Midway Gold Corp V.MDW

Haywood: Sell rating and $0.10 target price for Midway Gold

[shakerman640]

According to Haywood Securities:

https://personal.crocodoc.com/013sYoM

Midway Gold Corp. (MDW-T, MDW-US; $0.30)

Rating Sell (from Hold)

Target Price $0.10 (-$0.90)

Downgrading on Lower Grade/Fewer Ounces, Higher CAPEX & Lackluster Production

Event

Updated resource model and operations approach for Pan, and Q1/15 financials.

Valuation

Our $0.10 TP is based on a 1.0x multiple to our Corp NAV6% of $0.09/sh.

Impact – Negative

At Pan, the revised resource, poor production ramp-up, and other operational challenges, coupled with a strained balance sheet prompts a revision to our operating & financing assumptions and revised rating to Sell given our expectation for the need of a near-term financing to shore up the balance sheet until a longer-term solution is reached.

- Resource Downgraded on Lack of Continuity – An updated resource model on Pan, based on additional drilling (44,000 feet of RC drilling and 5 diamond holes) and in-pit geologic mapping, indicated that gold mineralization was less continuous than previously modelled. Measured & Indicated (M&I) resources now stand at 504 koz Au grading 0.44 g/t, which represents a 15% decrease in grade and 36% decrease in contained ounces relative to the 2011 Feasibility Study. Part of the decline in M&I resources was attributed to reclassification as Inferred resources, which now stand at 141 koz Au grading 0.31 g/t.

- Ramp-up Continues to Experience Delays – After over 40 days since the initiation of the first gold pour, production continues to lag due to operational start-up issues, lower ore grades and a protracted ramp-up due to lower fluid flow stemming at least partial as a result of low leach pad permeability. To address the permeability, the incorporation of crushing and agglomerating of South Pan ore (previously run-of-mine) is now being evaluated (an earlier version of the operating plan). Gold production now totals 4,300 ounces with ~36,000 ounces of gold on the leach pad (majority under leach). Cost to complete is now estimated at US$86.2M (excluding crusher, agglomeration, and leach pad expansion) with US$79.1M expended to date.

- Balance Sheet Set to Snap – As of March 31st, Midway had cash of US$2.7M, inventories of US$28.5M, payables of US$16.4M and negative working capital of US$29.9M. Current debtor obligations include US$47.5M due to CBA (currently in non-compliance and negotiating a further waiver to extend until June 20th, 2015), US$3.9M due to Hale (of a US$10.5M subordinated facility) and US$70M in redeemable preferred shares. Given the protracted rampup, reduced grade profile, CAPEX escalation / revised processing outlook, and current liquidity, we believe that Midway requires further capital to remain solvent.

- Haywood Revisions – Significant model revisions include the incorporation of a smaller minable resource at a lower grade, increased estimated CAPEX to completion, protracted rampup, and the incorporation of an equity financing (C$20M at C$0.20/sh) in Q2/15 to provide some breathing room and shore up the balance sheet. Given the reduced FCF generation from Pan and cognizant of the current obligations, an additional source of financing is required (currently un-modelled) in 2016 to meet future commitments which we anticipate could come in the form of asset monetization (e.g., sale of Spring Valley).

- Target Price, Ratings – We have revised our 12-month target to C$0.10/sh (from C$1.00) and downgraded our rating to Sell (from Hold) on the back of continued production / ramp-up delays combined with lower grades that drives significantly reduced cash flow, and the state of the balance sheet. Our valuation is based on a corporate NAV6% of C$0.09/sh (from C$0.96/sh).

Risks

Our overall risk rating for Midway is Very High given the Company’s current and forecasted funding requirements based on current financial obligations and production history.

Catalysts

1) Pan Updated Resource & Feasibility – Q1/15; 2) Spring Valley update – Q4/15; 3) Record of Decision on Gold Rock EIS – Q4/15.