other purchase
orders (“PO”), leading us to believe that
revenue in Q1-2020 will strengthen
compared to Q4-2019 (revenue of $2.93
million).
Positive – We are pleased to see a related-
party financing, as it indicates insider’s
conviction on the company.
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Cannabis
Company
Name:
Ticker
Symbol
Current Share
Price:
FRC Fair Value
Estimate:
Date of PR:
Inner Spirit
Holdings Inc.
CSE: ISH $0.15 $0.42 June 8, 2020
PR Content
Announced that five franchise partners
have secured Retail Store Authorizations
(“RSA”) for Spiritleaf cannabis stores in
the province of Ontario. Furthermore,
seven additional Spiritleaf stores in
varying provinces have completed
construction and are in the final stages of
licensing.
FRC Opinion
Positive – We are pleased to see the
company continually expand its footprint
across Canada. We expect Inner Spirit to
operate 73 retail cannabis stores
(franchised and corporate) in 2020.
Company
Name:
Ticker
Symbol
Current Share
Price:
FRC Fair Value
Estimate:
Date of PR:
AgraFlora
Organics
International
Inc.
CSE: AGRA $0.06 $0.38 June 15, 2020
PR Content
Announced the commencement of
cannabis cultivation at the Delta
Greenhouse Complex (“DGC”).
FRC Opinion
Neutral – We expected the commencement
of cannabis cultivation at the DGC in early
Q1-2020.
Coverage Update:
• We are terminating coverage on Agrios Global Holdings Inc. (CSE: AGRO) due to a lack of communication from management. Our rating and fair value estimate are no longer valid.
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Weekly Cannabis Commentary
Cannabis Industry Performance
Note: MCAN and XCAN was launched on November 18, 2019 and January 20, 2020, respectively.
Source: TMX Money, FRC
Over the past week, the Horizons Marijuana Life Sciences ETF (TSX: HMMJ / “HMMJ”), the Standard & Poor’s/MX International Cannabis Index (“MCAN”), and the Standard & Poor’s/TSX Cannabis Index (“XCAN”) generated a return of -10%, -10%, and -13%, respectively. Weakness in the broader market, due to fears of a second wave of COVID-19 and rising cases in some states in the United States, resulted in the poor weekly performance of the cannabis industry. Canadian retail sales data for the month of April 2020 are due on June 19, 2020. An update to retail cannabis sales will be provided next week.
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Valuation of Select Canadian LPs
The following shows the average Enterprise Value to Revenue (“EV/R”) of the cannabis
companies that we track.
Average EV/R (October 2019 – June 2020)
Source: S&P Capital IQ, FRC
Source: S&P Capital IQ, FRC
The average EV/R, as of June 15, 2020, is 10.9x – a slight deterioration from an
average EV/R of 11.1x as of June 8, 2020. The average EV/R, from October 7, 2019 to
date, is 12.4x. As a number of companies are not EBITDA positive, we have refrained
from tracking the average Enterprise Value to EBITDA (“EV/EBITDA”).
Below, we discuss the illicit market for cannabis in Canada.
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Canada’s Illicit Market for Cannabis
Legal recreational cannabis sales in Canada were $1.2 billion in 2019 (Source:
Statistics Canada), a figure dwarfed by an illicit cannabis market that is estimated at $5
billion to $7 billion (Source: The Associated Press). We believe there are two key
factors contributing to the success of Canada’s illicit market for cannabis: (1) the high
pricing for legal cannabis and (2) the lack of retail cannabis stores across Canada.
These two factors result in legal cannabis that is overpriced and not easily
accessible.
Key Issues with Canada’s Legal Cannabis Market
Source: FRC
• From our data, the price per gram of recreational cannabis has only dropped
5% from October 2018 to date (average price per gram currently sitting at
$11.49).
• Since we began tracking the number of retail cannabis stores in Canada
(February 2020), the store count has increased by 20%. Although this represents
a strong increase, the population per store currently sits at 40k. There is
tremendous potential for more store openings across Canada, especially in
the province of Ontario, who has a population per store of 166k. According
to a report by Verilife, the state of Oregon (a mature cannabis market) has a
population per store count of 6k.
If Canada expects to compete effectively against the illicit market for cannabis, stronger
effort must be made in decreasing the retail price of cannabis and opening more retail
cannabis stores.
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According to the 2019 National Cannabis Survey (“NCS”) by Statistics Canada, 29% to
51% of cannabis consumers in Canada acquire their products from an illegal
source.
Sources of Cannabis
Note: Respondents could select more than one category, so results may not add up to 100%.
Taken From: Vancouver Sun; Source: Statistics Canada, National Cannabis Survey
Canadian Retail Cannabis Pricing
Source: Online Provincial Cannabis Stores, FRC
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The average retail price per gram remained steady at $11.49 per gram.
In the long-term, we continue to reiterate our view that the retail price per gram of
cannabis will decrease to combat the black market for cannabis. According to
Statistics Canada, the average price of illegal cannabis in Q4-2019 was $5.73. The
following shows the trend in pricing for illegal cannabis:
Illegal Cannabis Pricing
Source: Statistics Canada, FRC
Retail Cannabis Stores
As of June 15, 2020, there are 943 retail cannabis stores across Canada. This is a
nominal increase from a week ago.
Number of Retail Cannabis Stores in Canada
Source: Provincial Websites, FRC
The following shows the number of retail cannabis stores by province/territory:
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Source: Provincial Websites, FRC
Shown above, Ontario and Quebec are the two largest underserved provinces for
cannabis, with a population / store of 165k and 202k, respectively. To our surprise, the
number of cannabis retail stores in Ontario decreased by three week-over-week. We
are not privy to the reason for this decrease. Growth in Canada’s cannabis market
hinges on more retail cannabis store openings in the two aforementioned
provinces.
The below chart shows Canadian retail dried cannabis flower pricing since we began
price coverage.
Canadian Retail Dried Cannabis Flower Pricing
Source: Online Provincial Cannabis Stores, FRC
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