Posts tagged ‘casa berardi’

Mar 17

Aurizon Mines: Maybe growth is finally on the horizon of Aurizon

Sorry about the title. That was a terrible rhyme.

I didn’t set off with the intent of writing a long post on Aurizon Mines this morning. I have other research projects to spend my time on that hold more near term potential. In particular, I have regional banks to evaluate, mortgage lenders to learn about, and mortgage lending podcasts to listen to and transcribe.

Nevertheless I must have a masochistic side because I am always more fascinated by the times I am wrong and the things that I don’t understand than with what is working and making sense. And nothing has been wrong or made as little sense to me as the downward spiral of Aurizon Mines.

Over the past 6 months I have (somewhat unintentionally) been swing trading Aurizon Mines. I hold a core position but around that position I buy more at or just under $5 and I sell what I buy at around $5.75 or $6. It worked well a couple of times last year, however this year not so much. The stock stalled out a few weeks ago at $5.50, it didn’t stay there long, and I ended up jumping out of some of my non-core position in the $5.30 range. After that I sat as a bagholder with the rest, watching the stock tumble below $5.

In the last couple weeks I have been in and out some more, buying at $4.80, getting out at $4.9 before buying back on Thursday at $4.50. The frequency of my indecision is telling. I clearly don’t know what to think about the stock.

To be honest, I didn’t think Aurizon would get this low. The company holds $1.31 in cash and would be considered to be one of the lower cost gold producers. It has consistently met targets. Its not a management disaster like so many gold miners. These are solid operators.

The Alamos Gold Comparison

I did a comparison a few months ago between Alamos Gold and Aurizon Mines to demonstrate the disconnect. I think it is instructive to dig up and refresh that analysis now that the Q4 numbers are out:

Instead of focusing on the valuation discrepancy and how the market has it wrong, I want to focus instead on why the market is willing to value Alamos at 2x to 3x the value they are willing to assign to Aurizon.

I think its all about growth and costs.

In the Alamos Q4 report, the company forecast that they would increase production from 153,000 ounces to over 200,000 ounces in 2012. They also predicted that costs would come in about the same as they did in 2011.

In 2012, the Mulatos Mine is forecast to produce its one millionth ounce of gold. Ongoing exploration success has resulted in a track record of mined reserves being replaced. In 2012, the Company expects production to increase to between 200,000 and 220,000 ounces at a cash operating cost of $365 to $390 per ounce of gold sold ($450 to $475 per ounce of gold sold inclusive of the 5% royalty, assuming a $1,700 gold price). The Company expects that gold produced from the gravity mill, which will process high-grade ore from Escondida, will add a minimum of 67,000 ounces of production in 2012 at a grade of 13.4 g/t Au. Based on bulk sample testing conducted in 2007, the Company believes that there is the potential for higher production from the gravity mill as a result of realizing positive grade reconciliation to the reserve grade.

The high-grade gravity mill has been constructed and is currently undergoing commissioning and is expected to be operational with high-grade production by the end of the first quarter of 2012. The current life of the Escondida zone is approximately three years and exploration efforts in Mexico in 2012 will continue to focus on sourcing additional high-grade mill feed. Metallurgical testing completed in 2011 on higher grade ore from San Carlos demonstrated that it is amenable to gravity processing, potentially doubling the amount of available mill feed. Further optimization and metallurgical studies are underway in order to increase the amount of high grade ore that can be processed through the gravity plant.

On the other hand a look at Aurizon’s Q4 report shows the following outlook:

It is estimated that Casa Berardi will produce approximately 155,000 – 160,000 ounces of gold in 2012 at an average grade of 7.5 grams of gold per tonne. Average daily ore throughput is estimated at 2,000 tonnes per day, similar to 2011. Mine sequencing in 2012 will result in ore grades that are expected to be approximately 6% lower than those achieved in 2011. Approximately 42% of production will come from Zone 113, 41% from the Lower Inter Zone, and the residual 17% from smaller zones and development material.

Assuming a Canadian/U.S. dollar exchange rate at parity, total cash costs per ounce for the year are anticipated to approximate US$600 per ounce in 2012. Onsite mining, milling and administration costs are expected to average $134 per tonne, up approximately 6% from 2011 costs as a result of higher stope preparation costs and smaller stopes.

Flat production. Higher costs.

$600 costs are not high by most gold mining standards. With those sort of costs Aurizon would still sit in the top quartile of low cost producers. I think that in this case Aurizon is guilty by association. There have been SO MANY gold miners that have began to predict higher costs only to see those costs spiral much higher than was originally anticipated. The market is on guard.

