CA - Ascot Resources: Attractive Upside Left

2023-04-18 00:34:45 ET

Summary

• Ascot Resources secured new financing for its Premier-Red Mountain gold project.
• The first gold should be poured in early 2024.
• Very good drill results keep on coming and there is high potential for the resources, reserves, mine life, and annual production rates to be expanded notably.
• If the current gold prices prevail and no further surprises are encountered during the construction and ramp-up process, there is potential for the share price to grow by further 50-100% over the next 12 months.

Ascot Resources ( OTCQX:AOTVF ) is an emerging gold producer with substantial upside potential. The development of its high-grade Premier-Red Mountain gold mine was disturbed by some financing issues. However, new financing has been secured lately, and the first gold production is expected in early 2024. Due to the attractive upside potential, I featured Ascot Resources as the October Idea of the Month for the subscribers of the Royalty & Streaming Corner. Since then, Ascot's share price has increased by more than 80%. However, there is still a meaningful upside left. Especially if the gold price remains around $2,000/toz or even higher.

The Premier-Red Mountain Project

The project is a fusion of two brownfield projects, Premier Mine, and Red Mountain Mine. It is located in the Golden Triangle of British Columbia, to the south of Newcrest's ( OTCPK:NCMGF ) (formerly Pretium's) Brucejack mine. According to the 2020 resource estimate, the deposits at the Premier and Red Mountain properties contain total measured & indicated resources of 1.85 million toz gold and 6.82 million toz silver, and inferred resources of 1.25 million toz gold and 4.77 million toz silver.

The 2020 feasibility study envisions centralized processing facilities that should be processing ore from Premier, Big Missouri, Silver Coin, and Red Mountain deposits. The mining operations should be able to produce 132,000 toz gold and 370,000 toz silver per year on average, over 8-year mine life. The AISC was projected only at $769/toz gold. However, this is only the beginning, as less than 1/2 of the overall resources have been converted into reserves that include 1.17 million toz gold and 3.92 million toz silver. Moreover, the drilling of the properties continues successfully. There is only little doubt that the ultimate mine life and probably also average annual production rates will be notably higher than presented in the chart below.

The recent drill results are really promising. In August , Ascot announced intersections of 11.83 g/t gold and 56.3 g/t silver over 2.73 meters, 6.33 g/t gold and 6.6 g/t silver over 3.2 meters, and 8.25 g/t gold and 15.7 g/t silver over 1.45 meters. These drill holes expanded the strike length of the Sebakwe Zone to 350 meters and it remains open. As a result, Ascot decided to drill 15 holes instead of the originally planned 10 holes in the Sebakwe area. In October , Ascot reported the intersection of multiple intervals of visible gold at the Big Missouri deposit. The best results included 31.92 g/t gold and 22.21 g/t silver over 10.69 meters, or 15.91 g/t gold and 31.5 g/t silver over 8 meters. In December , Ascot reported the intersection of 488 g/t gold and 181 g/t silver over 1 meter and 30.98 g/t gold and 9.35 g/t silver over 3 meters. And in January , Ascot reported another batch of drill results, including 26.56 g/t gold and 10 g/t silver over 8 meters or 43.3 g/t gold and 20.9 g/t silver over 1.5 meters.

What is important, the latest resource estimate was prepared back in 2020 and it doesn't include the Sebakwe Zone, as well as the Day Zone and Premier West expansion (picture above). The new resource estimate is poised to provide notably higher numbers.

The New Financing Package

The project development was disrupted by some financing issues. Sprott Private Resource Lending II originally agreed to provide an $80 million senior credit facility. However, after the first $20 million was drawn, Sprott refused to provide the remaining $60 million, as the two parties were unable to reach an agreement on the satisfaction of the drawdown conditions. Ascot was forced to postpone some construction activities and the original plan to commence production in early 2023 had to be changed.

But in December 2022 , Ascot announced a new financing package worth C$200 million ($150 million), consisting of a $110 million gold and silver stream, and a C$50 million equity investment.

