Stepping through the NAV of Aurizon Mines
The following post, originally published on November 23rd, 2011, has been updated to reflect the calculation of NPV after tax rather than being limited to before tax treatment only, as was the case before.
A couple of days ago I looked at the current cashflow generation capacity of Aurizon Mines. Contrary to popular market opinion (Aurizon continues to drop as though it would be bankrupt at $1500 gold), from my analysis I concluded the following:
- …about 20% of Aurizon’s market cap is in the form of cash on the balance sheet. The enterprise value of the company is only $740M after subtracting this cash. Annualizing the last four quarters, the company is trading at about 9x its free cash flow generated. That would be using an average gold price of about $1500/oz.
- Looking at the company on the basis of free cashflow, if you annualize the third quarter, where the realized gold price for Aurizon was $1695/oz, the company is generating free cash at a rate of $104M a year. This puts the company valuation at a little less than 7.5x free cash flow.
- On an operating cash flow basis, in the last four quarters (when there has been an average gold price of $1500) Aurizon generated $111M of operating cash flow This gives the company a 6.6x EV/opcf multiple for the ttm. If you annualize the third quarter operating cash flow alone you get $136M, which leads to an EV/opcf multiple of 5.4x.
So those are some basic conclusions that can be drawn based on production, revenues and costs. Now I want to expand the analysis to look at what net asset value of the company.
To look at the NAV I am going to sum up all the parts of the company, subtract any liabilities and debts and then divide by the shares outstanding to estimate the value of the assets on a per share basis.
Let’s start with Casa Berardi.
Casa Berardi is Aurizon’s single producing mine. Casa Berardi has been a steady producer over the last number of year, both in terms of produced ounces and costs.
In the current environment which has been wrought with gold companies missing cost estimates, it is particularly impressive that Aurizon has been able to actually reduce costs for the last two quarters.
Casa Berardi has the following reserves and resources
Note that some of the resource is open-pittable. The expectation is that the open pit production will begin near the end of the underground mine life when the underground is no longer supplying sufficient ore to the mill.
On March 31st Aurizon filed an updated technical report on Casa Berardi that looked specifically at the feasibility and economics of the open pit. That report can be found on Sedar. I have used the data in that report extensively to come up with my own estimates.
In the report the evaluators, Roscoe Postle, only considered mineral reserves for both the underground and open pit when determining the production schedule. I believe this is too conservative. I have instead incorporated 70% of the measured and indicated resource in my production profile. I have included none of the inferred resource. I believe that I am being conservative in these assumptions.
The inferred and M+I resource that I did not include in the production profile will be added to the Aurizon NAV based on a $/oz valuation. These ounces will have a lower value than those included in the production model, but still have some value assigned to them.
Because some of the M+I resource was added to the production profile, the profile I used is not the same as what was used by Roscoe Postle. I basically spread out the open pit production over twice as long of the period, and overlapped the production with a reduced but extended production profile from the underground. The specifics of how Aurizon eventually will sequence the underground and the open pit are a guess to me, but I don’t think that they will dramatically effect the result I am trying to achieve, which is to understand the NAV of the company.
I determined the following after tax (AT) value for Casa Berardi:
The details of the spreadsheet I used to come up with the estimates is provided below. The cost and processing assumptions are almost exclusively based on the Roscoe Postive report. The grades of the underground are based on the grades expected from the mine sequencing of the current reserves, and the stated grade of the M+I resource. Open pit grades are from Roscoe. Taxes are determined based on a 30% tax rate (includes provincial and federal tax) with depreciation deducted from the before tax income.
Aurizon has an advanced stage development project called Joanna. The company is completing a feasibility study on Joanna as we speak. The feasibility study has taken a bit longer than anticipated because it was originally expected thta Joanna would mine the ore, form a concentrate, and then ship the ore to Casa Berardi for final processing. Aurizon got about half done the feasibility study using this assumption before the drilling results at Joanna forced them to re-evaluate. The company is now producing a feasibility study that includes full mill and processing circuit on-site.
My analysis tries to incorporate this new on-site milling. The mining and base milling assumptions were determined from the pre-feasibility study that was done for Joanna December 22nd 2009. However I updated a number of the capital and operating cost numbers to better reflect both the cost increases, the mill on-site, and to add some conservativeness. The differences are listed below:
I am probably being conservative with all these assumptions. I’ve hiked the numbers rather substantially.
My analysis assumes ultimate production of 1.4Moz of in-situ gold (pre-recovery). This compares with the following estimate of gold resource at Joanna.
Clearly I am being conservative in basing my work on a 10 year mine life and 8,000t/d. There appears to have at least 2Moz and potentially 3Moz of gold in-situ. And the deposit remains open to more exploration.
As with Casa Berardi, any M+I or inferred resource not included in the production profile will be given a valuation based on a per ounce estimate.
Like Casa Berardi, I looked at 3 gold price scenarios; the trailing four quarter gold price ($1500/oz), the current gold price $1800/oz, and a future possible rise in the gold price ($2100/oz). Below is the before tax NPV of Joanna under each scenario.
The details of the spreadsheet I used to come up with the estimates is provided below.
Aurizon is involved in a number of other much earlier stage development projects. There of these already have legitimate (albeit small) deposits. There is exploration work being done on all three of these projects to increase the resources. I am not going to include any of the potential in the NAV calculation, but I will include the current resource value.