The Sinking Growth Ship

As for the growth, the problem is that the company’s flagship growth project is not inspiring confidence. I stepped through the news timeline at Joanna in a previous post. Since Aurizon has made it a habit of updating the street with quarterly reminders of just how shitty the Joanna PEA is going to be, let’s do the same thing here. Below is the time line of events:

May 12th 2008

Aurizon first commissioned a pre-feasibility study on Joanna.

November 11, 2009

Aurizon finally received that pre-feasibility study and proceed to a full feasibility study.

September 14th 2010

Aurizon notifies shareholders that the original recovery process assumed (called the Albion process) would show lower recoveries and higher costs than first anticipated. Additional metallurgical test work would be done and the study delayed until mid 2011.

August 11, 2011

Aurizon delays the feasibility study for Joanna again, saying: “the projected capital and operating costs appear to be significantly higher than previously anticipated. The increased scope of the project, as a result of the expanded mineral resource base, has increased capital costs, including those associated with an autoclave process. The costs of ore and waste stockpiles, tailings and of materials and equipment have also all been trending higher, along with the gold price.”

January 11, 2012

Another update giving an ETA: Feasibility study work on the Hosco deposit will continue in 2012 with completion of the study anticipated by mid-year. The feasibility study will incorporate a reserve update based on the increased mineral resource estimate announced on June 13, 2011, together with results of metallurgical pilot tests, a geotechnical study, updated capital and operating cost estimates, and other relevant studies.

As I wrote at the time:

Its been almost 4 years since the original pre-feasibility study on Joanna was complete! At this rate they should be mining by 2100.

The time line can now be updated with the latest installment from the Q4 report and the following comment:

While some studies are still in progress, based on its review of information currently available the Company believes that the feasibility study is sufficiently advanced to conclude that the projected capital and unit operating costs will be significantly higher than estimated in the December 2009 Pre-Feasibility Study, due in part to the change in the scope of the project, the expanded mineral resource base, the selection of an autoclave process and a decision to process the ore on site.

I think this is about the 3rd time the company has warned investors not to get their hopes up about Joanna. Keep in mind that the original numbers for Joanna weren’t exactly thrifty (if I rememver right they were $200M + capital and $700 costs).

If I was going to translate this news-release-speak into plain english it would sound something like this:

It is surprising even us with how shitty this project is turning out to be

But that’s just my interpretation. I could be wrong.

Takeover talk!

I have found 3 articles (here, here, and here) discussing a post-earnings release interview (or maybe it was on the conference call, I haven’t had a chance to listen yet) done by George Paspalas, the company’s CEO, where he said that the company has been approached by potential suitors and that the company is also looking for companyies they could takeover.

With respect to the potential for an acquisition, Paspalas said the following:

To receive the company’s interest, a target would have to be producing around 120 000 oz/y, and at similar profit margins to Aurizon’s flagship Casa Berardi mine in Quebec. “We’ve looked hard, I can tell you that,” Paspalas said, speaking in a telephone interview from the firm’s Vancouver headquarters. “There are a lot of companies out there…that are at a point where they have a pretty good project, but they don’t have any cash – and the shareholders are saying ‘enough’s enough’ in terms of dilution,” commented Paspalas. “We have five or six opportunities in our grade one category,” he said, adding that one of these could close in the near-term if there weren’t any pitfalls in the technical due diligence or price negotiations process.

He went on to say that they are shifting their focus from looking at acquiring a producing mine to instead acquiring a near-term project.

The one report also said that Aurizon “has itself received informal approaches regarding potential mergers.”

Cautiously Optimistic

I think this is quite good news. The problem with Aurizon, as I have tried to lay out above, is that the market wants growth and the market isn’t buying Joanna as the vehicle for that growth. It’s too bad they will have to pay up a good chunk of their cash hoard to acquire a project but the argument could easily be made that the cash is being ignored by the market right now anyways. If you remember Argonaut Gold, their adventure to double digit share prices began when the company took over Pediment Gold and with that acquisition bought themselves a stable of near term production projects. A similar acquisition by Aurizon would be a positive. It would allow the brokerages to start prjecting realistic growth into the future, and from those higher production numbers they can begin to tag a higher multiple onto the stock. Then everyone gets excited about the prospects and we all jump on the bandwagon and a couple of fund managers get on BNN and hype the stock and pretty soon you have Argonaut Gold all over again, going from $3 to $10 in a little over a year.

Its a plausible scenario. If the takeover happens and it looks like its the right takeeover, I will no longer swing trade the stock and instead will begin to hold it for the longer term. But without the takeover I am just not willing to put too many of my eggs in the Joanna feasibility basket, which is sounding more and more to me like it has a big hole in it.

Nov 24

5 Comments

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

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.

Joanna

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.

Other Projects

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.