Just over 10 months ago, I wrote on Vista Gold (NYSE:VGZ), noting that the stock was an inferior way to buy the sector-wide dip given that it did not control its own destiny, and was in a similar position to NovaGold (NG), waiting for a move from a partner. That setup was worsened by inflation at greenfield projects coming in well over 20% above expected levels on average, and several examples of capex blowouts across the sector (Cote, Magino, Valentine) and other significant revisions at growth projects like the Pueblo Viejo Expansion and Tanami Phase 2. Since that update, Vista Gold has massively underperformed the Gold Juniors Index (GDXJ), down 42% and suffering a ~50% drawdown.
With Vista sitting on an inventory of ~7.0 million ounces of gold (mineral reserves) compared to a market cap of just ~$60 million, one could certainly argue that the stock is undervalued, trading at less than $10 per ounce of gold reserves. However, one must factor in the probability of the company actually heading into production this decade, and with no partner in place, inflationary pressures making 2021 capital cost estimates stale and majors looking to grow off existing infrastructure or by acquiring high-margin projects/peers, I don’t see Vista being a top takeover target even if it does have a decent project in Mt. Todd. Given the potential for share dilution in the next 12 months and no real catalysts for a re-rating, I continue to stay on the sidelines, favoring developers like i-80 Gold (IAUX) instead.
Vista Gold owns the massive Mt. Todd Project in Northern Territory, Australia, and filed an updated Technical Report on for Mt. Todd early last year which highlighted a 50,000 tonne per day operation capable of producing just shy of 500,000 ounces per annum (first seven years) at $860/oz all-in sustaining costs [AISC]. This would make Mt. Todd one of the lower cost mines globally if it were to head into production and the company has noted that it’s working with CIBC (CM) to look for a partner or some type of transaction to achieve greater value recognition than what’s showing up in its valuation for Mt. Todd.
However, other than this decision to seek potential partners, it was a relatively quiet year with less than 10,000 meters drilling, leading to a dearth of material news flow in 2022, which is often the lifeblood for junior miner share-price performance. In my view, this was a reasonable decision to make to cut back on costs given that any added ounces have limited value when they’re likely being added onto the back end of an already long mine life (16 years). However, Vista delivered some disappointing news for investors hoping for a speedy transaction when it started exploring for options and engaging with partners, with Vista Gold’s CEO, Frederick Earnest stating the following in the Q3 2022 results, suggesting finding a partner in the current environment might be tougher than anticipated.
“Volatility in the economy and equity markets, including inflationary pressures, higher interest rates, and lower gold prices, have resulted in a number of interested parties adopting a more cautious near-term business strategy as they manage the impacts of these conditions. We believe the completion of an acceptable transaction may be dependent on sustained improvement and stability in the economy and capital markets.”
– Vista Gold CEO, Frederick Earnest, Q3 2022 Results
The Potential Impact Of Above-Average Inflation On Mt. Todd
The decision by interested parties to be more cautious is not surprising given that this is a massive project (50,000 tonnes per day) even larger than Cote, and Cote has been a disaster to date regarding delivering on its initial capex estimates. In fairness, Vista Gold’s most recent initial capex estimates were estimated in a Q4 2021 study with IAMGOLD’s (IAG) capex blowout occurring relative to 2018 pricing estimates of ~$1.15 billion. Still, updated build costs for Argonaut’s (OTCPK:ARNGF) Magino and Iamgold’s Cote were way off even from Q3 2021 estimates, with the same being true for Magino (+15%). Plus, this isn’t just an Ontario, Canada issue, with nearly all Australian gold producers citing difficulty securing adequate labor/contractors, and Newmont (NEM) reporting a 25% increase in its TE2 Project also in Northern Territory, like Mt. Todd.
If we were to assume a 20% increase in upfront capex for Mt. Todd to be conservative, we would see capex soar to ~$1.07 billion (2021 estimate: $892 million), making this one of the more expensive development projects globally in the gold sector. Just as importantly, operating costs may not have been conservative enough either in the 2021 TR, given the upward pressure on labor rates in prolific mining jurisdictions and sticky inflationary pressures (cyanide, lime, fuel, power) with mining costs and processing costs estimated at just $1.95/tonne and ~$8.00/tonne, respectively. The impact of a 15% plus increase in capex and over 5% increase in operating costs plus higher sustaining capital over the mine life would have a very negative impact on NPV (5%).
Some investors might argue that the recent surge in the gold price has more than made up for the impact of inflationary pressures on operating costs and upfront/sustaining capital costs and that this is not as big of a deal as some might expect. While this might be valid assuming Vista could fund this project on its own and decided that it was going to build this project based on an $1,800/oz gold price assumption, this is not the case. And in the case of those large producers capable of funding a ~$1.0+ billion capex bill (in addition to their other commitments at existing mines), they are not modeling $1,800/oz gold prices for growth projects. In fact, most are modeling a minimum of a 15% internal rate of return [IRR] at base case gold prices, which range from $1,300 to $1,500/oz for most gold majors.
For example, Barrick Gold (GOLD) has noted in its 2022 Annual Report that its required IRR for Tier-1 gold assets is 15% and for Tier-2 gold assets, it is 20%. Vista Gold would not quite make the Tier-1 definition given that it isn’t 500,000+ ounces over ten years in the lower end of the cost curve (it comes up just shy of 500,000 ounces per annum), hence at least per Barrick’s definitions, it would want a minimum 20% IRR. Even if we assume others would be less stringent at a 16 – 18% IRR, Vista does not meet this IRR hurdle at more conservative gold price assumptions ($1,300/oz to $1,500/oz). In fact, if we look at NPV (5%) sensitivities to different gold price assumptions for Mt. Todd, Mt. Todd’s IRR comes in at 14.0% at $1,400/oz (reserves prices for most majors), but this assumes no cost creep in operating costs or capital costs.