Because these projects are still years away from a feasibility type study, and because they represent a very small value in comparison to Casa Berardi and Joanna, I have chosen to value them on a very simple $/oz basis. In the case of Marban, as part of the earn in Aurizon has to pay $30/oz M+I and $20/oz inferred for 50% of the ounces defined in the final NI 43-101. That is why I have assigned a lower value to ounces in the Marban-Norlartic deposits.
The total value to Aurizon of these projects is about $12M.
At this point we will value the ounces that were not included in the production profile at Casa Berardi and Joanna. The value of each ounce is somewhat arbitrary. It really represents a risked value of what the NPV10 of that ounce would be if produced. M+I resource is worthe more than Inferred resource. Similarly, Casa Berardi ounces would need to be worth more than Joanna, because with a mill already built on-site and a mine in production, the risk profile of an ounce at Casa is less than at Joanna. Another consideration is the price of gold that ounce is being valued at. In the table below I have considered all 3 variables in my determination of the value of each ounce.
There are a number of sources that can be used to determined the average value of an ounce in the ground. All are bound to be wrought with error bars. One such study, performed by Edison Investment Research, drew the following conclusions:
we have been able to determine that the average value of a ‘measured’ resource ounce globally is US$340/oz, while that of an ‘indicated’ ounce is US$159/oz and that of an ‘inferred’ ounce is US$34/oz
Another study, published by Casey Research, determined some slightly lower numbers, though I suspect this was because the CaseyResearch team was mostly focused on junior exploration and development companies, or in other words companies that do not yet have a mine built, and where therefore the value of each ounce should be expected to be somewhat less:
1. Inferred: US$61.20 per ounce (up 179.5% from Dec 2010)
2. M&I: US$69.30 per ounce (up 56.4% from Dec 2010)
3. P&P: US$232.70 per ounce (up 1% from Dec 2010)
My estimates are quite conservative. They can be seen below as a function of the gold price they are being evaluated at.
Adding it all up
The last piece of the puzzle before we add up the numbers is corporate expense. This has been fairly consistent for Aurizon at around $15M. I assumed a continuation of the $15M expense going forward over the 11 year mine life of the production profile I developed for Casa and Joanna.
I did not include the NPV of any exploration expenses that Aurizon will incur in the future. I did not think it was correct to include these expenses without being able to estimate the offsetting assets they create. Obviously we can’t hope to know what the drilling may find, so I decided to leave this expense out of the calculation entirely.
As noted above, Casa Berardi and Joanna production profiles all assume a 30% tax rate to net mining profits. No tax rate has been assigned to the valuation of “other ounces”. It is assumed that the $/oz number that is used for those ounces implies the value of the ounce after tax.
The individual parts can now be added up to determine the net present value of the company at various gold price scenarios. This is shown in the two tables below, first discounted at 10% and then discounted at 5%.
A couple observations about the final result:
- The valuation of the company is quite dependent on the price of gold. The net asset value of the company varies by almost 50% depending on whether the valuation is done at $1500 gold or $1800 gold. Perhaps the violent swings in the share price with each $10 move in the price of gold are not as unwarranted as I have thought?
- The numbers vary significantly with the discount rate. There is a 20% swing depending on whether you want to discount at 5% or 10%. I think what this really puts in perspective more than anything is just how subjective the valuation can be.
- Based on my assumptions, Joanna isn’t worth that much at $1500 gold. But my asumptions are likely wildly conservative compared to what Aurzion’s upcoming feasibility study will show. Why? My production profile for Joanna did not include about 2Moz of resource. I ended up valuing those ounces separately at a much lower amount. If you add them to the production profile the value of Joanna would rise by 40-50%.
- Aurizon is fairly priced in the $6-$8 range if you believe in $1500/oz gold for the long term. Aurizon needs to move well into the double digits to begin to price in $2000/oz plus gold.
Overall, the work gives me confidence that there is unrealized value with Aurizon, and that if and when a gold price of $1800/oz begins to get accepted as a sustainable one, the price of the stock should move up significantly to reflect that.
I’ve been following you for some time. Your analysis has been interesting. I have a question with regard to Aurizon’s Joanna project. In reading their material, it appears the gold there is refracted. The stock clearly does not put any value on this potential mine. In your opinion, is this because the market is anticipating that Aurizon will abandon the mine due to high costs and lower than expected gold production, possibly making the project unfeasible?
I think there is the concern that the feasibility study is going to show unfavorable economics because of the refractory nature of the gold. With gold prices this high it is hard to believe that they would ever abandon the project, but imagine if the feasibility study comes out and shows $900 or $1000 costs or something like that. I think that’s the markets concerns.
I also think Aurizon may be getting punished since Agnico’s Goldex closure. Both mines are in Quebec, both underground, and as it is Auirzon has to be really careful at Casa Berardi, I think they said in their analyst day that they can only have a week worth of open stopes because of ground conditions. Now there have never been any problems at Casa that I am aware of but I think the market may be extrapolating that worry to ARZ.
Finally I think the biggest problem is there is no catalyst right now. With the market skeptical about Joanna there is no growth. The JV’s haven’t had very good results, and Casa is doing fine but it is boring and they are experiecing cost creep.
I still kick myself every day for dumping Argonaut in favor of Aurizon. It was such a stupid move.
Thanks. I appreciate the response. I guess its a wait and see now with the feasibility study. Assuming it is positive, that could lift the stock somewhat.
Your article is very informative! Since I am in my learning process of grasping the NAV model, is it possible for you to send me the the excel spreadsheet so that I can learn how everything links together? Thank you. Email: firstname.lastname@example.org
Thanks. Could you please send me a copy of the spreadsheet that you used so that I can follow your logic step by step. Thanks