CA - Victoria Gold: A Solid Start To 2023

2023-04-26 17:19:57 ET

Summary

• Victoria Gold was one of the worst-performing gold producers during the Q4 2022 sector-wide rally, struggling to gain any upside traction in a positive period for the Gold Miners Index.
• However, an attractive relative valuation combined with easier year-over-year comps has helped the stock to rally sharply, with VITFF being one of the better performers in 2023 (+42% year-to-date).
• Besides the benefit of rising gold prices, Victoria put together a solid Q1 performance, a step in the right direction and it's tracking ahead of its FY2023 guidance midpoint.
• That said, I believe the easy money has been made here with Victoria 50% off its lows and with higher costs in the updated Technical Report; I continue to see better reward/risk bets elsewhere in the sector.

Victoria Gold (VITFF) has struggled to meet guidance since it began production in 2019, and in fairness, the company deserves a pass on missing H2-2020 production given the unprecedented challenges experienced globally related to COVID-19 related restrictions and supply chain headwinds. That said, the 2021 and 2022 guidance misses were less excusable and they weren't small misses, rightfully placing the stock in the penalty box and resulting in the stock giving up most of its March 2020 through June 2021 gains. Fortunately, we've seen a complete 180 in Q1 2023, with Victoria putting together a record Q1 performance and confirming the viability of year round stacking at its Eagle Mine in the Yukon. Let's dig into recent developments a little closer below:

All figures are in United States Dollars unless otherwise noted.

Q1 Production

Victoria Gold released its preliminary Q1 results earlier this month, reporting quarterly production of ~37,600 ounces of gold, leaving the company tracking at ~22.1% of its annual guidance midpoint after the weakest quarter of the year due to seasonality (colder weather). Not only did this trounce the trailing two-year average Q1 production figures of ~25,600 ounces, but it smashed the previous Q1 record of ~26,800 ounces set in Q1 2021 by 40%. This solid performance was related to the confirmation of the viability of year-round stacking, with Victoria stacking ~2.1 million tonnes of ore in the period, a ~130% increase from the 0.90 million tonnes stacked in Q1 2022. Meanwhile, from a mining standpoint, tonnes of ore mined increased to 2.1 million tonnes at higher grades of 0.86 grams tonne, respectively.

Given this strong start to 2023, Victoria should meet its FY2023 guidance midpoint of 170,000 ounces with ease, with Q2 through Q4 production amounting to ~140,000 ounces of gold production in a year that wasn't impacted with nearly three weeks of downtime (belt splice failure of overland conveyor). The fact that Victoria is set up to beat guidance isn't overly surprising, with it setting very achievable guidance this year to ensure it didn't miss its forecasts again. Still, the ability to execute successfully on its year round stacking strategy is a positive development and will not only benefit this year's output (potential for a 2-4% vs. the guidance midpoint of 170,000 ounces), but also for future years and smoothing out volatility in its financial results with it typically having significantly back-end weighted output.

Given the potential to beat its FY2023 guidance midpoint, the continued weakness in the Canadian Dollar and the softness in the oil price year-to-date, it looks like Victoria should also see a beat on costs which will translate to a significant improvement in AISC margins. Assuming all-in sustaining costs [AISC] of $1,405/oz and an average realized gold price of $1,925/oz for 2023, we would see Victoria report AISC margins of $520/oz vs. my previous estimates of $420/oz under a lower gold price assumption and a ~3% decline in costs year-over-year. This would translate to a 57% increase in margins year-over-year vs. the $333/oz reported in FY2022, and the $520/oz figure looks beatable if gold prices continue to cooperate.

Although this expected margin expansion is certainly an impressive headline figure, Victoria is up against very easy year-over-year comps and AISC margins will still be down on a two-year basis vs. FY2021 levels (FY2021: $597/oz). That said, this is certainly a step in the right direction and a welcome improvement for long-term investors that have suffered through a tough two years holding Victoria Gold stock. Just as importantly, this margin expansion is not solely from outside factors such as the gold price, but it's being helped by Victoria making clear improvements to its operations at Eagle and it's certainly encouraging to see the year-end stacking strategy being put to work successfully even if Project 250 hasn't come to fruition.

