Summary
High-grade gold project in Fiji.
Potential large alkaline gold system.
High upside based on exploration success.
CEO has a history of developing and selling gold projects for large returns.
Long-term investment (3-5 years).
| Stock Name | Symbol (US) | Type | Risk | Share Price (US) | FD Shares | FD Mkt Cap (8/29/2019) |
| Lion One Metals | OTCQX:LOMLF | Gold | Moderate | $0.68 | 110M | $75M |
As I mentioned in the bullets above, this is really an exploration play. They currently only have 800,000 oz. at 7 gpt. So, it is currently a small deposit. I generally am not interested in small deposits, but this one has significant exploration potential.
The 800,000 oz. is a single deposit (Tuvatu). It is a narrow vein high-grade deposit that begins near surface, although it will be an underground mine.
It is an exciting discovery, with a 7-kilometer strike. The deposit is in the middle of the strike with high-grade surface samples all along the strike. It is open in both directions and at depth. There are high expectations that this deposit will increase in size.
Their initial goal is to find 1 million oz. and then mine 100,000 oz. for 10 years. However, I think this is a conservative goal and their real goal is much more ambitious. In fact, in their current company presentation on their website, they think it could be a 10+ million oz. mine.
Company Overview
Lion One Metals has an advanced high-grade project in Fiji called Tuvatu (33,000 acres). The mine area (950 acres) is fully permitted with a capex around $50 million (from the 2015 PEA). The after-tax IRR is over 50% at $1,300 gold. The cash costs are projected to be around $600 per oz.
I thought this was going to be a small high-grade mine. However, after I watched their recent company presentation at Beaver Creek, I realized that Tuvatu has multi-million oz. exploration potential.
What really interested me was Quinton Hennigh’s assessment that this is likely a large alkaline system that is found in this part of the world (Fiji, Papua New Guinea, etc.). Plus, the CEO (Walter Berukoff) is known for advancing projects and then selling them for large returns. He thinks this could easily be another large project. Management and insiders own 22% of the company and are shareholder-focused.
The key for this stock is likely going to be exploration success at Tuvatu. They need to extend the mine life significantly for this to have large returns. Fortunately, I think that is going to be the eventual outcome. Here are some drill holes that are not included in their current deposit size: 2017 drill holes of 11 meters at 9 gpt, 5 meters at 20 gpt. 2019 drill holes of 3 meters at 12 gpt, 19 meters at 8 gpt. Once they get some cash flow, they are going to drill aggressively.
It will take a few more years to develop the mine. That will require significant share dilution. I would expect production around 2021, so this is a long-term investment for large returns.
Project Information (refer to company presentation)
Location: Fiji.
Tuvatu Project: 800,000 oz. at 7 gpt (likely to increase is size).
Underground mine.
$50 million capex (2015 PEA estimate).
$650 per oz. cash costs / $1,100 all-in costs (my estimates for cash costs and free cash flow. The PEA expects about $600 cash costs).
100,000 oz. annual production (likely to increase).
85% recovery rate (PEA estimate).
50% after-tax IRR (PEA estimate).
Potential production in 2022 (my estimate).
Management
They have a strong management team. The CEO is Walter Berukoff who has a long history of developing mines. He’s been doing this since the 1980s and has sold two of his projects for more than $1 billion.
Balance Sheet (refer to Sedar.com)
They have about $6 million in cash and no debt. They are still drilling aggressively and still need to complete their PFS (pre-feasibility study) and potentially a final feasibility. This means they will be diluting shares to raise more money for development and drilling.
Concerns/Red Flags
My two main concerns are share dilution and the lag time until production. The payoff for this stock will not occur until around 2021 or 2022, when they begin production. Also, there is a chance that exploration could fail and they end up with a short mine life, but I don’t expect that to happen.
Another possible red flag is an increase to the capex. The original PEA from 2015 had a capex around $50 million. However, they expect the construction build to take 18 months. If the build is going take that long, my expectation is that capex will be much higher. I have a bit of concern for financing a larger capex, which could require hedging or streaming, but considering the size of this mine, the capex will not be that high.
Future Valuation
Note: I’m going to use two gold price scenarios and you can pick the one you prefer. I personally prefer the most optimistic scenario because I believe that when the next recession hits, gold will reach a new all-time high. I am using a free cash flow multiplier of 8, which I think is realistic if gold prices rise and there is good investor sentiment for gold miners.
Scenario #1 ($1,800 Gold Price)
All-In Cost Per Oz. ($1,100)
Estimated future free cash flow: 100,000 oz. x $700 = $70 million
Estimated future market cap: $70 million x 8 = $560 billion
Comparing the current market cap ($75 million) to the future market cap ($1 billion), you get a potential 650% increase.
Scenario #2 ($2,200 Gold Price)
All-In Cost Per Oz. ($1,100)
Estimated future free cash flow: 100,000 oz. x $1,100 = $110 million
Estimated future market cap: $110 million x 8 = $880 billion
Comparing the current market cap ($75 million) to the future market cap ($1 billion), you get a potential 1,000% increase.
Both scenarios could be optimistic because I am not reducing the upside potential for share dilution. However, if their share price jumps and the capex is low, then dilution could be kept down. Also, unless they can extend the mine life, it will not reach these valuations.
For scenario #2 (the most optimistic) valuation assumes that Lion One Metals will reach 100,000 oz. of production and they reach $110 million in free cash flow. This high cash flow is based on the assumption that gold prices will reach $2,200 per oz. This is close to a best-case scenario for the long term.
Conclusion
Whereas, I prefer producers at the moment, Lion One Metals does have an interesting project that looks really good. As a long-term speculation bet, it might pay off big. If they can increase the size of their mine, the upside potential is excellent. What I especially like about this stock is that the downside appears to be low because of the high grade and path to production.
This development story has nearly everything you look for:
1) High upside potential.
2) High insider ownership to prevent a hostile takeover.
3) Quality management team.
4) Desire by the company to get a high return for shareholders.
5) Low to moderate cash costs per oz.
6) Low to moderate capex.
7) Good entry price.
8) Good buzz.
9) Low downside potential.
10) Good grade.
11) Good recovery rate.
12) Good location.
13) Good resource and production growth potential.
14) Good place to build a mine.
Note: You can check the data included in this analysis at Lion One Metals.
Disclosure: I am/we are long LOMLF. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
