Victoria Gold: Still On The Sale Rack (OTCPK:VITFF)

It’s been a volatile year thus far for the Gold Juniors Index (GDXJ) in what’s typically the best month of the year from a seasonal standpoint (average return for the sector of ~2.6% in January over the past 30 years). This is certainly disappointing for investors in precious metals stocks, especially with the gold price registering a record nine weekly closes above the $2,000/oz level, and can be attributed to disappointing results from larger producers which have weighed on the index and sector-wide sentiment remaining near multi-year lows.

Fortunately, Victoria Gold (OTCPK:VITFF) had a better year in 2023 and delivered into its full-year guidance (albeit slightly below its midpoint), and its share price looks to have finally found a bottom after a brutal 75% correction. This delivery into guidance was despite being thrown off track by evacuations related to wildfires near Mayo in the Yukon, and its production results were much less lumpy with a successful shift to year-round stacking at its Eagle Mine. In this update we’ll dig into the Q4 and FY2023 results, the forward outlook, and where the stock’s updated buy zone lies.

Q4 & FY2023 Production

Victoria Gold released its Q4 and FY2023 results last week, producing ~42,000 ounces of gold and a record ~166,700 ounces in 2023. This translated to a 4% decline from the year-ago period on the back of lower grades, but annual production hit record levels and was up 11% year-over-year, albeit up against easy comparisons offset by a difficult summer for the company (wildfires). However, as the chart below highlights, production was much smoother throughout the year following the shift to year-round stacking of ore on its heap leach pads, reducing the company’s significant seasonality relative to other gold producers. However, the rewards of improvements at the mine didn’t show up immediately in the financial results, with impacts from inflationary pressures and higher capitalized stripping costs. And while early days, the company hit multiple impressive base metals intercepts, with a highlight intercept of 3.5 meters at 13.7 grams per tonne of gold, ~18% lead/zinc, and 216 grams per tonne of silver or ~22 grams per tonne gold-equivalent.

The above intercept was part of a broader intercept of 14.7 meters at 3.91 grams per tonne of gold, 74 grams per tonne of silver and ~6.4% lead/zinc.

As for the company’s results vs. guidance, Victoria reported annual production of ~166,700 ounces, which landed just shy of its initial guidance midpoint of 170,000 ounces. However, it would have delivered above its midpoint if not for the wildfire impact. This was the best job the team has done to date in terms of delivering against guidance since it started commercial production at Eagle in 2020. And while it may not have been a year for operations overall given the minor setback, it was another strong year from an exploration standpoint with its higher-grade Raven deposit (~1.07 million ounces at 1.67 grams per tonne of gold) extended to a 1.7 kilometer strike length (+30%) with a resource update expected this quarter that should allow the company to move some ounces into higher confidence categories.

2024 Outlook

While Victoria is yet to release its FY2024 guidance, the hope is that the company manages expectations better this year to ensure it doesn’t miss its guidance midpoint for the fourth consecutive year. That said, the updated mine plan calls for closer to 190,000 ounces this year, suggesting the potential for a ~10% increase in annual production. And even if we bake in some conservatism given the more challenging operating environment in the Yukon, I would expect to see production increase at least 7% to 180,000 ounces, marking another record year for the company. On a negative note, costs are likely to remain elevated despite the higher production levels, with higher stripping costs before a significant increase in annual free cash flow and lower unit costs post-2024.

The good news is that even if Victoria has another mediocre year in 2024 with $1,400/oz plus all-in sustaining costs, sentiment is so depressed on this name after its 70%+ correction that it won’t take much to move the stock. In addition, it’s worth noting that these costs would be back in line with the estimated industry average in FY2024 (~$1,420/oz), a significant improvement from the past three years when Victoria has been consistently above the industry average. Last, while costs may not improve much year-over-year and could be flat, the gold price has averaged $2,040/oz year-to-date and Victoria should see margin expansion (~$600/oz vs. ~$450/oz) if the gold price continues to cooperate with similar costs but a higher average realized price vs. ~$1,950/oz in 2023 ahead of more significant margin expansion (~$825/oz AISC margins in FY2025 at a $2,020/oz gold price assumption).

