Victoria Gold: Buy The Dips (TSX:VGCX:CA)

Just over three months ago, I wrote on Victoria Gold (OTCPK:VITFF), noting that while the H2 outlook had seen a downgrade because of wildfire related stoppages, this was getting priced into the stock. And while the stock drifted lower heading into its Q3 report, I started a position at US$4.30 given that it was becoming far too cheap to ignore, even for a temporarily higher-cost producer (LOM AISC estimates: $1,114/oz per 2022 TR). This position has contributed to continued outperformance in my portfolio vs. the Gold Miners Index (GDX), and the justification for finally starting a position in the stock was three-fold:

1. The sell-off looked overdone with the stock down 78% from its all-time highs even with the gold price just ~10% from all-time highs.

2. The valuation was the most attractive it had been in years at ~0.40x P/NAV and ~3.0x FY2025 free cash flow assess.

3. Its pipeline was improving, with Raven continuing to look admire a ~2.0 million ounce deposit at higher grades (1.8+ grams per tonne of gold), and the recent acquisition paving the way to potentially becoming a dual-asset producer down the line.

I have purposely used the worst possible benchmark for GDX in Q3 2020 when the index peaked vs. only showing returns in periods when the benchmark has been positive.

Since its October lows, Victoria has outperformed the GDX with a ~30% rally, released new drill results from Raven, and released its Q3 results, which showed a ~93% margin improvement (albeit helped by lower than planned capitalized stripping). And with the gold price marching to new all-time highs in Q4, the company will have an even better Q4-23 and a much better FY2024 if the gold price can hold on to most of its gains. In this update, we’ll dig into the Q3 results, why Victoria looks poised for encourage upside, and where the stock’s updated low-risk buy zone lies.

All figures are in United States Dollars unless otherwise noted with a C$ in front of the dollar figure.

Q3 Production & Sales

Victoria Gold released its Q3 results last month, reporting quarterly production of ~41,600 ounces of gold, a 17% reject from the year-ago period. However, this sharp reject was related to lower grades (mine sequencing) and the impact of two brief stoppages related to wildfire evacuations that affected stacking operations. This certainly put a dent in its Q3 performance and has left it tracking towards the low end of annual guidance vs. being on track for a beat on its mid-point previously. And while it’s obviously disappointing to see the Eagle Mine tracking towards another guidance miss this year after several consecutive misses since mine start-up, but the current miss is entirely out of the company’s control and operations look to be running smoother overall outside of the Q3 headwinds with less seasonality (year-round stacking). Plus, while Q3 production was lower, year-to-date production is sitting at a record ~124,800 ounces despite the impact of lower grades, suggesting this mine is capable of producing ~200,000 ounces if it can work without surprise interruptions.

As for Victoria’s financial results, revenue came in at C$105.1 million (+5% year-over-year) despite fewer ounces sold than produced, with Victoria getting some help from the higher gold price. Meanwhile, net income increased to C$5.6 million, and the company reported positive free cash flow of C$18.2 million before working capital. As for its balance sheet, Victoria ended the quarter with ~$14 million in cash and ~$170 million in net debt and it extended the maturity of its RCF from year-end 2024 to year-end 2025. Overall, this is certainly a material improvement from the year-ago period helped by higher gold prices, with Victoria generating over C$31 million in free cash flow year-to-date, elevated capital expenditures relative to life of mine averages (Q3 2023: C$21.1 million) and despite the impact of wildfire evacuations.

Costs & Margins

Moving over to costs and margins, all-in sustaining costs [AISC] came in below my expectations in Q3 at $1,484/oz which was partially related to lower than guided capitalized stripping due to the timing of waste mining. This represented a marginal reject over the year-ago period (Q3 2022: $1,489/oz), but a 93% enhance in AISC margins ($442/oz vs. $228/oz) with Victoria benefiting from a higher average realized gold price. And while this is partially related to lapping easy year-over-year comparisons (low gold price and unplanned downtime), actual unit costs would have been closer to $1,400/oz if not for the setback in Q3. Plus, while cost guidance is now tracking towards the high of the $1,350/oz to $1,550/oz guidance range, we should see another step up in margins in Q4 with the gold price averaging $1,960/oz quarter-to-date and likely to average at least $1,975/oz for Q4.

The one negative worth noting is that Victoria certainly hasn’t been immune from inflationary pressures, but given that it’s a high-volume operation it has seen some benefits from the pullback in energy prices. This was discussed on the Q3 Conference Call (as shown below).

