Before announcing this transaction, Yamana invested in Monarch during a June 2020 private placement, taking up a position that was equivalent to 7% of the outstanding shares in Monarch. Yamana holds a 50% interest in the Canadian Malartic Mine, in the Abitibi region, and less than 100km from the Wasamac project, and as such is likely to see significant strategic value through its acquisition of both Wasamac and the Camflo properties.
The deal is expected to close in late 2020 or early 2021. Investors should note the transaction is subject to Monarch shareholder approval and c 28% have indicated their support (66.67% approval required).
In terms of valuation, we have looked separately at the valuation inferred from the Yamana transaction for Wasamac (and the Camflo Mill) and independently assessed the valuation of the remaining assets that will be spun out via the SpinCo.
In the absence of the SpinCo, the value of the Yamana acquisition of Wasamac (and the Camflo Mill) is C$152m or C$0.48 per Monarch share. In our recent initiation note on Monarch we suggested a value for Wasamac of C$452m for toll milling and C$411m for own milling. To help understand if the Yamana offer for Wasamac was reasonable we have looked at how market valuations compare with fundamental project valuations for projects at a similar stage to Wasamac.
A 2019 study done by Edison, Gold Stars and Black Holes, showed a company’s EV as a percentage of attributable project NPV was 30.9% of the NPV of the company at BFS stage. Hence our comparative values for these two options would be C$140m and C$127m. Therefore, the consideration of C$152m represents a premium of 9% and 20% respectively. This suggests a reasonable M&A premium over and above where the market was likely valuing Wasamac.
Monarch management has suggested an implied valuation for the SpinCo of C$47.5m (C$0.15 per Monarch share). However, this is an arbitrary number as the TSX market announcements do not break down how to arrive at this valuation and ultimately the SpinCo will trade in the open market, which will set its market valuation.
To assess the proposed SpinCo valuation (and the overall deal premium) we have looked at the remaining properties and our associated valuations from our recent initiation report. We split this into the (former) production and development assets, Beaufor and Croinor, and the exploration properties, Swanson and McKenzie Break.
In our initiation note we valued Croinor on a DCF basis at a 10% discount rate at C$58.9m and Beaufor at C$38m, giving a combined value of C$96m pre-funded. Again, if we use the results of Gold Stars and Black Holes, which showed a company’s EV as a percentage of attributable project NPV was 30.9% of the NPV of the company at BFS stage, then we would value the two assets at approximately C$30m. This value is based on DCF valuations for Croinor and Beaufor only.
In our initiation note, we suggested a modest valuation for the company’s exploration properties, McKenzie Break and Swanson, based on in-situ resources valued at US$13.83/oz, of approximately C$3m.
In addition to the mining properties, SpinCo will also retain the fully permitted Beacon Mill and its associated tailings facilities. We did not value these assets in our initiation note but an indicative valuation could be c C$5m based on the acquisition terms of the mill and property in November 2016.
By adding the cash plus the calculated market valuations for each of Beaufor, Croinor, McKenzie Break and Swanson, and the transaction value for the Beacon Mill, we arrive at an implied valuation for SpinCo of C$52m, which is marginally ahead of Monarch management’s estimates of C$47.5m.
Exhibit 1: SpinCo valuation
Properties |
Implied valuation (C$m) |
Cash |
14 |
Croinor and Beaufor |
30 |
McKenzie Break and Swanson |
3 |
Beacon mill and tailings facilities |
5 |
Total |
52 |
Properties |
Cash |
Croinor and Beaufor |
McKenzie Break and Swanson |
Beacon mill and tailings facilities |
Total |
Implied valuation (C$m) |
14 |
30 |
3 |
5 |
52 |
Source: Edison Investment Research
Our valuations of Croinor and Beaufor are effectively on an unfunded basis as we had previously assumed that Wasamac cash flows would be used to fund the capex of Croinor (C$45m) and Beaufor (C$11m). To fund these two projects, SpinCo will probably be a need to raise additional equity at some stage, although the C$14m of cash that it will have will cover a substantial portion of the equity required at least initially.
