Sprott Update Ridgey's Rant then Sprott.
I do think the inflation numbers were ongoing issues to include in the estimate given what is changing from day to day. Looking at other industries and mining companies all the costs have increased substantially just like our day to day increases. From what I see a 35% increase for many manufacturing companies is not out of the question due to supply shortages, fuel costs and labour issues including interest rates. Inflation is running at its highest level in years. If our governments continue to try and raise interest rates to curb the inflation level we are in for unprecedented pain. What I see from my perspective are weekly increases to our family costs that won't end anytime soon. Our governments particularly Canada have pushed us over the cliff with their Green Energy and their effort to negate our needs for fossil fuels which adds to the problem ten fold.
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Sprott
Last week we lifted our DFS inflation from 15% to 38% for C$420m capex, and lifted DFS opex by ~15%
previously from ~C$2.94/t to C$3.32/t and C$14.39/t to C$16.54/t for mining and processing respectively,
accounting for reclassification of capital lease costs from DFS sustaining to opex, but not sustaining to
build capex which Marathon has now done.
For now, we maintain opex at the +15% level, but lift our capex
inflation from +38% / C$420m to +57% / C$480m, the midpoint of the guided increase.
This lowers our
group NAV, which includes 620koz @ 1.6g/t inventory at Berry (vs. current 1.3Moz @ 1.85g/t global MRE),
from C$1,137m to C$1,088m.
Similarly, we previously lifted our debt requirement from US$185m toUS$200m, which we now lift to US$220m. Including working cap above DFS, central G&A and finance costs plus exploration during build, we estimate a total funding package of ~C$513m. Net of current case, we solve for equity of C$170m (up from C$130m previously). Modelling equity at 0.4xNAV given tepid market conditions (stock currently trades at ~3xNAV), this takes our FD share count from 343m to 370m. As such,we maintain our BUY rating, but lower our PT from C$2.80/sh to C$2.50/sh.
Looking forward, the share count is of course the primary price driver - we note the premiums on royalties/streams are as high as equity discounts (against 12M highs) are low, hence do see room to lift this valuation depending on the shape of the funding package, the key catalyst post the updated DFS.
A better-than-last DFS is hard to deliver in this market, but do see good potential for Berry additions to offset cost inflation here (we currently model Berry in Y6 vs Y1-2 potential based on permitting guidance, albeit debt may need refinancing). Developers are very much an out of favor space right now of course, presenting both immediate risk, but similarly good upside for more long-term investors.
Table 1. SCPe Marathon Gold ‘Sources & Uses’ of funds
Cost guidance sees capex lift to C$470-490m; price target lowered to C$2.50/sh from C$2.80/sh
Marathon announced a construction decision with early works beginning in 4Q22, 1Q23 full construction
for first gold in 1Q25.
Cost guidance ahead of the updated DFS is C$470-C$490m build capex vs C$305m
in 2021 DFS on inflation, cost reallocations, and scope changes including updated 28M construction
schedule (vs 22M in DFS).
Procurement has been completed on the site equipment and infrastructure,
and mill long lead items including the primary crusher, ball and SAG mills, cyclones, ADR circuit, screens,
samplers, gravity concentrator, apron feeders, vibrating grizzly, slurry pumps and thickener. Mine
planning: the company is assessing the potential to add Berry into the mine plan for third pit in the
updated DFS, subject to its own permitting (18-24months).
Why we like Marathon
1. Low cost vanilla gold pit in Tier 1 jurisdiction is without peer in >150koz group
2. First satellite Berry has the potential to exceed our modelled 620koz in inventory
3. Potential for further satellites in Berry – Marathon ‘gap’ and NE of Marathon at Narrows
4. Builder-mentality of management, multiple recent staff bulk build team
5. Fully-diluted NAV in production sits at ~C$5.00/sh
Funding: uses Funding: sources
Updated (+57%) DFS capex C$480m Cash + ITM options* C$64m
SCPe G&A until first pour C$10m Sen. debt @ 65% gearing C$279m
SCPe pre-pro'n explor'n C$0m Equipment lease facility LOM
SCPe fin. costs + wkng cap C$23m Build equity C$170m
Total uses C$513m Total proceeds C$513m
*Cash from options expiring pre first pour Buffer C$0m
01 September 2022
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Catalysts
4Q22: Updated DFS
4Q22: Project financing
2022: Drill results from Victory, RC grade control program, and Scott Zone
1Q23 / 1Q24: Construction starts / first pour