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 Fri Jul 19, 2019
Tracker: Spec Value Rating for Midas Gold Corp (MAX-T)
    Publisher: Kaiser Research Online
    Author: Copyright 2019 John A. Kaiser

 
Midas Gold Corp (MAX-T: 0.77)
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Tracker - July 19, 2019: Spec Value Rating for Midas Gold Corp (MAX-T)

Midas Gold Corp is a Fair Spec Value rated Favorite based on the Stibnite gold-antimony project in Idaho where Midas is in the advanced stages of permitting a 20,000 tpd open pit mine that would produce over 300,000 oz gold annually over a 12 year mine life according to a 2014 PFS. Once in production the mine life will likely be extended as exploration delineates additional future mill feed and a higher long term real gold price lowers the cutoff for open-pittable resources. The mineralization footprint is substantial; this is an example of "get a mine going with a modest mine life that more than pays back the development cost and reward the investors with a much longer lived mine than "planned". The mine would also produce a significant amount of antimony as a by-product that would eliminate US import dependency on China which supplies 85% of global antimony output, much of it from a single large deposit. As long as America remains First and the US dollar is the cudgel with which America can bludgeon all other nations into submission, gold does not matter, but security of supply for antimony has an over-riding strategic value that makes Stibnite more important to turn into a mine than any other American gold deposit. In fact, the reason Stibnite is such an environmental mess is that it was America's primary source of antimony during World War II, with later gold mining making the mess worse. Antimony's main use is as a fire retardant which links demand growth to the global economy and military conflict. Antimony is currently in a downtrend at $2.62/lb approaching the ten year low of $2/lb compared to $8/lb in early 2011, but given the winner-take-all showdown brewing between the United States and China, one that has bipartisan support, only a fool would assume the current antimony price level or lower as the long term global reality. CEO Stephen Quin has called Stibnite a "reclamation project funded by a gold mine". None of that has helped speed up mine permitting nor has any of Trump's deregulation bluster and his wall temper tantrum that resulted in a government shutdown was not helpful; the latest US Forestry Service prediction is that it will issue a draft environmental impact statement by the end of 2019, with a final EIS in Q3 of 2020 and a record of decision in Q4. In other words maybe mine approval in 2021 and production in 2023? There is a lingering market perception that Stibnite will never get permitted, that the process is a permanent make work program for bureaucrats. What partly makes Midas a Fair Spec Value rated Favorite rather than Good Spec Value is a weak valuation resulting from the perception that Stibnite will never get permitted and even if it does, it does not matter because to be worth developing it needs a substantially higher real gold price which will never happen if America stays First. The question of Stibnite's value is up in the air while the market waits for a feasibility study whose completion will coincide with issue of the draft EIS with whose recommendations the mining plan must conform. What gold price is needed to justify a production decision based on the hurdles of an after-tax IRR in excess of 15% and an NPV exceeding CapEx? The 2014 PFS using a $1,350 base case gold price generated an after-tax NPV at 5% below the USD $970 million CapEx which is high because of the need to treat the refractory ore with pressure oxidation. The economics of the PFS were weaker than an earlier PEA because the drill density in parts of the deposits was insufficient for PFS requirements to allow full inclusion of data, which also turned the antimony output into something way down the road whose value is destroyed by the math of the DCF model. Subsequent infill drilling has dealt with this problem and the expectation is that the initial PEA grade assumptions in the ore schedule will be restored and possibly improved. The reduction of the federal tax rate from 35% to 21% will also have a positive effect. However, CapEx, which includes a lot of base metal, will likely be higher as a result of Trump's import tariffs and additional mitigation measures arising from the EIS. For this project to proceed it needs an NPV in excess of CapEx (using a discount rate higher than 5%), which, if CapEx is USD $1.2 billion with a 1.31 CAD:USD exchange rate implies a minimum NPV/share of $3.63 based on fully diluted 432.7 million shares. Midas raised nearly $20 million at $0.60 in late May just before gold finally developed an uptrend, with John Paulson and Barrick electing to maintain their equity stakes. When thinking about Midas one has to take into consideration the $55 million financing done in 2016 in the form of a zero coupon debenture convertible at $0.354, most of which was put up by Paulson who shot to fame in 2009 because he shorted the real estate bubble created by Wall Street through its securitization of mortgages. Paulson mutated into an unconventional gold bug, namely not the simplistic type who erroneously thinks a higher gold price arising from fiat currency debasement and hyper-inflation caused by evil socialism will make a gold deposit like Stibnite worth developing, but rather one with a sophisticated view that higher real prices will drag marginal deposits into the money. The failure of a real gold price uptrend to develop has helped turn Paulson's hedge fund into a family office as investors bailed on Paulson's vision. The 2016 financing decision was opposed by Rick Rule who wanted Midas to stop all work and go into hibernation as a pure optionality play that will one day prove very valuable. That would have turned Midas into a fake gold play waiting for a pump and dump when gold finally makes its big move for whatever reason. The "fund the permitting cycle" camp won out, with dilution as the price. To put the value potential into perspective, if we apply the DCF model to the 2014 PFS assumptions using current metal prices ($1,428/oz gold) and the new 29.4% combined federal and state tax rate, the after-tax NPV (5%) and IRR are USD $1,082,000,000 and 26.8% which is a green light though at 10% discount rate the $656 million NPV is not. At $1,600 gold the NPV is $1.4 billion at 5% and $930 million at 10%, meaning that if gold crosses $1,600 the market will price the stock toward the CAD $2.76 to $4.25 NPV/FD share range for 10% and 5% discount rates. At $2,000 gold achieved not because of rampant inflation but rather because of a radical upward repricing similar to what happened in the late seventies when it became unclear as to who was in charge of the world's destiny, the NPV jumps to $2.3 billion (5%) and $1.6 billion (10%) where a production decision is a no-brainer. The catch for now is that we must see how Stibnite looks when the feasibility study is published. Barrick through its strategic equity investments has emerged as an obvious contender to buy out Midas Gold. If Paulson proves correct that a major upwards revision in the real price of gold is on the horizon, Stibnite has a lot of leverage on the upside and is the biggest and most advanced major potential gold mine in a stable jurisdiction owned by a junior. Midas Gold is a KRO Favorite because if you have a rationale for believing gold is due for an upwards real price adjustment into the $2,000-$3,000 range (a mere gold price double!), the stock will end up trading at $10 plus and possibly get funded to develop Stibnite on its own rather than get bought out by a gold producer.

 
 

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