Midway Gold Corp V.MDW

RE:Canaccord: Sell rating and $0.10 target for Midway Gold

[shakerman640]

According to Canaccord Genuity:

https://is.gd/FR5oUg

Midway Gold Corp.

RATING: SELL (unchanged)

PRICE TARGET: C$0.10 (unchanged)

Company Update

Mining activity at Pan suspended

Investment thesis

Midway Gold announced that it has reduced its workforce at the Pan open pit, heap leach gold project in Nevada as mining activities have been suspended. The workforce reductions involve not only MDW’s personnel but also that of their mining contractor Ledcor. The leaching of the ore that had previously been placed on the first lift of the heap leach pad continues but at levels short of its expectations. The reduction in throughput and recovery were expected, as we detailed our mine plan revisions in our research note published May 13, 2015,"Living on the edge (of default)". We agree that placing more run of mine (ROM) ore on the leach pad is of limited value. To achieve gold recoveries of 80-85% from South Pan, the ore will have to be crushed and agglomerated, which we estimate will require a capital injection of US$20-25 M.

We maintain our SELL rating as the final outcome of the company's restructuring efforts, in our opinion, has a low probability of favouring equity holders. The next significant potential catalyst is the filing of the technical report underlying the revised mine plan announced on May 11, 2015.

Highlights

• The waiver on its CBA Senior Debt facility obligations expired on May 20, 2015, so MDW is in technical default. MDW remains in active discussions with CBA to obtain additional waivers. MDW formed a Special Committee and retained an advisor in late May 2015 to evaluate alternatives to keep the company a going concern. The company does not intend to disclose any progress on this front until a specific transaction has been approved by the Board of Directors.

• We note that the company's other assets including Gold Rock, Spring Valley JV with Barrick Gold (ABX : TSX │Sell rated by Tony Lesiak), and even the Golden Eagle project (Washington State) provide it with options to support its working capital position. We have modeled the sale of its stake in the Spring Valley JV (US$24-25 M) in Q4/15E to keep MDW solvent as its 2015 free cash flow is expected to be negative.

• The company's situation parallels the travails of Luna Gold (LGC : TSX │ Restricted), which was not in compliance with its Corporate Secured Revolving facility (Q3/14 MD&A) and suspended its mining operations (Aurizona, Brazil) in February 2015. LGC extended the forbearance on its debt facility a few times and announced that it is in the process of restructuring its capital structure (it estimates completion by end of June 2015). So if MDW follows the same path, we would expect some kind of resolution within 4-5 months.

Valuation

Our target price is predicated on an asset valuation of its Pan and Gold Rock projects (NPV@7%, 0.6-1.0x, C$0.66) netted against balance sheet items (C$0.15) and corporate G&A and interest expense of C$0.42.