According to the streaming agreement, in an exchange for a $110 million upfront payment, Sprott Streaming will be entitled to 8.75% of gold and 100% of silver production, at ongoing payments of 10% of the prevailing spot price. After 150,000 toz gold is delivered, the stream will be reduced to 4.375% gold and 50% silver. Moreover, between January 1, 2025, and December 31, 2026, Ascot will be entitled to repurchase 1/2 of the stream for $80 million. It is also important to mention that the original 10% gold streaming agreement with Sprott Streaming was altered to become a part of the new stream.

The equity financing consisted of 48.5 million common shares priced at C$0.41 and 60 million common shares qualified as flow-through shares priced at C$0.5. The total gross proceeds amounted to C$49.89 million. The equity financing was provided by Ccori Apu that became Ascot's biggest shareholder with a 19.9% equity stake.

The Countdown to Production

With the recent financing, the project should be more than fully financed. According to the December news release, overall investment in the mine construction amounted to C$153 million and there was C$147 million remaining. The original projection of C$176 million increased by approximately 2/3 due to the construction delays, as well as the inflation pressures. It means that the new C$200 million financing should provide a relatively robust buffer. If there is some money left, it should be used to repay the outstanding debt that equaled approximately C$45 million as of the end of 2022.

With financing in hand, the way forward should be clear. In April, the underground works should resume, and in May, the earthworks on the Cascade Creek Diversion Channel and tailings facilities should resume. The ore processing should start before the end of 2023, with the first gold pour in early 2024. Commercial production should be reached around the middle of 2024.

The Upside and Risks

Despite the increased CAPEX, the upside remains robust. According to the latest corporate presentation , even after the new C$300 million CAPEX estimate is taken into account, the after-tax NPV(5%) of the project is C$673 million ($500 million) at the current gold price. The after-tax IRR equals 55%. Yes, the numbers would be lower if the AISC was updated as well. However, at the current market capitalization of approximately $270 million, there is room for further share price growth.

The main risks are some further construction delays, further cost overruns, some issues with the ramp-up process, and also the potential decline in gold prices. There is a good chance for further delays to be avoided, as the mine development is well progressed, and at this stage, Ascot should be able to estimate the schedule relatively well. However, some unexpected issues cannot be excluded completely. The situation is similar also in the case of cost overruns. As a major portion of CAPEX has been already committed, moreover, the inflation pressures seem to be easing, there is a good chance not to exceed the new C$300 million price tag. And, of course, there is also the gold price risk, which is a factor completely out of Ascot's control. However, the good news is that even at a gold price of $1,700/toz, which is well below the current market price, the after-tax NPV(5%) should be higher than Ascot's current market capitalization. If all these risks are avoided, there is potential for the share price to increase by another 50-100% over the next 12 months.

Of course, the upside potential may be further boosted by successful exploration activities. As I mentioned above, the drilling is progressing well and very good high-grade interceptions keep on coming. There is a very high probability that the mine life or the production rates (and possibly both) will be significantly expanded.

Conclusion

In early 2022, before the financing issues and subsequent construction delays emerged, Ascot's shares were trading above $1. All the negative developments along with stock and gold price weakness pushed it all the way down to the $0.25 area. However, the financing news and improved gold prices pushed it back to the $0.6 level in early 2023. Since then, it has been moving in a channel between $0.6 and $0.42. Right now, the share price is in the middle of the trading range and growing. The RSI stands at 55 which leaves a lot of space before the overbought levels are reached. Moreover, the 10-day moving average crossed the 50-day one to the upside which is a bullish signal. If the $0.6 level is broken, the next meaningful resistance should be met somewhere around $0.8, or more than 50% above the current share price of $0.51.

From a fundamental standpoint, there is space for further growth. Especially if the current gold prices prevail and no further surprises are encountered during the mine construction and ramp-up. In this case, there is a high potential for the share price to grow by 50-100% over the next 12 months. And even more, after the very good exploration results are transformed into a new resource and reserve estimate and mine plan.

For further details see: