Closeup of big gold nugget

Beaufor resources up 136%, valuation up 20%

Monarch Mining Corporation 6 August 2021 Update
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Monarch Mining Corporation

Beaufor resources up 136%, valuation up 20%

Resource upgrade

Metals & mining

6 August 2021

Price

C$0.88

Market cap

C$69m

US$/C$1.25

Net cash (C$m) at 31 March 2021

19.0

Shares in issue

78.0

Free float

84%

Code

GBAR/GBARF

Primary exchange

TSX

Secondary exchange

OTC

Share price performance

%

1m

3m

12m

Abs

(5.4)

8.6

N/A

Rel (local)

(5.8)

3.0

N/A

52-week high/low

C$1.16

C$0.6

Business description

Monarch Mining Corporation is a Canadian gold explorer with two near-term projects and two second tier projects in the Abitibi, Quebec, gold belt.

Next events

Q421 results

August 2021

Analyst

René Hochreiter

+44 (0)20 3077 5700

Monarch Mining Corporation is a research client of Edison Investment Research Limited

Monarch Mining Corporation’s potentially high-return gold projects in the well-established Abitibi gold belt have reported a 136% increase in measured and indicated (M&I) resources at its Beaufor asset to 219,200oz of gold, with total measured, indicated and inferred (MI&I) up 178% to 341,700oz. We have added a six-year life extension and now forecast an 11-year life for Beaufor, which is set to start production by June 2022. Croinor is planned for start-up in FY24/25. Ongoing exploration could lead to more life extensions. McKenzie Break and Swanson could add further value in the future. Meanwhile an additional C$11.3m has been raised from a royalty transaction and C$13.5m from debt financing increasing gross cash to over C$43m. We have increased our valuation by 20% to C$1.19/share.

Year end

Revenue (C$m)

PBT*
(C$m)

EPS*
(c)

DPS
(c)

P/E
(x)

Yield
(%)

06/21e

0.0

(4.0)

(5.9)

0.0

N/A

N/A

06/22e

20.5

(3.8)

(5.2)

0.0

N/A

N/A

06/23e

56.3

15.5

16.1

7.4

5.5

8.4

06/24e

74.7

21.1

16.9

14.2

5.2

16.2

Note: *PBT and EPS are normalised, excluding amortisation of acquired intangibles, exceptional items and share-based payments. Listed in January 2021, no historical data.

Significant Beaufor mine life extension likely

The planned re-start of Beaufor and Beacon mill entered a new phase with the expansion to 219,200oz M&I ounces (up 136.5% from its previous 92,700oz) presenting a six-year life extension to the previous 4.5 years. This, together with an increase in cash resources to C$43m on the back of four successful equity, royalty and debt transactions should easily enable Monarch to recommission its two main mining assets. Monarch moved into recruiting mode in mid-June and is set to restart production by mid-2022. It will focus on operating Beaufor from a vertical shaft and a production ramp. The ongoing 42,500-metre drilling programme has more than doubled the potential mine life in less than six months. This is confirmation of the incredible ability of the Abitibi gold belt to continue to produce gold resources.

Successive transactions bolster balance sheet

Since January 2021, Monarch has raised C$42m comprising of C$10.1m flow-through shares issued, C$6.7m raised in a bought deal private placement of units, a C$11.3m royalty transaction with Gold Royalty Corp and a C$13.5m debt senior secured term loan from Investissement Québec. Its bolstered balance sheet increases confidence in operational outlook and mine extension upside.

Valuation: C$1.19/share including next tier assets

Our valuation of C$1.19/share comprises C$0.89/share for Beaufor and Croinor, starting operations in FY22 and C$0.30/share for next tier assets. This increase in value from our previous C$0.99/share validates the mine life extension upside we presented in our initiation note. Further upside remains through additional life extensions and unlocking value in the tier two assets of McKenzie Break and Swanson through corporate action or bringing them into production.

