Freegold Ventures |
Shorty Creek potential validated by South32 |
Exploration update |
Metals & mining |
22 March 2019 |
Share price performance
Business description
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Analyst
Freegold Ventures is a research client of Edison Investment Research Limited |
Freegold Ventures has granted South32 (an A$19.0bn market cap major demerged from BHP in 2015) an option to earn up to a 70% interest in Shorty Creek by investing US$30m, of which at least US$10m will be in the form of exploration expenditure. Freegold will remain the operator. However, South32’s (time deferred) option effectively represents a validation of the exploration potential at Shorty Creek and (significantly) allows it to be further explored and validated with no further share dilution to Freegold investors.
Year end |
Revenue (US$m) |
PBT* |
EPS* |
DPS |
P/E |
Yield |
12/16 |
0.0 |
(1.0) |
(0.7) |
0.0 |
N/A |
N/A |
12/17 |
0.0 |
(0.6) |
(0.4) |
0.0 |
N/A |
N/A |
12/18e |
0.0 |
(0.9) |
(0.5) |
0.0 |
N/A |
N/A |
12/19e |
0.0 |
(0.9) |
(0.5) |
0.0 |
N/A |
N/A |
Note: *PBT and EPS are normalised, excluding amortisation of acquired intangibles, exceptional items and share-based payments.
Shorty Creek valuation alone 6.8–9.6 US cents/share
South32’s commitment of US$30m for a 70% interest in Shorty Creek implies a valuation for the project currently of c US$12.9m, or 6.8 US cents (9.0 Canadian cents) per share. In our recent report Gold stars and black holes, published in January 2019, Edison calculated an average in-situ value for copper resources of US$22.50 per tonne of contained metal. When applied to our estimate of 0.8Mt of contained copper metal at Hill 1835 (see our note Freegold Ventures: Boldly going, published on 20 August 2018), this implies a potential value for Shorty Creek of c US$18.1m, or US$0.096/share (assuming that the resources can be brought to NI 43-101 standards). South32’s implied pre-resource valuation of the project of US$12.9m represents a 29.0% discount to Edison’s resource-stage valuation. However, the exploration programme at Shorty Creek will also be focusing on the outlying areas of the project with the intention of proving up its district scale potential – in which case its ultimate in-situ resource could to far exceed our (order of magnitude) estimate based on drilling to date.
Valuation: 13.1c + 6.8–9.6c for Shorty Creek + upside
In the wake of Freegold’s C$1.2m October fund-raising, we estimate a value to Freegold of 13.1 US cents per share from the development of the Golden Summit project (see our note, Freegold Ventures: Boldly going, published on 20 August 2018). Like Shorty Creek however, Golden Summit is wide open in terms of the geological opportunity that it represents and successful exploration has the potential to increase this valuation materially (eg by 43.5%, to US$0.188/share, if Freegold is able to double its oxide resource to 1.2Moz, thereby supporting a doubling in early-stage production rates).
Shorty Creek option detail
Freegold has granted South32 a four-year option to earn a 70% interest in Shorty Creek for a US$30m commitment. To maintain the option in good standing, South32 is required to contribute minimum expenditures of US$2m in years one and two and US$3m in years three and four (an aggregate investment of US$10m). Freegold will act as the operator during the four-year option period. The year one commitment of US$2m is guaranteed and, subsequently, South32 may elect to exercise its option at any time thereafter by committing US$30m less expenditures to date. If South32 elects to withdraw during the four-year option, the option shall lapse and South32 shall have no further interest in, or claim over, the property.
Provided that all the exploration data and information has been made available by 31 December of each year of the option agreement, South32 will decide within 30 days whether to fund the next tranche of investment. Hypothetically, therefore, South32 could expend US$10m (5.3 US cents, or 7.0 Canadian cents per Freegold share) during the option phase of the project and then decide not to exercise its option and have no claim over the property. At an absolute minimum, it will expend US$2m (1.1 US cents, or 1.4 Canadian cents per Freegold share) and have no claim over the property.
After the subscription funding US$30m has been expended, South32 and Freegold will contribute additional funding pro-rata to their shareholdings (ie in the ratio 70:30).