Recent Developments

Victoria Gold released an updated Technical Report for its Eagle Gold Mine earlier this year, with the new mine plan highlighting average annual production of 202,000 ounces for the first eight years, with a life of mine production profile of ~170,700 ounces over the 12-year mine life. While this was slightly below my expectations, we saw the bigger impact from an operating cost standpoint, with all-in sustaining costs increasing to $1,114/oz from estimates of $744/oz previously. This is not an issue with the ore body and grade and tonnes continue to reconcile well with the reserve model. Instead, this is a sector-wide issue related to inflationary pressures, with operating costs up from ~$9.30/tonne to ~$14.70/tonne, or the equivalent of a 0.10 gram per tonne loss in value per tonne of ore leached.

This would amount to a rounding error for a high-grade open-pit operation like Skeena's ( SKE ) Eskay Creek or B2Gold's ( BTG ) Back River Project. However, for a low-grade heap-leach asset like Eagle, a cost increase per tonne that wipes out the value of ~0.10 grams per tonne of gold is significant and has certainly impacted the NPV (5%). In fact, at a constant $1,800/oz gold price relative to the 2019 mine plan, the After-Tax NPV (5%) has declined by nearly 40% to ~$820 million vs. $1.35 billion. In addition, the lack of reserve growth was a little disappointing, given the significant increase in the gold price assumption ($1,275/oz ---> $1,550/oz), a figure that's above the industry average for reserve calculation.

That said, Eagle is still a very profitable mine at current levels, and while the increase in all-in sustaining costs of 44% isn't ideal ($1,114/oz vs. $774/oz), Eagle should operate at costs below the industry average even if we assume a $1,200/oz AISC to be more conservative to factor in sticky inflationary pressures on consumables and a tight labor market that could pressure wages. So, while the 2022 TR didn't come in nearly as favorable as some investors might have hoped, it is a viable operation even at a $1,600/oz gold price, and the same can't be said for some other low-grade operations that lack economies of scale or have higher strip ratios, which have made them marginal at best, such as most of Argonaut's ( OTCPK:ARNGF ) heap-leach assets in Mexico.

Valuation & Technical Picture

Based on ~68 million fully diluted shares and a share price of US$7.52, Victoria Gold trades at a market cap of $512 million, making it one of the cheaper ~200,000-ounce producers in the market today, and it's certainly reasonably valued on a relative basis compared to some developers that aren't likely to pour a single ounce of gold before 2029 yet trade near billion dollar valuations like New Found Gold ( NFGC ). That said, if we compare Victoria's valuation to an estimated net asset value of ~$650 million, the stock is creeping up towards fair value following its rally. And if we apply a 0.90x P/NAV multiple to the stock to be more conservative given that the company has struggled to meet internal guidance to date, this translates to a fair value of $570 million or US$8.40 per share.

This points to a 12% upside from current levels, and Victoria certainly has meaningful leverage to gold prices in a higher-cost year during 2023. However, when investing in small cap miners, I prefer a 40% discount to fair value to justify starting new positions. After applying this discount to Victoria's conservative fair value of US$8.40, this translates to a low-risk buy zone of US$5.05 or lower. Obviously, there's no guarantee that the stock hits this level and waiting for these prices may result in a missed long opportunity. However, I prefer only to buy when the odds are stacked heavily in my favor. So while I went long the stock in December at US$5.45, I exited my position for a 30% gain and I don't see the reward/risk as attractive enough here at US$7.50.

Summary

Victoria Gold has exceeded my expectations for Q1 and this should allow the company to beat its FY2023 guidance midpoint for output and costs. The result should be material margin expansion and moderate free cash flow generation ($30+ million) vs. a previous outlook of limited free cash flow generation at a more conservative gold price assumption. That said, some of this already looks priced into the stock and I continue to see better relative value elsewhere in the sector. So, while I would view pullbacks below US$5.50 in Victoria as buying opportunities from a swing-trading standpoint, I don't see any reason to rush into the stock here near US$7.55.

For further details see: