GLGDF - GoGold: Review Of Updated Preliminary Economic Assessment On Los Ricos South

2023-09-12 10:27:40 ET

Summary

• GoGold Resources Inc. released an updated preliminary economic assessment on Los Ricos South, from the impressive Phase II drill results, which showed an impressive improvements in grade.
• The PEA indicates 8M silver equivalent ounces of annual production for 11 years.
• The company has a good valuation and a strong balance sheet. So, permitting Los Ricos South will be the main risk for GoGold.

Investment Thesis

GoGold Resources Inc. (GLGDF) is a Canadian listed precious metals mining company, with producing and development assets in Mexico. I have covered the stock many times over the last 5 years, where those articles can be found here .

The company did earlier today release a long-awaited updated preliminary economic assessment ("PEA") on Los Ricos South, which included the impressive Phase II drill results, and the Eagle zone that was acquired a year ago .

This article reviews the numbers from the updated PEA together with the valuation of the company, using my latest estimates, and a couple of different discount rates.

Updated PEA Review

The original PEA on Los Ricos South was released in early 2021 and the key figures of that report can be seen above, the report then had an estimated net present value ("NPV") of $295M using a silver price of $21/oz and a gold price of $1,550/oz.

The updated PEA saw an increase in the NPV at Los Ricos South to $458M, where the base case is using a silver price of $23.75/oz and a gold price of $1,850/oz, with a 5% discount rate. While that might look like an impressive increase, much of it is because of higher metal prices. Using similar gold and silver prices, the increase in the NPV is more marginal.

It is possible that the mine plan will change once the pre-feasibility study is released, scheduled for late 2023, but the latest PEA indicates an open pit and underground mine with 8M silver equivalent ounces of annual production for 11 years. So, we are looking at a total of 88Moz payable AgEq for Los Ricos South alone, up from 70Moz AgEq in the original PEA. The relatively minor increase in total resources is probably the most disappointing fact with this study.

However, even if the total number of ounces have only increased slightly. We have seen a very healthy increase in the silver equivalent grade to 217 g/t, up from 157 g/t, which has in turn led to very impressive operating costs. The cash cost is estimated at $8.15/oz and the projected AISC is $9.02/oz, even if there is also some expansion capital not covered in those figures. Regardless, we are looking at a decrease in both cash cost and AISC, which is impressive given how much costs have increased elsewhere in the industry over the last few years.

The initial capital cost has increased slightly to $148M, which is not ideal, but less of a surprise given the very high inflation we have seen for construction spending over the last few years. However, that is still a very manageable amount for a company with no debt, a producing asset in Parral, and with $99M in cash as of the latest quarterly report. The IRR is 37% using the base case, which is an attractive figure, even if it is down quite a bit from the original PEA using similar metal prices.

Valuation & Conclusion

Despite a slightly underwhelming PEA in some regards, we are still talking about an NPV of around $450M using spot prices for gold and silver, which can be compared to GoGold's latest market cap of $333M and an enterprise value of $234M. The company does apart from Los Ricos South have Los Ricos North, and Parral, plus a strong balance sheet after the large bought deal earlier this year.

I have been relatively conservative with my estimates for Los Ricos North due the challenges of permitting open pit mines in Mexico lately, which was discussed in my last article on GoGold that can be found here . If we add up the various components of GoGold, we can see the valuation in the chart below, using both a 5% and an 8% discount rate for the combined assets.

The stock is currently trading with market cap to a combined NPV of around 0.35 using spot prices for gold & silver and a 5% discount rate, it is more like 0.42 using an 8% discount rate.

GoGold has experienced a few headwinds lately, with the increased political risk in Mexico, the strong Mexican Peso, and a higher interest rate which has depressed development companies especially. However, I am less concerned about the Mexican Peso in the long run.

A higher interest rate will naturally make precious metals development companies less attractive, all other things being equal, but GoGold is far better capitalized than the average development company. So, I am not overly concerned with the financing for Los Ricos South.

The main risk for GoGold is the permitting of Los Ricos South, where the process has over the last couple of years become much more uncertain, even if delays related to covid could possibly explain part of that. The company expects to have Los Ricos South permitted by the end of Q1-24, which sounds optimistic, but it could naturally be a substantial catalyst for the company.

Even though the Los Ricos South PEA was weaker than I expected, the valuation is still attractive for GoGold Resources Inc. after I have revised my estimates. Also, we are talking about an asset with a relatively low initial capital cost and an AgEq AISC below $10/oz, which still makes Los Ricos South an appealing asset.

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