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Victoria Gold — Update 23 February 2016

Victoria Gold — Update 23 February 2016

Victoria Gold

Analyst avatar placeholder

Written by

Victoria Gold

Defining Shamrock and Olive to enhance Eagle

2016 exploration programme

Metals & mining

24 February 2016

Price

C$0.20

Market cap

C$72m

US$/C$:0.73

Net cash (C$m) at 31 August 2015 (excludes restricted cash)

12.9

Shares in issue

361.1m

Free float

76%

Code

VIT

Primary exchange

TSX-V

Secondary exchange

N/A

Share price performance

%

1m

3m

12m

Abs

29.0

53.9

21.2

Rel (local)

25.3

61.3

44.4

52-week high/low

C$0.2

C$0.1

Business description

The Eagle Gold project, Victoria Gold’s flagship project, is in the 100%-owned Dublin Gulch property in the Yukon Territory, Canada. Victoria Gold also intends to explore its other claims while developing Eagle and is looking to monetise its Santa Fe project in Nevada, US.

Next event

Updated Eagle FS

Q3 FY17

Analysts

Tom Hayes

+44 (0)20 3077 5725

Charles Gibson

+44 (0)20 3077 5724

Victoria Gold is a research client of Edison Investment Research Limited

In April 2016 Victoria Gold will initiate an exploration and resource definition programme over its Shamrock-Olive target area, 2km from the proposed Eagle mine. On completion, the company will have a far greater understanding of how the Shamrock-Olive area could complement and enhance Eagle’s economics, which will be published in an updated feasibility study (FS) by year end. Victoria Gold completed a C$3.6m flow-through share financing in December; funds will be used to complete the upcoming work programme.

Year end

Revenue (C$m)

PBT*
(C$m)

EPS*
(c)

DPS
(c)

P/E
(x)

Yield
(%)

02/14

0.0

(1.6)

(0.9)

0.0

N/A

N/A

02/15

0.0

(1.7)

(0.3)

0.0

N/A

N/A

02/16e

0.0

(2.1)

(0.6)

0.0

N/A

N/A

02/17e

0.0

(1.9)

(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.

2016 data to produce new Eagle FS by year end

The 2016 work programme will run from April and last around four months. It will allow an assessment of the near-surface mineralisation drill tested at both Shamrock and Olive, and the un-tested 300m separation between the deposits. If Shamrock and Olive are found to join and there is a positive metallurgical testing and resource estimate, Victoria Gold will have been successful in delineating an orebody with a strike length of c 1km. This could produce a materially sized ore reserve to supplement Eagle’s economics. Previous metallurgical test work on Olive supports it being a suitable ore feed for the future Eagle processing plant and the company will look to replicate the results at Shamrock.

Valuation: Production start rolled forward one year

We roll forward our assumption for the production start date at Eagle by one year, now FY19. This allows for the work programme results to be analysed and incorporated into a new Eagle FS due by end CY16. We maintain our US$/C$ forex rate of 0.73 and retain our gold price forecasts as in our sector report Gold: The value of gold and other metals and use a 10% discount rate to reflect general equity risk. On this basis, our valuation adjusts down 5% to C$1.39 per share (previously C$1.47). At a flat gold price of US$1,000/oz, Victoria Gold’s base-case valuation is C$0.45, a 125% premium to its current share price. Our upside valuation uses these adjustments but factors in extra crushing capacity and raises the head grade in the early years of production (due to Olive and potentially Shamrock ore being treated). It is C$2.18 (previously C$2.30) per share. This latter scenario is our attempt to estimate the value uplift resulting from the forthcoming 2016 drill campaigns and updated Eagle FS due by end 2016. The assumptions that underpin our upside valuation are given on page 2.

Shamrock and Olive – higher grade deposits nearby

Victoria Gold’s Dublin Gulch hosts numerous identified exploration targets that have been investigated via early stage reconnaissance techniques (grab-sampling, geophysical techniques) and confirmatory drilling.

