RBC Expects Dilution, Price Target drops to $3.50June 13, 2022
Marathon Gold Corp
Outperform
Speculative Risk
TSX: MOZ; CAD 1.74
Price Target CAD 3.50 ↓ 4.00
Highlights from RBCCM Global Mining Conference
Our view: We recap highlights from our recent management meeting at the RBCCM Global Mining & Materials Conference. In our view, Marathon has multiple catalysts ahead with expected completion of the Federal EA process, mid-year resource update, and FS incorporating Berry upside and refreshed cost estimates. We view current valuation as an attractive entry point for investors and could merit a renewed look at potential M&A. Reiterate OP, price target to C$3.50 (from C$4) reflecting greater dilution via assumed equity financing given pullback in share price.
Key points:
Multiple near-term catalysts ahead of construction: Marathon has a number of upcoming catalysts in H2 centred on anticipated completion of the Federal EA process, open for public review through June 26th, after which approval could be shortly received. Concurrently, a companywide resource update is expected, incorporating 100,000 m total drilling at Berry (mid-year), updated capital and cost estimates (H2), financing (~C $175-200M), and updated FS (H2). As such, we view a busy H2 for the company in defining the future of Valentine ahead of construction.
Updated FS to outline Berry upside offset by higher costs: We view the updated FS in H2 to be a significant milestone ahead, incorporating upside via Berry as a third mining front, offset by higher costs reflecting current inflation pressures. We view potential for Berry to surpass 1 Moz (M&I+I) vs maiden Inferred of 640 Koz at 1.75 g/t, with strong conversion to M&I and a higher-grade component (495 Koz at 2.64 g/t). As well, we estimate 25% higher capex vs the 2021 FS of C$305M and 16% higher LOM costs vs $833/ oz (+15-20% guided). Overall, we view potential for a longer-lived project and stronger upfront production via higher grades from Berry, which could be accelerated pending permitting, offset by current inflation realities.
Getting ready to build: Marathon is prepping for ramp-up of early works this fall, with major items including tree clearing and pre-stripping of the Leprechaun pit, infrastructure including communications tower and road/ bridge upgrades, and temporary camp construction. An LOI with SNCLavalin has also been signed for the mill build via EPCM, integrating the construction management team. Cost pressures have been experienced on skilled labour and diesel, with modest relief on materials from recent highs. Overall, MOZ is well prepped for construction ramp-up in H2, and we view updated budgeting via the FS to be a significant de-risking milestone ahead.
Valuation at an attractive entry point; could prompt uptick in M&A: We estimate MOZ trading at 0.46x spot NAV, a 10% discount vs developer peers, and $61/oz vs peers at $44/oz. Given catalysts ahead, we view potential strength into H2 as Berry upside is incorporated, reinforcing asset quality in a Tier I jurisdiction. We view current valuation reflecting an attractive entry point; reiterate OP rating, PT to C$3.50 (from C$4) given greater modelled dilution with recent pullback in share price.