Drilling success supports mine life extensions

Monarch Mining has the potential to become a 25–65Koz pa gold producer in one of the most prospective areas for gold exploration in the world (Exhibit 1). With its track record of adding 11oz of gold for every metre of exploration drilled in the Abitibi gold belt, there is every reason to believe that the current 63,200m drilling programme could further add significant resources to its MI&I resources.

Exhibit 1: Location of Monarch’s projects, Abitibi, Quebec

Source: Monarch Mining, 2021

Main risk/reward: Highly geared to mine life

We see the principal risks and sensitivity to Monarch Mining as extending the life of the mines and accelerating or delaying bringing the Croinor mine into production in FY24, which is our base case. This is in addition to the normal risks of execution and the gold price. The risks related to the cash position and the ability to finance in order to bring Beaufor and Croinor into production have been largely removed through successful funding transactions year-to-date. The mine extension upside we flagged in our initiation note sensitivities has now in part been formalised in our valuation, although further upside remains through additional life extension potential for Beaufor and Croinor. This upside is dependent on additions to MI&I, but with continued investment in exploration and recent successes, we are optimistic.

Conclusion: Drill as much as possible

The exploration programme has already added significant new resources to the company’s MI&I resources statement and is likely to do so again in this highly prospective gold belt. Management is aware that this is the way to add the most value to this early-stage company and therefore intends to maintain a high level of exploration and development spend going forward.

Financials

Our forecasts for FY21 remain unchanged with a 5.9c/share loss driven by running costs and Beaufor only coming online in FY22. We have increased our FY22 forecast loss from 4.6c/share to 5.2c/share with the pre-tax loss increasing from C$3.2m to C$3.8m primarily for two reasons.

The first relates to the 23 July 2021 announced transaction with Gold Royalty Corp whereby Monarch has sold a C$2.50/t royalty interest on all material processed through the Beacon mill originating from the Beaufor mine operations and a 2.5% net smelter return royalty on each of the Croinor, McKenzie Break and Swanson properties for a C$11.25m consideration. With Beaufor expected to come into production in FY22, the royalty payment increases cost of sales in our forecast.

The second relates to the C$13.5m senior secured loan agreement with Investissement Québec, which was announced on 3 August 2021. Although this helps to bolster Monarch’s current gross cash position to over C$43m (as of August 2021), this three-year term loan attracts finance cost at 6% until the restart of Beaufor, 5% during the first year of production and 4% thereafter. We have increased our finance costs assumptions to account for the loan.

The impact of these two transactions continues into our post-FY22 forecasts as well with FY23 earnings cut from 17.9c/share to 16.1c/share and FY24 cut from 19.4c/share to 16.9c/share. However, this near-term negative impact on our forecasts is more than offset by mine life extensions, which have resulted in dividends under our base case continuing until FY28 where they ceased in FY26 previously. We have based our mine life projection on the latest available M&I and our assumed ore production schedule, which is driven by the company’s NI 43-101 technical reports, allowing for production levels to remain flat in the additional forecast years.

Our forecasts now also allow for the impact of the bought deal private placement of unts that was upsized from C$6m to C$6.7m since our previous note.

Valuation

We have increased our core valuation relating to Beaufor and Croinor by 29% to C$0.89/share on the back of the forecast life extension for Beaufor. This increase is driven by an extended dividend payment profile as represented below.

Exhibit 2: Valuation and dividend forecasts – base case to FY28

Source: Edison Investment Research

Our base case core valuation does not include further life extensions or dividend payments after FY28, although we flag the potential for this to occur, which could lead to further upside. Our valuation for the tier two assets is based on a peer resource valuation of 12 gold producers in Canada with price appreciation since our initiation report offsetting dilution due to share issuance, leaving our valuation at C$0.30/share. Although Monarch’s recent exploration successes present upside potential for this valuation through either corporate action or bringing them into production, we have taken a conservative approach. Our revised total valuation is C$1.19/share, which is a 20% increase on our previous value of C$0.99/share. This uplift illustrates the sensitivity of Monarch’s valuation to mine life extensions, which we flagged in our initiation note.