As noted earlier, I think a 20% increase in capex could end up being on the low end at Mt. Todd given capex blowouts seen sector-wide and I also believe that operating cost assumptions are not conservative enough. For example, diesel prices were estimated at US$0.57/liter (A$0.81/liter) in the 2021 TR, which is well below levels being reported sector-wide. To further my point on majors looking for high IRR projects if they’re going to make acquisitions, and the most recent major acquisition was B2Gold’s purchase of Sabina (OTCQX:SGSVF). This is a project with a 28% IRR even at a $1,600/oz gold price and there’s room to increase throughput given additional permitted capacity to push the IRR above 30% and also room to pull forward higher grades (V2 Zone).
To summarize, if Vista were building Mt. Todd and built it on the assumption of higher gold prices that would offset sector-wide inflation, the project could be green-lighted. But, majors are typically more rigid regarding major investments, and I can’t see them taking on a massive relatively low-grade project when there’s growth available by acquiring lower-capex and higher-grade projects (more margin for error) or simply leveraging off existing infrastructure. So, with lower-risk growth options available, I see Mt. Todd as a lower priority for majors on a risk-adjusted basis.
Some examples of leveraging off existing infrastructure are Agnico Eagle (AEM) looking to employ a “hub and spoke” model along the Abitibi Gold Belt with multiple mines feeding idle processing capacity, or NGM LLC in Nevada, which recently added a shaft at TRUG and is bringing Goldrush online to haul ore where there’s available processing capacity at the nearby Carlin Complex.
What About A Smaller Footprint?
Vista Gold has updated its most recent Presentation to note that it is now looking at options for a smaller footprint with an internal scoping study and evaluating a ~5 million tonne per annum project vs. the ~17 million tonne per annum project envisioned in its most recent Feasibility Study. Obviously, this would bring with it much more modest upfront capital costs with the possibility to build Mt. Todd in phases given the current inflationary environment. As highlighted in the update, annual production could range from 150,000 to 200,000 ounces, AISC would “remain competitive” and initial capex should come in at less than US$350 million.
While I see this decision as a positive, it doesn’t fix much for Vista nor the Mt. Todd Project in my view. This is because a lower-grade project that lacks economies of scale could have less margin of error with the potential for higher AISC due to fixed costs, and while sub $350 million upfront capex is better than ~$1.0+ billion (adjusted for inflation), that still isn’t a project that Vista can fund on its own. Meanwhile, in the case of a smaller study, the list of potential suitors changes dramatically, given that there’s no shortage of 150,000 to 225,000 ounce projects out there with ~$1,000/oz AISC. So, while a phased approach was ideal for Artemis (OTCPK:ARGTF) at Blackwater, which had the market cap to support funding Phase 1 on its own, I don’t see this changing much for Vista, even if it is worth exploring to give itself some more options at least.
Let’s dig into Vista’s valuation and see whether the stock is worth owning at current prices:
Based on ~130 million fully diluted shares and a share price of US$0.54, Vista Gold trades at a market cap of US$70 million, which represents just a fraction of its estimated After-Tax NPV (5%) of $1.0 billion at a $1,600/oz gold price. Even if we assume the actual After-Tax NPV (5%) is closer to $750 million when incorporating capital and cost inflation and use a conservative P/NPV multiple of 0.20x (lower end of range for gold developers), this would translate to a fair value of US$150 million or US$1.15 per share. However, with just ~$8.0 million in cash and ~$7.4 million in net cash used in operating activities last year, we could see a capital raise in the next 12 months, meaning it’s harder to rely on the current share count figure. Assuming Vista raised $10.0 million at US$0.50 per share, this share count would increase by 20 million shares to ~150 million fully diluted, reducing fair value to US$1.07 per share.
Some investors might see this 100% upside to fair value as enticing and choose to buy the stock here, and there’s no arguing that Vista is undervalued based on what it owns (a multi-million ounce project in a Tier-1 mining jurisdiction). The problem is that stocks often underperform when there’s a high probability of a capital raise in the next 12-18 months and there’s no real catalyst for a re-rating in the stock given that this is a sit and wait game until a partner comes into the picture. The reason is that even with a lower capex project of US$300 – US$350 million, Vista still can’t raise that money at its current market cap. Hence, while Vista is cheap, I think there are more attractive places to park one’s money in the sector with names that control their own destiny and have a low probability of share dilution over the next 12 months.
Vista Gold is the proud owner of a decent project in a Tier-1 mining jurisdiction, with Mt. Todd having the potential to produce just shy of 480,000 ounces of gold per annum (first seven years) at sub $1,000/oz AISC. However, like NovaGold, it does not control its own destiny, and while NovaGold does have a partner in Barrick that increases its probability of eventually heading into production, Vista does not and doesn’t have nearly the capitalization to support even a 15,000 tonne per day operation. Plus, the company’s cash balance is running lower suggesting the potential for a capital raise in the next 12 months, while NovaGold should be safe until at least H2-2025 in regards to a capital raise.
Given my preference for companies generating cash flow with high-grade projects/mines and a low-risk of share dilution in the next twelve months (and ideally a dividend yield), I continue to see far more attractive bets elsewhere in the sector. Among large-caps, I see Barrick Gold as a solid buy-the-dip candidate below US$16.00. Among smaller-cap names, I see i-80 Gold as one of the most undervalued names in the market today, and a steal on any pullbacks below US$2.10 per share.
Editor’s Note: This article covers one or more microcap stocks. Please be aware of the risks associated with these stocks.