It’s been a busy year for gold developers in the precious metals sector (GDXJ), as several companies have rushed to get new studies out to showcase their projects at higher gold (GLD) prices. One of the most recent names to release a Feasibility Study (FS) is Ascot Resources (OTCQX:AOTVF), a gold junior in the Golden Triangle of British Columbia surrounded by past and currently producing mines. The Feasibility Study released earlier has displayed quite attractive economics and comes with low initial capital costs, benefiting from existing infrastructure. In addition, all-in sustaining costs (AISC) are projected to come in below $800/oz, more than 20% below the industry average. Based on Ascot’s attractive project and a reasonable valuation in a Tier-1 jurisdiction, I see the stock as a Hold.
Ascot Resources released an FS for its Premier Gold Project in British Columbia earlier this year, with the study envisioning average annual gold-equivalent production above 140,000 ounces over an eight-year mine life. The plan is for four underground operations to feed a central processing facility, with expected output over the eight-year mine life of 1.1 million ounces of gold and 3 million ounces of silver. Meanwhile, the projected all-in sustaining costs for the project are quite attractive at US$769/oz, and as we can see below, this stacks up quite favorably to current producers in the sector. Before digging into the project any further, let’s take a quick look at the company below:
For those unfamiliar with Ascot, the company’s flagship property is its Premier Gold Project in the Golden Triangle of British Columbia, an exceptional location. The district is home to several large gold projects, including Pretium’s (NYSE:PVG) Brucejack Mine, Seabridge’s (NYSE:SA) KSM Project, and Skeena’s Eskay Creek Project (OTCQX:SKREF). Ascot’s project has arguably one of the best locations within the Golden Triangle, just 25 kilometers from Stewart, which means there’s no need for a remote camp and site if it were to head into production. This is a significant cost-savings benefit both from a construction standpoint as Brucejack does require a camp and sits nearly 50 kilometers north of Ascot’s Premier Gold Project. To date, Ascot has delineated a high-grade resource of 3.1 million ounces at 7.56 grams per tonne gold across its properties, with the company valued at US$51.82/oz based on an enterprise value of US$156 million. Now that we have some background on the company, let’s circle back to the recently released Feasibility Study:
As noted earlier, Ascot’s Premier Gold Project is based on the production of 1.1 million ounces of silver and 3 million ounces of silver over an eight-year mine life, with production peaking in year two at 180,000 gold-equivalent ounces. The operational metrics for the project are relatively average among most gold developers. However, the stand-out parameter for the project is the extremely low initial capex, with Ascot expecting a capex bill of just US$106 million to move into production. This low upfront capital is due to the existing plant and underground access in place already, and this figure is well below the peer average for small- and medium-sized gold projects of US$188 million. Meanwhile, even though the project is based on roughly one-third of Ascot’s total resources, the after-tax NPV (5%) is impressive at approximately US$271 million, using a $1,450/oz gold price. It’s worth noting that Ascot mentioned that there are 2.2 million tonnes at similar grades that could potentially be converted to reserves with future drilling. Therefore, this after-tax NPV (5%) figure could certainly head north of US$325 million if these were included. We can take a look below to see how the project stacks up against other small- to medium-sized development projects:
As we can see from the chart above, Ascot (right side) has one of the lowest initial capex bills among its peers and is more than 60% below the peer average of US$188 million. The only two projects with similar costs are Australian developers Bardoc Gold (BDC.ASX) and Capricorn Metals (CMM.ASX), which have lower production profiles than Ascot. Even more impressive, while Ascot’s upfront capital to move Premier into production is 60% below the peer average, its average gold-equivalent annual output is 3% above the peer average at 142,000 ounces vs. a peer average of 137,000 ounces. Based on the fact that Ascot beats its peers in both metrics, and is located in a Tier-1 jurisdiction, there’s certainly a lot to like here.
If we take a look at how the project stacks up from an after-tax NPV (5%) to initial capex ratio standpoint, Ascot also stands head and shoulders above the majority, ranked 4th out of 13 projects for the highest ratio at 2.56, and 3rd among Tier-1 jurisdictions. This figure is more than 15% above the peer average of 2.16 and is third only to Integra Resources (OTCQX:IRRZF) and Capricorn Metals, which are also in Tier-1 jurisdictions. As we can see, the best ratio among peers belongs to Orezone’s (OTCQX:ORZCF) Bombore Project, but the project sits in Burkina Faso, a much less desirable mining jurisdiction than British Columbia. Therefore, from a financial standpoint and operational standpoint, Ascot is clearly one of the top-10 undeveloped medium-sized assets in the sector currently. It’s important to note that these figures are based on $1,450/oz gold for all projects, so they are as close to apples-to-apples comparisons as possible.
So, are there any negatives?
The only real inferior trait of Ascot’s Premier Gold Project is the reliance on underground mining, which is not something that other peers listed have to contend with as they’re mostly open-pit. While there’s no reason to believe that Ascot will have trouble mining this project, underground mining can be much more complicated even at high grades, and Ascot’s neighbor Pretium Resources has undoubtedly learned this the hard way. Despite projecting all-in sustaining costs below $600/oz before moving into production, the company continues to produce gold at above $875/oz, more than 40% above what shareholders were expecting. There is no reason to make the leap that because Pretium has had its challenges that Ascot will also; this warning is merely to point out that underground projects are not as predictable as open-pit mining. Often, we see quite a bit of variance between intended results and actual results. It’s for this reason that I prefer developers that are looking to develop open-pit mining operations.
The good news for Ascot is that despite some minor risks associated with underground vs. open-pit operations, the company is trading at a relatively attractive valuation at US$51.82/oz. As the above chart of a three-period moving average of the price paid per ounce in US/Canada takeovers shows, the average is closer to US$70.00/oz currently. Therefore, in a takeover scenario, an argument could be made that Ascot could fetch a valuation of at least 30% higher than current levels. This does not mean that the stock is due to re-rate 30% higher immediately, it is merely to point out that in a takeover scenario, a fair price for Ascot’s ounces would be at least US$70.00/oz, or 30% above current levels.
Ascot Resources’ recent Feasibility Study has outlined a solid project in a Tier-1 jurisdiction, and the valuation suggests that the stock is currently slightly below fair value. The most attractive part of the project that investors can take comfort in is the low initial upfront capital. This means that it should be a breeze to move the project into production as Ascot could easily finance the project itself with minimal debt dilution. Therefore, based on the attractive economics and more than reasonable valuation of US$51.82/oz, I see the stock as a Hold. While I would argue that there are similar projects out there in the sector at slightly lower valuations like Integra Resources at US$35.00/oz, Ascot’s Premier is one of the better undeveloped projects in the industry not held by an intermediate or senior gold producer.
Disclosure: I am/we are long GLD, IRRZF, SKREF. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
Additional disclosure: Disclaimer: Taylor Dart is not a Registered Investment Advisor or Financial Planner. This writing is for informational purposes only. It does not constitute an offer to sell, a solicitation to buy, or a recommendation regarding any securities transaction. The information contained in this writing should not be construed as financial or investment advice on any subject matter. Taylor Dart expressly disclaims all liability in respect to actions taken based on any or all of the information on this writing.