2023-03-23 11:34:39 ET
Summary
- Victoria Gold continues to be one of the worst performers sector-wide, with this being self-inflicted because of poorly managing investor expectations.
- Not only did Victoria miss guidance three consecutive times (H2-20, FY-21, FY-22), but its dreamy Project 250 talk has dissipated, with no hopes of this coming to fruition anytime soon.
- The good news is that Victoria is expecting a better 2023, but the improvements aren't nearly what I expected, given the easy year-over-year comps after two pitiful years.
- Given that I see Victoria Gold as a bottom-10 miner in the sector, and less likely to be a takeover target with life-of-mine costs likely to come in closer to ~$1,200/oz, I continue to see far better bets elsewhere in the sector.
Just over seven months ago, I wrote on Victoria Gold (VITFF), noting that while the softer H1 results appeared to be mostly priced into the stock at US$7.40, I still didn't see the stock being worth owning. This is because there was a much more favorable way to get exposure to gold and Victoria's Eagle Mine in the Yukon through Osisko Gold Royalties ( OR ) which owned a massive 5.0% NSR on the mine but without the sting of inflationary pressures and much more diversification (~20 producing assets vs. one). Since that August update, gold ( GLD ) is up 13%, Osisko Gold Royalties is up 47%, and Victoria is up a mere 1%.
In Victoria's defense, the company suffered a minor setback with a belt splice failure at its overhand conveyor. However, even without the downtime, it still would have logged its third consecutive massive miss vs. its guidance mid-point (H2-20, FY-21, FY-22). This massive underperformance in the past seven months is evidence of why there is absolutely no reason to own miners that can't deliver on promises, and certainly not pay up for them, which is why I noted to avoid the stock or take profits last month above US$7.50. In this update, we'll dig into the FY2022 results and why I continue to favor other names elsewhere in the sector.
Victoria Gold, Gold Price, Osisko Gold Royalties Performance (TC2000.com)
All figures are in United States Dollars unless otherwise noted with a C$.
Q4 & FY2022 Results
Victoria Gold released its Q4 and FY2022 results last month, reporting quarterly production of ~43,700 ounces (down 11% year-over-year), and FY2022 production of ~150,200 ounces, a nearly 9% decline from the year-ago period. Not only was this production disappointing because it was down sharply on a year-over-year basis, but it was even more disappointing given that the company came into the year guiding for 165,000 to 190,000 ounces, implying a guidance midpoint of 177,500 ounces. And while cold weather in December, a belt splice failure of its overland conveyor that resulted in downtime and cold weather in Q1 impacted production, the Eagle Mine was destined to deliver into the low end even before the October setback (18 days of downtime).
Victoria Gold - Quarterly Gold Production (Company Filings, Author's Chart)
Given the significantly lower production in Q4 combined with an increase in sustaining capital (C$22.3 million vs. C$18.0 million) plus a weaker average realized gold price and the impact of inflationary pressures, Victoria's AISC soared to a sector-lagging figure of US$1,376/oz (Q4 2021: US$1,052). On a full-year basis, the results were just as ugly, with AISC increasing to US$1,441/oz, up from US$1,193/oz in the year-ago period. That said, it was a busy year for sustaining capital with the construction of a water treatment facility, capital component rebuilds on its material handling system, an expansion of the heap leach pad, and mobile mining fleet rebuilds, resulting in AISC looking even worse than investors hoped.
Given the decline in gold sales on a full-year basis (~139,600 ounces vs. ~158,700 ounces), annual revenue declined to just C$321.8 million, and free cash flow fell deep into negative territory at C$53.5 million despite being up against easy year-over-year comps (FY2021 free cash flow: C$26.8 million). This was, of course, related to higher costs because of inflation, a weaker average realized gold price, and fewer ounces sold for the year related to setbacks, with the main one being the failure of the overland conveyor. The result was that Victoria ended the year with a lower cash balance of just C$20.6 million and a worse net debt position, with C$184.5 million in long-term debt.
Victoria Gold - Quarterly Production & AISC Margins (Company Filings, Author's Chart)
Finally, if we look at AISC margins, we saw considerable margin compression, with AISC margins sliding to just US$237/oz in Q4 2022, down 48% from US$460/oz in Q4 2021 and 69% from US$763/oz in Q4 2020. Given where the gold price sits today, I would expect an improvement in AISC margins year-over-year, with AISC margins likely to improve to at least US$420/oz based on estimated AISC of US$1,430/oz in FY2023. Still, the company noted in its recent Conference Call that one headwind continues to be labor with higher turnover rates than it would like, and inflationary pressures don't appear to be easing as much as some producers would like even if diesel costs have improved. Hence, there is the possibility that costs could come in above the guidance midpoint if labor continues to be an issue.
Forward Outlook
During Q1 2022, Victoria Gold teased its Project 250 plans (year-round stacking and scalping fine ore material from the crushing circuit to boost production), aiming to increase annual production to 250,000 ounces during 2023. As the saying goes, one should work on walking before they run, and this certainly applies to Victoria and its Eagle Gold Mine, with management getting a little ahead of themselves with their Project 250 plans before they put up another miserable performance in 2022 relative to guidance. Since then, the Project 250 plans have scuttled out of the Corporate Presentation where they previously sat in Q1 2022 , and based on the mid-point of FY2023 guidance, annual production will come in 15% shy of the 200,000-ounce mark, let alone the 250,000-ounce mark.