Exhibit 1: Geological map of Dublin Gulch projects

Source: Victoria Gold website

The Potato Hills Trend (PHT)

The Potato Hills Trend (PHT) is a >13km long belt of gold-bismuth-arsenic-antimony and silver-lead-zinc mineralisation that extends to the north-east and south-west of the Eagle project along, and beyond, the margins of the Dublin Gulch granodiorite stock. The PHT hosts the advanced-stage Olive project and the earlier-stage Shamrock and Popeye gold-dominant exploration projects. Victoria Gold has two distinct silver exploration projects – Rex and Peso – but these are not core to its efforts to bolster Eagle’s economics. It is important to note that Olive and Shamrock are located just 2.5-5.0km from Eagle so could supply additional, potentially higher-grade, ore streams to the planned Eagle processing plant.

The style of mineralisation along the PHT is not characterised by vein arrays of thin, sub-parallel quartz and quartz-sulphide veins, like those at Eagle, but rather widely spaced, structurally controlled arsenopyrite-sulfosalt veins (rare, complex sulphide minerals). The PHT is distinct in both style of mineralisation and grade from Eagle. Mineralisation along the PHT is generally of a slightly higher tenor than at Eagle (it has a higher metal content) with visible gold and multi-ounce assays returned from early-stage grab samples. Another encouraging factor is that the mineralisation along the PHT overprints Eagle mineralisation and reactivates earlier Eagle veins. This means there are greater amounts of gold in these areas, as shown by higher-grade drill intercepts. This is a key reason for Victoria Gold’s management exploring and investigating its projects close to Eagle.

Underlying assumptions to our upside valuation

We have not adjusted either of our valuations (base case or upside) for the 7 August 2015 announced Olive metallurgical recoveries and we retain the 73% average recovery factor first worked out for Eagle ores for its April 2012 FS. The main reason we have not adjusted the upside valuation for the new metallurgical recoveries is that we expect a complex reworking of Eagle’s mine schedule, which will likely accommodate ore streams from the Eagle, Olive and potentially Shamrock deposits. The company intends for the results and findings of its 2016 work programme and the 2015 metallurgical test results to underpin a revised FS on Eagle, which is likely to be released to market by end CY16. Omitting the new gold recovery factors from Olive and Shamrock is justified due to the uncertain development timeline for Eagle and the potential for royalty streaming financing agreements, which could materially affect the magnitude and timing of revenues from the Eagle project and positively limit dilution.

For our upside valuation scenario, we retain a more simplified assumption to show the potential increased value that could occur from including higher-grade ore streams. The assumption is that the gold grade of 0.93g/t already used in the Eagle FS for the first three years of production is maintained until the sixth year of production (FY23). We believe this is supported by the gold grades achieved from recent drilling at the Olive deposit. We also assume the currently envisaged base-case throughput rate to the crushing plant of 29,500tpd is increased to 41,300tpd, which is its maximum nameplate crushing capacity. This allows for greater delivery of ore to the leach pads during the 250-day leaching period. Although management believes it could shorten the 100 days where no ore stacking takes place (due to an improved understanding of gold recoveries at lower temperatures), we maintain a 250 day leaching period until plans showing how Eagle can be optimised are released. The scenario above results in an undiluted upside case valuation of C$2.18 per share, representing a 57% uplift to our C$1.39 per share base-case valuation. The upside case takes account of proportional uplift in mining, processing and G&A costs, and a notional 30% uplift in capex to reflect the additional haulage, ore stacking capacity and reagents required.

The Shamrock deposit (located 3-5km north of Eagle on the same mineralised trend) provides further upside in terms of potentially higher (than Eagle’s) gold grades being mined and treated at the future Eagle processing plant. However, far greater understanding of the scale (resource estimation) and the amount of gold that could be recovered from the deposit is the subject of the current 2016 work programmes soon to start.

Financials

Victoria Gold’s interim financial statement indicates cash burn of C$962k per quarter and an end-August cash balance of C$12.9m. Victoria Gold has since finalised a C$3.6m flow-through financing (on 23 December 2016) via the issue of 21m shares at an average share price of 17c. Adjusting for its flow-through financing and using our exploration budget assumption of C$3.6m for the year, we estimate VIT will finish FY17 with cash of c C$7.5m, which should more than cover its stated work programme and maintain the company as a going concern.