“Our #1 cost input is labor and the persistent upward pressure on wages is causing increased cost, and this also affects contractors and consultant costs. We have seen a fairly wide range of commentary from our industry peers regarding inflation with some peers noting that inflation is subsiding and others noted that it’s still an issue. This might be influenced by jurisdiction or a host of other factors. But for Western Canada and Yukon, where we do business, inflation continues, and we are seeing wage pressures as well as cost pressures across the board.”

– Q3 2023 Conference Call, Victoria Gold

However, from a bigger picture standpoint, there’s reason to be optimistic. For starters, Victoria Gold should produce closer to 190,000 ounces in 2024 and over 200,000 ounces in 2025 which will positively impact unit costs (higher denominator), and the mine will also benefit from a lower strip ratio (2024-2026) and slightly lower capital expenditures vs. 2022 and 2023 which were higher capex years. Simultaneously, Victoria looks likely to benefit from a higher gold price, and I don’t think it’s unreasonable to believe that the gold price could average $2,000/oz next year. So, even assuming AISC of $1,450/oz in 2024 and $1,200/oz in 2025, we should see AISC margins improve from ~$450/oz in 2023 to $550/oz in FY2024 and $800/oz in FY2025 which I would expect to result in a significant improvement in sentiment for the stock. And in my view, this is shift to positive sentiment is nowhere near priced in currently, with Victoria still trading at a depressed multiple as we’ll dig into below:

Recent Developments

In mid-September, Victoria Gold announced that it had purchased Sabre Gold Mines’ Yukon assets for $10 million (some might recognize these assets if they followed Golden Predator), which included a 100% interest in Brewery Creek (advanced-stage heap-leach project), Gold Dome and Grew Creek. This deal comes after they missed their opportunity to buy ATAC Resources with Hecla (HL) outbidding them. Grew Creek and Gold Dome cover 230 square kilometers, significantly expanding Victoria’s land position in the Yukon Territories. Meanwhile, Brewery Creek (historical producer of ~280,000 ounces of gold) is a 180 square kilometer project that lies 120 kilometers west of Victoria’s Eagle Mine and it’s a nice fit with it being an above average grade heap leach project with ~1.14 million ounces of measured & indicated resources at 1.03 grams per tonne of gold and another ~1.02 million ounces of gold at 0.88 grams per tonne of gold.

As for project economics, A PEA was completed in early 2022 that envisioned $117 million in upfront capex (likely closer to $145 million when baking in 22%-25% inflation to be conservative by the time it’s built) with average unit costs of ~$21.50/tonne with a 9,000 tonne per day processing rate, and ~$970/oz all-in sustaining costs (~$1,300/oz looks more realistic when adjusting for inflation and the fact that scoping studies often understate actual costs). Still, the mine has an estimated mine life of eight years and expected gold production of ~480,000 ounces, and the estimated After-Tax NPV (5%) was $134 million at $1,800/oz. So, even adjusting for higher capital costs and operating costs to be more conservative, it looks admire Victoria acquired this asset for just ~$10/oz and less than 0.15x P/NPV, which is a very reasonable price.

However, the other benefit is that Golden Predator (Sabre’s wholly owned subsidiary) had $33 million in non-reported capital losses, potentially providing synergies from this angle as well. Finally, the company appears quite excited about the Gold Dome Project, which is south of Eagle and much closer relative to Brewery Creek. According to Victoria, Gold Dome is a 9,500 hectare property and an “intrusion related gold target with the potential for bulk tonnage sheeted vein style deposits and high-grade skarn, replacement, and vein style deposits, and one of the largest gold-arsenic-bismuth soil anomalies in the Yukon.” Small placer mining occurred on the property after the discovery of placer in Johnson Creek and Highet Creek, and historical results by Golden Predator include:

• 21.95 meters of 1.00 grams per tonne of gold (Hawthorne Ridge)
• 25.4 meters of 11.12 grams per tonne of gold (Tom Zone)
• 9.8 meters of 1.68 grams per tonne of gold (Tom Zone)
• 13.3 meters of 1.29 grams per tonne of gold (Tom Zone)
• 12.19 meters of 1.49 grams per tonne of gold (Swede Zone)

Overall, I admire this deal. This is because it’s a similar project in the same jurisdiction, suggesting that it’s in Victoria’s wheelhouse in terms of technical complexity, and it’s a logical fit, similar to when Orla (ORLA) also acquired an above average grade heap leach asset (Railroad South) to complement its Camino Rojo Oxides Mine. Plus, the risk is low on a deal at this price and the company gets additional exploration upside, making this one of the better deals completed in the past few years from a risk standpoint (low price paid, potential tax pools and nice optionality). And assuming the company goes ahead with starting a new operation at Brewery Creek, this is a relatively low capex way to shed its single-asset producer status and add another 50,000+ ounces of annual production per annum.