Exhibit 3: Financial summary

C$'000s

Sep 2020

FY21e

FY22e

FY23e

FY24e

June

Pro forma

IFRS

IFRS

IFRS

IFRS

PROFIT & LOSS

Revenue

 

0

0

20,505

56,269

74,699

Cost of Sales

0

0

(11,383)

(31,694)

(44,191)

Gross Profit

0

0

9,122

24,575

30,509

EBITDA

 

(1,883)

(3,790)

(3,378)

15,949

21,700

Operating Profit (before amort. and except.)

 

(1,883)

(3,790)

(3,378)

15,949

21,700

Amortisation

0

(2,500)

(1,328)

(1,477)

(1,509)

Exceptionals

188

250

1,500

500

0

Other

0

0

0

0

0

Operating Profit

(1,695)

(6,040)

(3,206)

14,973

20,191

Net Interest

(69)

(206)

(436)

(456)

(631)

Profit Before Tax (norm)

 

(1,952)

(3,996)

(3,814)

15,493

21,069

Profit Before Tax (FRS 3)

 

(1,764)

(6,246)

(3,642)

14,517

19,560

Tax

467

0

0

(2,918)

(7,882)

Profit After Tax (norm)

(1,485)

(3,996)

(3,814)

12,577

13,189

Profit After Tax (FRS 3)

(1,297)

(6,246)

(3,642)

11,599

11,678

Average Number of Shares Outstanding (m)

66.3

68.0

73.9

78.0

78.0

EPS - normalised (c)

 

(2.2)

(5.9)

(5.2)

16.1

16.9

EPS - normalised and fully diluted (c)

 

(2.2)

(5.7)

(4.9)

15.0

15.7

EPS - (IFRS) (c)

 

(2.0)

(9.2)

(4.9)

14.9

15.0

Dividend per share (c)

0.0

0.0

0.0

7.4

14.2

Gross Margin (%)

N/A

N/A

44.5

43.7

40.8

EBITDA Margin (%)

N/A

N/A

-16.5

28.3

29.0

Operating Margin (before GW and except.) (%)

N/A

N/A

-16.5

28.3

29.0

BALANCE SHEET

Fixed Assets

 

36,504

36,504

37,989

38,313

65,944

Intangible Assets

14,319

14,319

14,319

14,319

14,319

Tangible Assets

13,282

13,282

14,767

15,090

42,721

Investments

8,903

8,903

8,903

8,903

8,903

Current Assets

 

20,920

19,439

44,023

60,188

41,568

Stocks

1,192

1,192

1,139

3,126

4,150

Debtors

2,122

2,122

2,079

5,704

7,572

Cash

14,000

14,520

39,200

49,752

28,240

Other

3,605

1,605

1,605

1,605

1,605

Current Liabilities

 

(2,698)

(2,695)

(9,337)

(13,900)

(16,707)

Creditors

(2,666)

(2,666)

(2,557)

(7,120)

(9,928)

Short term borrowings

(32)

(29)

(6,779)

(6,779)

(6,779)

Long Term Liabilities

 

(10,671)

(8,797)

(15,873)

(16,699)

(17,025)

Long term borrowings

(26)

(29)

(6,779)

(6,779)

(6,779)

Other long term liabilities

(10,644)

(8,768)

(9,093)

(9,919)

(10,245)

Net Assets

 

44,056

44,452

56,803

67,902

73,780

CASH FLOW

Operating Cash Flow

 

0

(3,464)

(3,064)

15,226

21,941

Net Interest

0

(206)

(436)

(456)

(631)

Tax

0

0

0

(2,418)

(7,882)

Capex

0

(500)

(2,813)

(1,800)