Recent Shorty Creek exploration
In January, Freegold announced the results of two holes at Hill 1835 (just one of the targets at Shorty Creek). Both intersected broad, consistent copper porphyry mineralisation as well as continuing to define and validate it as a new copper porphyry with significant size potential. Hole SC 18-01 recorded a mineralised interval of 442.2m at a copper equivalent (CuE) grade of 0.42%, including 121.15m at 0.80% CuE. Hole SC 18-02 recorded a mineralised interval of 442.4m at a copper equivalent grade of 0.44%, including 126m at 0.54% CuE.
The results compare to those of earlier drill holes completed by Freegold at Hill 1835, as shown in the Exhibit below:
Exhibit 1: Hill 1835 drill intercept summary
Hole number |
From (m) |
To (m) |
Interval (m) |
CuE (%) |
Cu (%) |
SC15-03 |
91.4 |
0.81 |
0.55 |
||
SC16-01 |
434.5 |
0.64 |
0.36 |
||
SC16-02 |
409.5 |
0.49 |
0.29 |
||
SC17-01 |
83.0 |
443.0 |
360.0 |
0.42 |
0.24 |
SC17-02 |
77.0 |
485.0 |
408.0 |
0.42 |
0.27 |
SC17-03 |
116.0 |
362.2 |
246.2 |
0.36 |
0.20 |
SC17-04 |
308.5 |
500.5 |
192.0 |
0.25 |
0.11 |
SC17-05 |
209.0 |
495.3 |
286.3 |
0.44 |
0.21 |
Averages |
303.5 |
0.47* |
0.27* |
Source: Freegold Ventures, Edison Investment Research. Note: *Interval weighted.
Note that, in addition to all 10 drill holes encountering mineralisation, all 10 also ended in mineralisation.
Interpretation
In contrast to typical copper–gold mineralisation hitherto encountered in Alaska, Freegold believes that its drilling to date is consistent with having intersected the upper portions of buried porphyry mineralisation at Hill 1835. Regional scale structures often control clusters of porphyry systems, which manifest themselves as magnetic lows owing to magnetite-destructive alteration associated with mineralisation. Primary controls are structural features such as faults, shears, fractures and breccias. Secondary controls are often porous volcanic and/or sedimentary units, bedding plane contacts and unconformities. Breccias provide channel pathways for hydrothermal fluids originating from deeper porphyry copper systems and commonly carry elevated values of gold and silver. Significantly, multiple generations of veins and hydrothermal breccias are common. Evidence in support of this interpretation at Shorty Creek includes the long mineralised intersections, the fact that the project is known to encompass several porphyritic intrusives, which extend approximately 10km in diameter, and the presence of crackled (or crackle) zones, veins, stockworks, breccia pipes and elevated grades of tungsten again at Hill 1835. While virtually undocumented in Alaska to date, mineralised porphyry systems of this scale are not uncommon in large porphyry systems, such as Bingham District (Utah), the Central Mining District (New Mexico), Los Bronces (Chile) and Chuquicamata (also Chile).
Political background
US midterms generally showed Democrat gains, with one exception…
In general, midterm election results at the state level in 2018 tended to mirror results at a national level. Immediately prior to the elections, Republicans had complete control of 26 state governments (ie they controlled the state legislature as well as the governorship), while the Democrats had total control of eight and a further 16 were ‘hung’ in the sense that one party controlled the governorship while the other party had primacy in the legislature. After the midterms, the Republicans controlled 23 state governments, while the Democrats controlled 14 and 13 were ‘hung’.
…being Alaska, albeit still showing its traditional independent mindedness
In Alaska, Republicans won 23 of the 40 seats available in the 2018 elections, while the Democrats won 16 seats and one was taken by a Democratic-aligned independent. However, Republicans were not able to organise a majority in the House owing to defections from the party, with the result that Alaska’s political status stayed as ‘divided’ – as in 2017 to 2018. At the same time, Alaska was one of 36 states that held an election for governor in 2018. The governorship changed hands in eight of the states in which elections occurred, with all but one representing gains for the Democrats, with the single exception being Alaska, which shifted toward the Republicans.
