In the present article, I highlight a company whose stock was just decimated in 2013, Vista Gold’s (NYSEMKT:VGZ). However, the stock has now doubled off of its lows and is heading much higher, as the value of its properties is worth more than the market cap of the stock. Further, it is taking necessary steps to raise cash and is a very likely takeover target. In this article, I will highlight reasons why I am adding to a position and expect the stock to triple (yes increase 3X in value, if not more) as gold returns to favor in light of 2014 being rocky for markets. Vista’s main holding, the Mount Todd Mining Site in Australia, is a premiere site that sits on massive reserves.
I believe that this junior gold miner may be one of the best opportunities among all of the junior gold miners. The company has massive proven and probable reserves, is getting its debt under control, and has a large potential according the most bullish analyst. On top of it all, the company is ripe for a takeover. Being a junior miner, Vista Gold is a leveraged trade on the price of gold. When gold returns to investor favor, the stock of Vista Gold and other similar companies should outperform. Despite moving with its sector, I think Vista Gold offers multiple reasons to own its stock, but Mount Todd is reason enough to buy at current levels.
Mount Todd Mining Site’s Massive Proven and Probable Reserves and Stable Jurisdiction
Vista Gold’s premiere mining site is a gem. I think once the company secures permits and production begins, revenue will skyrocket significantly higher and reward shareholders with subsequent share price appreciation in future quarters. If not, a large competitor could easily want to buy it now. Mount Todd is located in the Northern Territory of Australia in a very mining friendly jurisdiction with excellent existing infrastructure. Mount Todd is of significant size and Vista Gold has exploration permits for a very large sections of the site. At the site, there are confirmed deposits of gold, silver, copper, and lead among other metals and minerals. Figure 1 displays the regions of the Mount Todd site exploration area where various deposits are located.
Figure 1. Exploration Areas and Resource Locations at Vista Gold’s Mount Todd Mining Site, 2013.
Mount Todd has significant existing infrastructure including paved access from the major transportation corridor, a natural gas pipeline to site and medium-tension power lines for power generation, a fresh water reservoir and water treatment plant, readily available labor and technical personnel. The Northern Territory government is supportive of new mineral developments and there are no Aboriginal rights issues associated with the project. Mount Todd was acquired by Vista in 2006 for $2.1 million, which equates to a paltry cost of $0.66 per ounce of gold acquired. Since the acquisition, Vista has drilled over 48,000 meters and added significantly to the resource base of the project.
In January 2011, Vista announced the results of a preliminary feasibility study that contemplated a 30,000 ton per day processing facility with estimated average gold production of approximately 240,000 ounces of gold per year. Proven and probable reserves were estimated to be 4.1 million ounces of gold within 149.9 million tons of ore with an average gold grade of 0.85 grams per ton. In September 2011, the company announced the results of a new resource estimate for the Mount Todd gold project and in November 2011 initiated a resource conversion drilling program. In September 2012, it announced the results of a new resource estimate with 7.0 million ounces measured and indicated as well as 2.0 million ounces inferred resources.
Just last year, Vista Gold announced that after completing a scoping study to assess the optimal size for the project process facilities, it has adopted a 2-stage development strategy for Mount Todd. The company believes that it can recover about 82 percent of the gold at the deposit through a two stage mine development process that will minimize capital investment, accelerate capital payback to shareholders and maximize mine and reserve life. It will do this by constructing a 30,000 ton per day plant and raise the cut-off grade to 0.5 grams gold/ton to minimize initial capital requirements and shorten the payback period.
Subsequently, the company intends to expand the project to 45,000 tons per day and lower the cutoff grade to 0.4 grams gold/ton to take full advantage of Mount Todd’s large and growing resource. Resource conversion drilling is winding down and was mostly complete in November 2012.
The Most Recent Reserve Update-Significantly Adds to Value
The results of a large study if Mount Todd came in last year. The company released two possible scenarios, a base case and alternate case. This means that there are two separate potential pits that could be used (figure 2 and figure 3 below). For the base case, Vista estimates a 50,000 ton per day average. This is coupled with estimated proven and probable reserves of 5.9 million ounces of gold (223 million tons at 0.82 grams of gold per ton.) This is an increase of 44 percent from Vista Gold’s January 2011 feasibility study.
The company estimates an average annual production of 369,850 ounces of gold per year, with a higher amount of production in the first five years. In the first five years there would be an average annual production of 481,316 ounces of gold per year. Turning to cost, it would be estimated to cost $773 per ounce produced over the life of the mine, with only $662 average cost for the first five years. Vista estimates a 13 year operating life that would require $1.04 billion in capital.
Figure 2. Cross Sectional Imagery Model Detailing Potential Pit Intersections, Feasibility Study, Mount Todd, 2013.
Figure 3. Underground Imagery Model Detailing Potential Pit Intersections With Measured and Indicated Reserves, Feasibility Study, Mount Todd, 2013.
For the alternate case pit, which would be about 33,000 tons per day mined, there would be and estimated proven and probable reserve of 3.56 million ounces of gold (124 million ton at 0.90 grams of gold per ton). Under this estimate there would be an average annual production of 262,826 ounces of gold per year over the course of the life of the mine. This would require approximately $684 per ounce production cost, including average cash costs of $676 per ounce during the first five years of operations. The total estimated operating life would be about 11 years. Initial capital requirements to ramp production are estimated to total $761 million.