(29,140)

Acquisitions/disposals

0

0

0

0

0

Financing

0

4,690

17,493

0

0

Dividends

0

0

0

0

(5,800)

Net Cash Flow

0

520

11,180

10,552

(21,512)

Opening net debt/(cash)

 

0

(13,941)

(14,461)

(25,641)

(36,193)

HP finance leases initiated

0

0

0

0

0

Other

0

0

0

0

0

Closing net debt/(cash)

 

(13,941)

(14,461)

(25,641)

(36,193)

(14,682)

Source: Source: Monarch Mining accounts, Edison Investment Research. Note: We do not show historical figures and instead show pro forma FY20 figures published in September 2020, reflecting that on 10 November 2020 Yamana bought the Wasamac mine and Camflo mill from Monarch Gold and, as such, there are no historical numbers that are relevant to Monarch Mining.

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This report has been commissioned by Monarch Mining Corporation and prepared and issued by Edison, in consideration of a fee payable by Monarch Mining Corporation. Edison Investment Research standard fees are £49,500 pa for the production and broad dissemination of a detailed note (Outlook) following by regular (typically quarterly) update notes. Fees are paid upfront in cash without recourse. Edison may seek additional fees for the provision of roadshows and related IR services for the client but does not get remunerated for any investment banking services. We never take payment in stock, options or warrants for any of our services.

Accuracy of content: All information used in the publication of this report has been compiled from publicly available sources that are believed to be reliable, however we do not guarantee the accuracy or completeness of this report and have not sought for this information to be independently verified. Opinions contained in this report represent those of the research department of Edison at the time of publication. Forward-looking information or statements in this report contain information that is based on assumptions, forecasts of future results, estimates of amounts not yet determinable, and therefore involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of their subject matter to be materially different from current expectations.

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New Zealand

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Frankfurt +49 (0)69 78 8076 960

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1185 Avenue of the Americas

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Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

60325 Frankfurt

Germany

London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

1185 Avenue of the Americas

3rd Floor, New York, NY 10036

United States of America

Sydney +61 (0)2 8249 8342

Level 4, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

General disclaimer and copyright

This report has been commissioned by Monarch Mining Corporation and prepared and issued by Edison, in consideration of a fee payable by Monarch Mining Corporation. Edison Investment Research standard fees are £49,500 pa for the production and broad dissemination of a detailed note (Outlook) following by regular (typically quarterly) update notes. Fees are paid upfront in cash without recourse. Edison may seek additional fees for the provision of roadshows and related IR services for the client but does not get remunerated for any investment banking services. We never take payment in stock, options or warrants for any of our services.

Accuracy of content: All information used in the publication of this report has been compiled from publicly available sources that are believed to be reliable, however we do not guarantee the accuracy or completeness of this report and have not sought for this information to be independently verified. Opinions contained in this report represent those of the research department of Edison at the time of publication. Forward-looking information or statements in this report contain information that is based on assumptions, forecasts of future results, estimates of amounts not yet determinable, and therefore involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of their subject matter to be materially different from current expectations.

Exclusion of Liability: To the fullest extent allowed by law, Edison shall not be liable for any direct, indirect or consequential losses, loss of profits, damages, costs or expenses incurred or suffered by you arising out or in connection with the access to, use of or reliance on any information contained on this note.

No personalised advice: The information that we provide should not be construed in any manner whatsoever as, personalised advice. Also, the information provided by us should not be construed by any subscriber or prospective subscriber as Edison’s solicitation to effect, or attempt to effect, any transaction in a security. The securities described in the report may not be eligible for sale in all jurisdictions or to certain categories of investors.

Investment in securities mentioned: Edison has a restrictive policy relating to personal dealing and conflicts of interest. Edison Group does not conduct any investment business and, accordingly, does not itself hold any positions in the securities mentioned in this report. However, the respective directors, officers, employees and contractors of Edison may have a position in any or related securities mentioned in this report, subject to Edison's policies on personal dealing and conflicts of interest.