Finally, I’d be remiss not to converse Raven briefly, a deposit that is currently home to ~20 million tonnes of material (inferred) at 1.67 grams per tonne of gold and a ~1.07 million ounce resource basis. As Victoria noted, a new resource is due out at Raven in Q1 2024 and we’ve seen a 20% plus enhance in the strike since Victoria released a maiden resource in 2022. In addition, recent exploration results have been exceptional, with solid grades over thick intercepts, including highlights admire 83.5 meters at 3.59 grams per tonne of gold, 25.7 meters at 1.15 grams per tonne of gold, plus 31.4 meters at 5.83 grams per tonne of gold, and 27.5 meters of 3.45 grams per tonne of gold more recently. Just as noteworthy, the company has hit some very significant base metal intercepts with extremely high silver, direct, and zinc values, including 2.7 meters at 311 grams per tonne of silver and 57.1% direct/zinc, and 14.7 meters of 3.9 grams per tonne of gold, 74 grams per tonne of silver and 6.5% direct/zinc.

Victoria shared that “it was not until late 2022 that their potential (high-grade sulphosalt bearing base metal veins) as consistent veins distinct from the gold-bearing massive sulphide was recognized and analytical over-limit procedures were established on all core samples.” The company shared that the post field season work will include reviewing these veins and independent modeling, and it can conduct over-limit assays on intervals of note if required given that it has maintained the coarse rejects and pulps from all 2018-2023 drilling. Overall, this certainly adds another dimension to Raven, and Raven already looks admire it could ultimately grow to ~2.0 million ounces at 1.8+ grams per tonne of gold. And while this will necessitate a different processing method from existing infrastructure at Eagle, it’s certainly encouraging to see a potential second mine on the same property east of Eagle.

Valuation

Based on ~68 million fully diluted shares and a share price of US$5.20, Victoria trades at a market cap of ~$350 million and an enterprise value of ~$520 million. This represents a significant discount to its estimated net asset value of ~$720 million ($1,875/oz gold price, with $100 million in exploration upside for non-operating assets), leaving the stock trading at just ~0.50x P/NAV, and one of the lower P/NAV multiples in its peer group. Plus, it’s important to note that Eagle continues to have upside at depth (mineralization continues to ~800 meters) and to the west of the reserve pit, with drilling extending Eagle mineralization 500 meters along strike. Finally, if the gold price can hold above the $1,950/oz level and average $2,000/oz over the rest of the mine life, there is material upside to the mine’s estimated after-tax NPV (5%), as shown below.

As the table below highlights, Eagle’s After-Tax NPV (5%) is C$1.34 billion [US$1.0 billion] at $2,000/oz gold, and even factoring in inflationary pressures, this still points to an After-Tax NPV (5%) well above the ~US$715 million NPV (5%) at the base case $1,700/oz gold price.

As for free cash flow generation, the company finally appears to have ironed out the kinks at Eagle and while Project 250 made less sense from a return standpoint given the impact of inflationary pressures, a new General Manager and less seasonality suggests a more consistent several years ahead at Eagle. This transition to more consistent operations is convenient timing when combined with a gold price that is continuously making higher lows and hanging out near all-time highs, and production should average ~200,000 ounces over the next six years with a lower strip and lower capital expenditures. Hence, Eagle should be a free cash flow machine going forward, with the potential to create ~$105 million in FY2025 free cash flow at a $2,000/oz gold price. And if we differentiate this figure to its current market cap of ~$350 million, leaving it trading at ~3.3x FY2025 free cash flow.

On an EV/FCF basis and assuming total net debt of ~$70 million, Victoria’s FY2025 EV/FCF multiple sits at ~4.0x.

Therefore, no matter how you slice it, Victoria is dirt-cheap even after its recent rally, and even at a relatively conservative multiple of 7x free cash flow, the stock could trade at US$9.80 (2-year price target).

Summary

Victoria Gold had a mediocre Q3 due to events outside of its control but operations are running better overall, it’s got a tailwind from the gold price at its back, and we’re heading into higher production and lower strip years over the next few years. This should morph Victoria Gold from a high-cost producer into a more average cost producer and from a mine generating some free cash flow to one generating over $100 million in free cash flow post-2024. And with the stock trading at one of the lowest free cash flow multiples sector-wide, I think there is considerable upside left in the stock. In summary, I would view any sharp pullbacks as buying opportunities.

Editor’s Note: This article discusses one or more securities that do not trade on a major U.S. exchange. Please be aware of the risks associated with these stocks.