Victoria Gold - Actual Production vs. Guidance & 2023 Outlook + 2024 TR Estimates (Company Filings, Author's Chart)
As noted in my previous update in February, I did not expect production to get close to the 250,000-ounce mark in 2023 nor 2024, with estimates of annual production of 192,000 ounces and 219,000 ounces, respectively. However, Victoria has put forth guidance of just 160,000 to 180,000 ounces this year, and its updated Technical Report is calling for production of ~194,000 ounces in 2024. Given the track record of consistently missing on forecasts, I imagine that the company is being ultra-careful with 2023 guidance and sandbagging to ensure it doesn't disappoint a fourth time. That said, even if we assume production of 172,000 ounces at AISC of $1,430/oz (just below midpoint of $1,450/oz), this will mark another disappointing year.
So, what's the good news?
Although 2024 will be another high-cost year for the company, it is getting bailed out a little by the gold price (currently sitting above $1,980/oz), which should allow for margin expansion despite relatively flat costs on a year-over-year basis. In addition, costs should drop materially over Eagle's mine life, with FY2022/FY2023 likely to mark the peak for costs over the next several years. This is based on its estimated life-of-mine AISC of $1,141/oz, with these unit costs sitting 20% below the FY2022/FY2023 average. I would argue that these cost estimates look to be on the low end and I would expect costs to come in at $1,200/oz plus, but regardless, this is an improvement and would represent a reversion to costs below the industry average (FY2022: ~$1,300/oz).
The negative development, though, is that I previously saw Victoria as a takeover target if it could sustainably operate at 225,000+ ounces per annum at sub $1,050/oz costs given that a mid-tier or intermediate miner might look at the company as an easy way to add Tier-1 operating exposure at below average costs. However, the updated life of mine plan is calling for ~170,700 ounces per annum on average and a more conservative outlook appears to be ~$1,200/oz AISC. At these unit cost assumptions, Victoria's Eagle Mine may offer decent growth when added to the portfolio of a potential suitor, but it would not offer material margin expansion for most operators, which is important for two reasons.
First, the goal when growing should be to add profitable ounces or at least ounces that are more profitable than a current production profile, and with AISC costs close to the mid-tier and intermediate average, Victoria's Eagle Mine does not offer the potential to dramatically reduce unit costs when added to a mid-tier/intermediate producer's portfolio. Second, if trekking into a less favorable climate (frigid temperatures), I would imagine most operators want costs near the lowest quartile of the cost curve (especially if taking on a lower-grade asset), such as B2Gold ( BTG ) picking off Sabina ( SGSVF ) which should operate at sub $850/oz AISC and Kaminak acquired by Goldcorp, plus N-Mining with Kinross ( KGC ). Victoria does not meet these criteria, which it looked like it might before inflationary pressures hit and Project 250 became Project 200.
To summarize, I no longer see Victoria as a top takeover target, and while 2023 and 2024 will be better than 2022 (which isn't saying much given how poor 2022 was), costs will remain higher than I expected because of the lower production levels. So, although Victoria may remain out of favor and semi-undervalued (two key ingredients for a turnaround) I think much of the underperformance is justified.
Valuation
Based on ~68 million fully diluted shares and a share price of US$6.45, Victoria Gold trades at a market cap of ~$439 million. This compares quite favorably to an updated NPV (5%) of ~$810 million at Eagle using an $1,800/oz gold price assumption. If we add $100 million in exploration upside to the property, we arrive at a fair value for its assets of $910 million. Although this would suggest that Victoria trades at a deep discount to fair value, I believe a more conservative multiple for the stock is 0.90x P/NAV and we must subtract ~$260 million in combined estimated corporate G&A plus net debt from this figure. So, after applying a 0.90x multiple and adjusting for net debt and estimated corporate G&A, the conservative fair value for the stock drops to just $564 million [US$8.30 per share].
If we measure from a current share price of US$6.45, this might seem like a very attractive return potential, with Victoria having 29% upside to fair value. However, when investing in small-cap producers, I am looking for a minimum 40% discount to fair value to justify starting new positions, especially if the team has a track record of failing to deliver on promises. If we apply this discount to Victoria's fair value of US$8.30, the stock would need to decline below US$5.00 to move back into a low-risk buy zone. So, although it may be tempting to buy VITFF here with it not taking part in the sector-wide rally, I see this underperformance as partially justified, and I do not see the stock in a low-risk buy zone here.
Summary
If one is going to own a single-asset producer which carries higher risk, one must ensure they own the best names, or at least buy with a large enough margin of safety that it's very difficult to lose money. Two examples of serial outperformers are Lundin Gold ( LUGDF ) and Orla Mining ( ORLA ) and I see both as solid buy-the-dip candidates if they trade down to lower levels. However, in Victoria's case, the company may have easy comps on deck after two pitiful years, but it's hard to trust this team to deliver and they certainly have proven to the market that it's better to bet against them than back them when they haven't come even close to annual guidance.
Fortunately, this year they should meet guidance and potentially beat guidance, but they've set the bar so low that it isn't anything to write home about, and the dreamy Project 250 plans sold to shareholders by management certainly aren't anywhere near coming to fruition. Given that I see Victoria Gold as a bottom-10 miner in the sector, and less likely to be a takeover target with life-of-mine costs likely to come in closer to ~$1,200/oz, I don't see any reason to own the stock as an investment and certainly not without a margin of safety present. So, while I would consider the stock from a swing-trading standpoint if it were to drop back below US$5.10, I think there are far better ways to park one's money elsewhere in the sector.
For further details see:
Victoria Gold: A Disappointing Forward Outlook