Copyright: Copyright 2021 Edison Investment Research Limited (Edison).

Australia

Edison Investment Research Pty Ltd (Edison AU) is the Australian subsidiary of Edison. Edison AU is a Corporate Authorised Representative (1252501) of Crown Wealth Group Pty Ltd who holds an Australian Financial Services Licence (Number: 494274). This research is issued in Australia by Edison AU and any access to it, is intended only for "wholesale clients" within the meaning of the Corporations Act 2001 of Australia. Any advice given by Edison AU is general advice only and does not take into account your personal circumstances, needs or objectives. You should, before acting on this advice, consider the appropriateness of the advice, having regard to your objectives, financial situation and needs. If our advice relates to the acquisition, or possible acquisition, of a particular financial product you should read any relevant Product Disclosure Statement or like instrument.

New Zealand

The research in this document is intended for New Zealand resident professional financial advisers or brokers (for use in their roles as financial advisers or brokers) and habitual investors who are “wholesale clients” for the purpose of the Financial Advisers Act 2008 (FAA) (as described in sections 5(c) (1)(a), (b) and (c) of the FAA). This is not a solicitation or inducement to buy, sell, subscribe, or underwrite any securities mentioned or in the topic of this document. For the purpose of the FAA, the content of this report is of a general nature, is intended as a source of general information only and is not intended to constitute a recommendation or opinion in relation to acquiring or disposing (including refraining from acquiring or disposing) of securities. The distribution of this document is not a “personalised service” and, to the extent that it contains any financial advice, is intended only as a “class service” provided by Edison within the meaning of the FAA (i.e. without taking into account the particular financial situation or goals of any person). As such, it should not be relied upon in making an investment decision.

United Kingdom

This document is prepared and provided by Edison for information purposes only and should not be construed as an offer or solicitation for investment in any securities mentioned or in the topic of this document. A marketing communication under FCA Rules, this document has not been prepared in accordance with the legal requirements designed to promote the independence of investment research and is not subject to any prohibition on dealing ahead of the dissemination of investment research.

This Communication is being distributed in the United Kingdom and is directed only at (i) persons having professional experience in matters relating to investments, i.e. investment professionals within the meaning of Article 19(5) of the Financial Services and Markets Act 2000 (Financial Promotion) Order 2005, as amended (the "FPO") (ii) high net-worth companies, unincorporated associations or other bodies within the meaning of Article 49 of the FPO and (iii) persons to whom it is otherwise lawful to distribute it. The investment or investment activity to which this document relates is available only to such persons. It is not intended that this document be distributed or passed on, directly or indirectly, to any other class of persons and in any event and under no circumstances should persons of any other description rely on or act upon the contents of this document.

This Communication is being supplied to you solely for your information and may not be reproduced by, further distributed to or published in whole or in part by, any other person.

United States

Edison relies upon the "publishers' exclusion" from the definition of investment adviser under Section 202(a)(11) of the Investment Advisers Act of 1940 and corresponding state securities laws. This report is a bona fide publication of general and regular circulation offering impersonal investment-related advice, not tailored to a specific investment portfolio or the needs of current and/or prospective subscribers. As such, Edison does not offer or provide personal advice and the research provided is for informational purposes only. No mention of a particular security in this report constitutes a recommendation to buy, sell or hold that or any security, or that any particular security, portfolio of securities, transaction or investment strategy is suitable for any specific person.

Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

60325 Frankfurt

Germany

London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

1185 Avenue of the Americas

3rd Floor, New York, NY 10036

United States of America

Sydney +61 (0)2 8249 8342

Level 4, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

60325 Frankfurt

Germany

London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

1185 Avenue of the Americas

3rd Floor, New York, NY 10036

United States of America

Sydney +61 (0)2 8249 8342

Level 4, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

Source:      

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