While Republican-leaning politics should not be taken as a guarantee towards developing mining projects, it may reasonably be assumed that they are less constrained by bureaucracy and environmental considerations and certainly less openly hostile to the mining industry than some of their political counterparts. Within this context, it is notable the effect that the change in the presidency had in mobilising the share prices of some of Freegold’s fellow miners in Alaska in 2016, of which Northern Dynasty (which had a project that was otherwise moribund in environmental bureaucracy for many years) is an example:
Exhibit 2: Northern Dynasty share price (C$), January 2016-present |
Source: Refinitiv. |
Geological background
While not generally thought of as such, Alaska is located on the Pacific’s famed Ring of Fire, which is a nearly continuous series of oceanic trenches, volcanic arcs and volcanic belts that are a direct result of plate tectonics. In the case of Alaska, the breakup of Pangea c 200m years ago mobilised the North American plate, which consequently accreted various terranes onto it as it drifted westwards. The geology of Alaska is typical of that of the North American cordillera and hosts rocks from the Precambrian (ie the Earth’s earliest geological eon) to the present. Owing to the combination of accretion and volcanism, Alaska is, along with the rest of the Ring of Fire and its near neighbour, the Yukon, across the border in Canada, highly prospective and should be thought of in a similar manner to British Columbia, California, Mexico, Columbia, Ecuador, Peru, Chile, Indonesia, Papua New Guinea and the Philippines in terms of their potential mineral endowment and mining opportunities. As a result, historically, the Yukon is famed for the Klondike gold rush in the late nineteenth century around Dawson City, and has played host to White Gold’s recent success in the region as well as Victoria Gold’s Eagle project, while Alaska boasts major deposits such as Pebble, Red Dog, Fort Knox, Pogo, Kensington and Green’s Creek.
An idea of its geological prospectivity may be gained from the fact that Alaska polled third of the world’s mining destinations in the Best Practices Mineral Potential index of Fraser Institute’s annual survey of mining jurisdictions:
Exhibit 3: Fraser Institute’s Policy Mineral Potential index, 2018 |
Source: Fraser Institute |
The Best Practices Mineral Potential index assumes jurisdictions’ policies are based on “best practices” and is designed to rank them based on which region’s geology either “encourages exploration investment” or is “not a deterrent to investment”. Since it assumes a “best practices” policy regime, the index therefore represents as closely as possible survey respondents’ assessment of a jurisdiction’s pure mineral potential.
Exhibit 4: Financial summary
US$000s |
2016 |
2017 |
2018e |
2019e |
2020e |
2021e |
||||
Year end 31 December |
IFRS |
IFRS |
IFRS |
IFRS |
IFRS |
IFRS |
||||
PROFIT & LOSS |
||||||||||
Revenue |
|
|
0 |
0 |
0 |
0 |
0 |
0 |
||
Cost of Sales |
0 |
0 |
0 |
0 |
0 |
0 |
||||
Gross Profit |
0 |
0 |
0 |
0 |
0 |
0 |
||||
EBITDA |
|
|
(967) |
(636) |
(915) |
(781) |
(781) |
(781) |
||