Recent Moves to Raise Capital Were Wise
Sale of Los Cardones
In October 2013, Vista agreed to sell 100 percent of its debt and equity participation in the Los Cardones gold project to the Purchasers for $13 million ($7 million of which was paid in October and $6 million of which is due by January 30, 2014.) The Purchasers have the option to elect, in their discretion, not to make the second payment of $6 million, in which case, Vista will retain the $7 million received today and the project will be returned to Vista.
Converting Awak Mas into a Royalty Project
In December 2013, Vista Gold announced that it closed a transaction to convert its interest in the Awak Mas gold project in Sulawesi, Indonesia into a net smelter return royalty on the project. This move will raise much-needed cash. Prior to the closing, the Awak Mas Project was indirectly Vista Gold Barbados Corp. (Vista Barbados) and was the subject of a 2009 joint venture agreement, as amended and assigned, and a 2011 additional option agreement, as amended and assigned, each between Vista Barbados and Awak Mas Holdings Pty Ltd. The former agreements provided the Purchaser with the option to acquire an 80 percent interest in the Awak Mas Project by completing certain activities.
As part of the Transaction, the former agreements were terminated and Vista transferred 100 percent of the outstanding shares of Vista Barbados to the purchaser. In exchange, the purchaser agreed to forego certain cash payments due to have been paid by Vista had the Purchaser completed the earn-in of its interest in the Awak Mas Project, and Vista received the Royalty; 2 percent on the first 1.25 million ounces of gold production and 2.5 percent on the next 1.25 million ounces of gold production from the Awak Mas Project.
Optioning the Guadalupe de Los Reyes Project
Just last week, Vista Gold announced that it has signed a non-binding letter of intent to option its interest in the Guadalupe de los Reyes gold and silver project in Sinaloa, Mexico (the GdlR Project) to Cangold Limited (or, Cangold). The LOI provides that a non-refundable $50,000 payment be made to Vista for which Cangold will have a 90 day period of exclusivity (the “Exclusivity Period”) to complete due diligence and negotiate and enter into a definitive option agreement with Vista (the Option Agreement). The LOI contemplates that the Option Agreement (if entered into) will provide that Cangold may earn a 70 percent interest in the GdlR Project by:
- Making payments totaling $5,000,000 in five payments over a three-year period, with payments totaling $1,000,000 in the first year, $1,500,000 in the second year and $2,500,000 in the third year.
- Operating the GdlR project, maintaining the concessions comprising the GdlR Project in good standing.
- Fulfilling all of the obligations of Vista’s wholly-owned subsidiary, Minera Gold Stake , S.A. de C.V. (or, MGS) to the Ejido La Tasajera (or, Ejido) as set out in the temporary occupation contract between MGS and the Ejido.
The option agreement is expected to further provide that all cash payments are non-refundable and optional to Cangold, and in the event Cangold fails to pay any of the required amounts on the scheduled dates or fails to comply with its other obligations, the option agreement will terminate and Cangold will have no interest in the GdlR Project. Provided it is not in breach of the option agreement, Cangold may at its discretion advance the above payment schedule and exercise the initial option for a 70 percent interest in the GdlR Project any time during the three-year period.
Subject to Cangold earning a 70 percent interest in the GdlR Project, pursuant to the option agreement Cangold will be granted an additional option to earn the remaining 30 percent interest in the GdlR Project by notifying Vista of a production decision and by making a cash payment to Vista of $3,000,000 plus an additional cash payment based on a formula that includes the growth, if any, in estimated NI 43-101 compliant Measured and Indicated mineral resources of the GdlR Project, and the then prevailing spot gold.
Should Cangold determine not to put the GdlR Project into production, the Option Agreement will provide Vista the right to buy back Cangold’s 70 percent interest in the GdlR Project for a cash payment of $5,000,000 plus an additional cash payment based on the same formula for the escalator payment described above. If Vista does not exercise its buyback option, Vista will still retain a right of first refusal should Cangold elect to sell its 70 percent interest in the GdlR Project to a third party. The positive impact of these recent moves to shareholder value cannot be underrated. The fact that these measure do not dilute shareholder equity is reason to buy.
Vista Gold is literally sitting on a gold mine with Mount Todd and it is flying under the radar of Wall Street. The large resource base at Mount Todd’s Batman Deposit alone of 6 million ounces with another 1.7 million measured and indicated and another 1.7 million inferred is in and of itself an attractive deposit that a larger competitor. Given that gold and silver are in limited supply, these larger companies may make some acquisitions while stock prices are deflated given the recent drop in precious metals prices.
Many smaller gold miners operate in politically risky areas of the world, and the Northern Territory of Australia is quite stable, another positive for the company. The company was decimated in 2013, but is now taking appropriate steps to ensure survival, raise cash and focus its efforts on Mount Todd. The stock is way undervalued. With its proven and probable reserves alone, combined with the beating the shares have taken with the recent selloff in precious metals, I am inclined to be bullish on this for the long-term.
Disclosure: Christopher F. Davis has traded Vista Gold in the past and has acquired a position as the price has come down. The author is adding to his stake in anticipation of eventual permitting of production at Mount Todd, the efforts to preserve shareholder equity, and the likelihood of a potential buyout.