To summarize, while investors may have to be patient until 2025 to see Victoria’s transformation into a company consistently generating ~$100 million in free cash flow per annum, the company is in better shape heading into 2024, and I would not be surprised to see it play catch-up to some of the better-performing junior peers like G Mining Ventures (OTC:GMINF), Aris Mining (ARMN), and Aya Gold & Silver (OTCQX:AYASF). Let’s take a look at Victoria’s valuation below.

Valuation

Based on ~68 million fully diluted shares and a share price of US$4.70, Victoria trades at a market cap of ~$320 million and an enterprise value of ~$480 million. This leaves the stock trading at just ~0.44x P/NAV vs. its estimated net asset value of ~$720 million, a very reasonable valuation for a Tier-1 jurisdiction producer in the Yukon. Meanwhile, the stock trades at just ~$75/oz on total resources (excluding resources at Brewery Creek and upside from the initial resource at Raven), a very reasonable valuation compared to an average and median price paid for developers over the past four years of ~$106/oz and ~$140/oz, respectively. Finally, assuming Victoria can generate $100 million in free cash flow in 2025, which looks more than achievable if the gold price can hold the $1,950/oz level. And if successful, the stock trades at one of the lower EV/FCF multiples sector-wide at just ~4x FY2025 estimates.

It’s worth noting that Victoria did a solid job of increasing its land package in the Yukon this year, adding multiple new projects (Brewery Creek, Clear Creek, Gold Dome), and increasing its footprint at Raven. In addition, the area continues to heat up with Hecla (HL) acquiring its neighbor at the high-grade silver-lead-zinc mine, Hecla also gaining key land to the north and northeast of Keno Hill with Tiger/Ocelot/Bobcat (CRD mineralization) and Osiris (Carlin-style gold mineralization), and Snowline (OTCQB:SNWGF) continuing to drill monster intercepts ~200 kilometers away at Rogue. And while being in the right district doesn’t mean that Victoria must make a major new discovery like its peers, it’s doing a solid job of growing its pipeline at a low cost with a growing gold resource at Raven, a small-scale project in the wings at Brewery Creek, and polymetallic potential now identified at Raven as well.

So, is the stock a takeover target?

We recently learned that there were multiple confidentiality agreements signed in the Calibre (OTCQX:CXBMF) and Marathon Gold (OTCQX:MGDPF) bidding process, suggesting there’s certainly an appetite for above-average grade assets with below average costs in Tier-1 ranked mining jurisdictions. And while Victoria’s LOM AISC of ~$1,250/oz (inflation-adjusted estimates) may not be as attractive as Marathon’s ~$1,125/oz LOM AISC (inflation-adjusted estimates) and Newfoundland is a more attractive location than the Yukon, Eagle is still a very solid asset, and Raven/Lynx aren’t too shabby either. Plus, Eagle looks like it has a solid chance of mine-life extension and while Eagle’s grades may be low relative to most open-pit mines, its grades are attractive for a heap-leach asset when combined with its low strip. So, while I wouldn’t put Victoria on a top takeover list, I wouldn’t rule out a takeover attempt if it stays at depressed levels, especially with the interest we saw in Marathon, with all but Calibre coming up empty-handed.

Summary

Victoria Gold had a better year in 2023 and the slight miss on the guidance midpoint was related to evacuations related to wildfires and the company deserves a pass this year. More importantly, though, this was the most consistent year for operations and its financial results with a transition to year-round stacking, and the company has a strong few several years ahead with average annual production from 2024 to 2027 of ~205,000 ounces. This should result in a significant decline in unit costs and a meaningful improvement in sentiment for the stock. Finally, if gold can continue to cooperate, Victoria could generate closer to $110 million in free cash flow in FY2025 at a 200,000 ounce run rate, making it one of the cheaper Tier-1 producers with a ~35% free cash flow yield.

So, with an attractive valuation, relatively easy year-over-year comps and the benefit of a higher gold price environment, I would view any pullbacks in Victoria Gold below US$4.52 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.