Operating Profit (before amort. and except.) |
(978) |
(645) |
(923) |
(790) |
(790) |
(790) |
||||
Intangible Amortisation |
0 |
0 |
0 |
0 |
0 |
0 |
||||
Exceptionals |
14 |
318 |
0 |
0 |
0 |
0 |
||||
Other |
21 |
(16) |
(2) |
0 |
0 |
0 |
||||
Operating Profit |
(942) |
(343) |
(926) |
(790) |
(790) |
(790) |
||||
Net Interest |
8 |
5 |
(0) |
(111) |
(518) |
(1,981) |
||||
Profit Before Tax (norm) |
|
|
(970) |
(641) |
(924) |
(901) |
(1,307) |
(2,770) |
||
Profit Before Tax (FRS 3) |
|
|
(935) |
(339) |
(926) |
(901) |
(1,307) |
(2,770) |
||
Tax |
0 |
0 |
0 |
0 |
0 |
0 |
||||
Profit After Tax (norm) |
(949) |
(657) |
(926) |
(901) |
(1,307) |
(2,770) |
||||
Profit After Tax (FRS 3) |
(935) |
(339) |
(926) |
(901) |
(1,307) |
(2,770) |
||||
Average Number of Shares Outstanding (m) |
129.5 |
152.2 |
176.5 |
189.0 |
189.0 |
521.7 |
||||
EPS - normalised (c) |
|
|
(0.7) |
(0.4) |
(0.5) |
(0.5) |
(0.7) |
(0.5) |
||
EPS - normalised and fully diluted (c) |
|
(0.7) |
(0.4) |
(0.4) |
(0.4) |
(0.5) |
(0.5) |
|||
EPS - (IFRS) (c) |
|
|
(0.7) |
(0.2) |
(0.5) |
(0.5) |
(0.7) |
(0.5) |
||
Dividend per share (c) |
0.0 |
0.0 |
0.0 |
0.0 |
0.0 |
0.0 |
||||
Gross Margin (%) |
N/A |
N/A |
N/A |
N/A |
N/A |
N/A |
||||
EBITDA Margin (%) |
N/A |
N/A |
N/A |
N/A |
N/A |
N/A |
||||
Operating Margin (before GW and except.) (%) |
N/A |
N/A |
N/A |
N/A |
N/A |
N/A |
||||
BALANCE SHEET |
||||||||||
Fixed Assets |
|
|
34,015 |
36,765 |
38,567 |
41,368 |
53,370 |
125,153 |
||
Intangible Assets |
33,638 |
36,396 |
36,396 |
36,396 |
36,396 |
36,396 |
||||
Tangible Assets |
377 |
369 |
2,171 |
4,973 |
16,975 |
88,757 |
||||
Investments |
0 |
0 |
0 |
0 |
0 |
0 |
||||
Current Assets |
|
|
2,392 |
898 |
51 |
51 |
51 |
51 |
||
Stocks |
0 |
0 |
0 |
0 |
0 |
0 |
||||
Debtors |
7 |
66 |
0 |
0 |
0 |
0 |
||||
Cash |
2,306 |
780 |
0 |
0 |
0 |
0 |
||||
Other |
79 |
51 |
51 |
51 |
51 |
51 |
||||
Current Liabilities |
|
|
(650) |
(664) |
(545) |
(545) |
(545) |
(545) |
||
Creditors |
(650) |
(664) |
(545) |
(545) |
(545) |
(545) |
||||
Short term borrowings |
0 |
0 |
0 |
0 |
0 |
0 |
||||
Long Term Liabilities |
|
|
(835) |
(221) |
(1,242) |
(4,944) |
(18,253) |
(62,459) |
||
Long term borrowings |
0 |
0 |
(1,012) |
(4,705) |
(18,005) |
(62,201) |
||||
Other long term liabilities |
(835) |
(221) |
(230) |
(239) |
(249) |
(258) |
||||
Net Assets |
|
|
34,922 |
36,778 |
36,832 |
35,931 |
34,624 |
62,201 |
||
CASH FLOW |
||||||||||
Operating Cash Flow |
|
|
(462) |
(666) |
(828) |
(772) |
(772) |
(772) |
||
Net Interest |
8 |
5 |
(0) |
(111) |
(518) |
(1,981) |
||||
Tax |
0 |
0 |
0 |
0 |
0 |
0 |
||||
Capex |
(2,464) |
(2,827) |
(1,810) |
(2,810) |
(12,010) |
(71,791) |
||||
Acquisitions/disposals |
31 |
0 |
0 |
0 |
0 |
0 |
||||
Financing |
4,823 |
1,963 |
846 |
0 |
0 |
30,347 |
||||
Dividends |
0 |
0 |
0 |
0 |
0 |
0 |
||||
Net Cash Flow |
1,935 |
(1,525) |
(1,792) |
(3,693) |
(13,300) |
(44,196) |
||||
Opening net debt/(cash) |
|
|
(371) |
(2,306) |
(780) |
1,012 |
4,705 |
18,005 |
||
HP finance leases initiated |
0 |
0 |
0 |
0 |
0 |
0 |
||||
Other |
(0) |
0 |
0 |
0 |
0 |
0 |
||||
Closing net debt/(cash) |
|
|
(2,306) |
(780) |
1,012 |
4,705 |
18,005 |
62,201 |
Source: Freegold Ventures data, Edison Investment Research
|
|