Monarch still has some excellent assets that could be developed or sold. At Croinor, the projected average cash cost of US$670 per ounce over four years is at the lower end of gold producers’ cost curve, whereas at Beaufor, the average of US$983 per ounce cash cost over a similar period is similarly appealing, with the current gold price at around US$1,900 per ounce.
There are still a number of deals that can be made and Monarch management has shown itself to be a smart and astute team, capable of unlocking value even at the current high and expensive phase of the gold price cycle.
The market is placing a value of the current price of C$0.56 per share on the value of Monarch. Hence, the difference between the C$0.48 per share value placed on Wasamac and the share price implies the value of SpinCo is C$0.08 per share or C$25m, lower than the C$47.5m implied value given by Monarch.
Rationale for purchase of the Camflo Mill
In addition to the sale of Monarch’s flagship Wasamac property, Yamana is also purchasing the Camflo Mill. However, we understand the mill is being purchased to support Yamana’s other operations in the region, rather than to process Wasamac ore. This is because the Camflo Mill is located next to the Canadian Malartic (Yamana Agnico) partnership (Exhibit 1). The SpinCo itself will likely use the Beacon Mill for its activities.
Exhibit 2: Yamana/Agnico Malartic mine and nearby Camflo Mill
|
|
|
|
While we had previously suggested in our initiation report that Monarch would use toll milling to develop Wasamac, it is more likely that Yamana will either build its own milling and tailings facilities at Wasamac, or use the Canadian Malartic Mine nearby for processing.
Yamana has a C$7.1bn market capital and is sure to have done its due diligence before agreeing to the deal. The final plan for bringing to account the Wasamac property will be interesting.
Exhibit 3: Financial summary
|
|
C$'000s |
|
2018 |
2019 |
2020 |
2021e |
2022e |
June |
|
|
UK GAAP |
IFRS |
IFRS |
IFRS |
IFRS |
IFRS |
PROFIT & LOSS |
|
|
|
|
|
|
|
|
Revenue |
|
|
|
30,125 |
31,653 |
6,681 |
11,543 |
11,095 |
Cost of Sales |
|
|
|
(28,685) |
(27,303) |
(2,553) |
(3,000) |
(3,000) |
Gross Profit |
|
|
|
1,441 |
4,350 |
4,127 |
8,543 |
8,095 |
EBITDA |
|
|
|
(6,796) |
(3,616) |
(3,605) |
4,905 |
4,457 |
Operating Profit (before amort. and except.) |
|
(6,796) |
(3,616) |
(3,605) |
4,905 |
4,457 |
Amortisation |
|
|
|
1,707 |
1,383 |
252 |
(79) |
0 |
Exceptionals |
|
|
|
915 |
4,797 |
14,670 |
0 |
0 |
Other |
|
|
|
0 |
0 |
0 |
0 |
0 |
Operating Profit |
|
|
|
(4,174) |
2,564 |
11,318 |
4,827 |
4,457 |
Net Interest |
|
|
|
(121) |
(387) |
(209) |
53 |
277 |
Profit Before Tax (norm) |
|
|
|
(6,917) |
(4,003) |
(3,814) |
4,958 |
4,734 |
Profit Before Tax (FRS 3) |
|
|
|
(4,295) |
2,177 |
11,109 |
4,879 |
4,734 |
Tax |
|
|
|
(482) |
(1,691) |
(1,576) |
(3,588) |
(3,400) |
Profit After Tax (norm) |
|
|
|
(7,399) |
(5,694) |
(5,390) |
1,370 |
1,334 |
Profit After Tax (FRS 3) |
|
|
|
(4,777) |
486 |
9,533 |
1,291 |
1,334 |
|
|
|
|
|
|
|
|
|
Average Number of Shares Outstanding (m) |
|
|