Exhibit 2: Financial summary

C$'000s

2013

2014

2015

2016e

2017e

28-February

IFRS

IFRS

IFRS

IFRS

IFRS

PROFIT & LOSS

Revenue

 

 

0

0

0

0

0

Cost of Sales

15,796

(2,779)

(8,522)

(2,146)

(2,146)

Gross Profit

15,796

(2,779)

(8,522)

(2,146)

(2,146)

EBITDA

 

 

(3,391)

(2,491)

(1,985)

(2,146)

(2,146)

Operating Profit (before amort. and except.)

(3,391)

(2,491)

(1,985)

(2,153)

(2,153)

Intangible Amortisation

0

0

0

0

0

Exceptionals

18,308

(364)

(6,537)

0

0

Other

(1,475)

(1,438)

867

(100)

0

Operating Profit

13,442

(4,293)

(7,655)

(2,253)

(2,153)

Net Interest

1,046

940

320

82

259

Profit Before Tax (norm)

 

 

(2,345)

(1,550)

(1,665)

(2,071)

(1,895)

Profit Before Tax (FRS 3)

 

 

14,488

(3,353)

(7,335)

(2,171)

(1,895)

Tax

(4,843)

30

(118)

0

0

Profit After Tax (norm)

(8,663)

(2,959)

(916)

(2,171)

(1,895)

Profit After Tax (FRS 3)

9,645

(3,323)

(7,453)

(2,171)

(1,895)

Average Number of Shares Outstanding (m)

339.7

340.1

340.1

353.9

361.1

EPS - normalised (c)

 

 

(2.6)

(0.9)

(0.3)

(0.6)

(0.5)

EPS - normalised and fully diluted (c)

 

(1.2)

(0.4)

(0.1)

(0.3)

(0.3)

EPS - (IFRS) (c)

 

 

2.8

(1.0)

(2.2)

(0.6)

(0.5)

Dividend per share (c)

0.0

0.0

0.0

0.0

0.0

Gross Margin (%)

N/A

N/A

N/A

N/A

N/A

EBITDA Margin (%)

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

BALANCE SHEET

Fixed Assets

 

 

110,076

112,949

114,903

117,680

121,280

Intangible Assets

9,163

0

0

0

0

Tangible Assets

100,853

112,949

114,903

117,680

121,280

Investments

60

0

0

0

0

Current Assets

 

 

33,621

25,498

16,341

14,518

9,111

Stocks

0

0

0

0

0

Debtors

14,265

11,008

185

185

185

Cash

12,489

14,175

14,752

12,928

7,521

Other

6,867

315

1,404

1,404

1,404

Current Liabilities

 

 

(6,087)

(3,908)

(4,260)

(4,084)

(4,172)

Creditors

(6,087)

(3,908)

(4,260)

(4,084)

(4,172)

Short term borrowings

0

0

0

0

0

Long Term Liabilities

 

 

(4,616)

(3,784)

(2,798)

(2,798)

(2,798)

Long term borrowings

0

0

0

0

0

Other long term liabilities

(4,616)

(3,784)

(2,798)

(2,798)

(2,798)

Net Assets

 

 

132,994

130,755

124,185

125,315

123,420

CASH FLOW

Operating Cash Flow

 

 

(8,946)

(3,986)

(2,859)

(2,774)

(2,065)

Net Interest

1,046

940

320

82

259

Tax

4,097

(553)

(798)

0

0

Capex

(3,587)

4,428

3,459

(2,739)

(3,600)

Acquisitions/disposals

14

37

0

0

0

Financing

107

821

454

3,607

0

Dividends

0

0

0

0

0

Net Cash Flow

(7,269)

1,687

577

(1,824)

(5,407)

Opening net debt/(cash)

 

 

(19,664)

(12,489)

(14,175)

(14,752)

(12,928)

HP finance leases initiated

0

0

0

0

0

Other

94

0

0

0

0

Closing net debt/(cash)

 

 

(12,489)

(14,175)

(14,752)

(12,928)

(7,521)

Source: Company accounts, Edison Investment Research

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Frankfurt +49 (0)69 78 8076 960

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Germany

London +44 (0)20 3077 5700

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London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

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US

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