202.3 |
238.0 |
266.5 |
315.3 |
421.1 |
EPS - normalised (c) |
|
|
|
(3.7) |
(2.4) |
(2.0) |
0.4 |
0.3 |
EPS - normalised and fully diluted (c) |
|
|
(3.7) |
(2.4) |
(2.0) |
0.4 |
0.3 |
EPS - (IFRS) (c) |
|
|
|
(2.4) |
0.2 |
3.6 |
0.4 |
0.3 |
Dividend per share (p) |
|
|
|
0.0 |
0.0 |
0.0 |
0.0 |
0.0 |
|
|
|
|
|
|
|
|
|
Gross Margin (%) |
|
|
|
4.8 |
13.7 |
61.8 |
74.0 |
73.0 |
EBITDA Margin (%) |
|
|
|
(22.6) |
(11.4) |
(54.0) |
42.5 |
40.2 |
Operating Margin (before GW and except.) (%) |
|
|
(22.6) |
(11.4) |
(54.0) |
42.5 |
40.2 |
|
|
|
|
|
|
|
|
|
BALANCE SHEET |
|
|
|
|
|
|
|
|
Fixed Assets |
|
|
|
53,500 |
59,752 |
62,317 |
62,238 |
62,238 |
Intangible Assets |
|
|
|
9,926 |
17,589 |
17,573 |
17,573 |
17,573 |
Tangible Assets |
|
|
|
14,497 |
15,286 |
15,813 |
15,734 |
15,734 |
Investments |
|
|
|
29,077 |
26,877 |
28,931 |
28,931 |
28,931 |
Current Assets |
|
|
|
20,166 |
12,825 |
30,670 |
54,671 |
131,231 |
Stocks |
|
|
|
2,638 |
2,272 |
1,194 |
2,063 |
1,983 |
Debtors |
|
|
|
1,007 |
783 |
259 |
949 |
912 |
Cash |
|
|
|
15,046 |
6,381 |
11,274 |
33,716 |
110,394 |
Other |
|
|
|
1,474 |
3,389 |
17,943 |
17,943 |
17,943 |
Current Liabilities |
|
|
|
(11,845) |
(4,971) |
(6,829) |
(7,374) |
(7,374) |
Creditors |
|
|
|
(9,799) |
(4,226) |
(3,116) |
(3,662) |
(3,662) |
Short term borrowings |
|
|
|
(2,046) |
(745) |
(3,713) |
(3,713) |
(3,713) |
Long Term Liabilities |
|
|
|
(19,645) |
(21,853) |
(18,348) |
(21,936) |
(25,336) |
Long term borrowings |
|
|
|
(5,764) |
(5,763) |
(2,290) |
(2,290) |
(2,290) |
Other long term liabilities |
|
|
|
(13,882) |
(16,090) |
(16,058) |
(19,646) |
(23,046) |
Net Assets |
|
|
|
42,175 |
45,754 |
67,810 |
87,598 |
160,759 |
|
|
|
|
|
|
|
|
|
CASH FLOW |
|
|
|
|
|
|
|
|
Operating Cash Flow |
|
|
|
(1,990) |
(5,143) |
(3,336) |
3,892 |
4,574 |
Net Interest |
|
|
|
(121) |
(387) |
(209) |
53 |
277 |
Tax |
|
|
|
(200) |
(234) |
(55) |
0 |
0 |
Capex |
|
|
|
(8,049) |
(2,061) |
4,543 |
0 |
0 |
Acquisitions/disposals |
|
|
|
1,041 |
0 |
0 |
0 |
0 |
Financing |
|
|
|
17,301 |
(33) |
5,458 |
18,497 |
71,827 |
Dividends |
|
|
|
0 |
0 |
0 |
0 |
0 |
Net Cash Flow |
|
|
|
7,983 |
(7,858) |
6,400 |
22,442 |
76,678 |
Opening net debt/(cash) |
|
|
|
746 |
(7,236) |
126 |
(5,272) |
(27,714) |
HP finance leases initiated |
|
|
|
0 |
0 |
0 |
0 |
0 |
Other |
|
|
|
0 |
495 |
(1,001) |
0 |
0 |
Closing net debt/(cash) |
|
|
|
(7,236) |
126 |
(5,272) |
(27,714) |
(104,392) |
Source: Monarch Gold, Edison Investment Research. Note: Forecasts above do not reflect the proposed Yamana deal.
General disclaimer and copyright This report has been commissioned by Monarch Gold and prepared and issued by Edison, in consideration of a fee payable by Monarch Gold. 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 2020 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 |
|
General disclaimer and copyright This report has been commissioned by Monarch Gold and prepared and issued by Edison, in consideration of a fee payable by Monarch Gold. 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 2020 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 |
|
