CIBC Construction Update from August 2ndQ2/23 Valentine Project Construction Update
August 2, 2023 - CIBC Equity Research, Flash Research
Price Target (12-18 months) C$1.70
Impact: Neutral
Marathon Gold provided a construction update at its Valentine Gold Project, following its second full quarter of principal construction. As at June 30, 2023, the project was 35% complete, compared to 27% at the end of Q1/23. The remaining cost of completion is now $391M, which includes an increase to the budget of $40.5M (~8%). The budget increase is primarily the result of modifications to the process plant design that render a more operable layout and potentially increase production in the early years of operation. Marathon noted strong construction progress this summer and the project remains on track for first gold in Q1/25, in line with our model.
Although construction is progressing well, overall we consider this update as a slightly negative one. While modifications to the process plant will likely be beneficial in the long run, we believe Marathon will require additional funding to accommodate the increased budget, which we view as negative in the near term. Marathon trades at 0.3x P/NAV vs. peers at 0.5x at spot.
Process Plant Modifications Increase Costs: Marathon announced new process plant design modifications, comprising a more operable layout and a larger Carbon-in-Leach (CIL) recovery circuit that will allow for throughput to exceed the currently planned 2.5Mtpa over the first three years, increasing the mill cost by ~$33M. Modifications are expected to de-risk operability and enhance mill availability, and include an improved layout of the 4Mtpa grinding circuit. Marathon will also optimize the 4Mtpa gravity circuit, allowing simpler expansion beyond 2.5Mtpa, and perform optimization of the >2.5Mtpa CIL recovery circuit through the addition of a large leach and aeration tank, larger CIL tanks, and pre-installed concrete foundations and piping for easier expansion above 2.5Mtpa.
Additional Financing Likely Required: The process plant modifications add ~$33M in capex and the overall budget has increased by 8% to date. We anticipate that additional financing will be required to cover the budget increase. The project’s cost to completion now stands at $391M, including a contingency of $38.9M with $7.3M drawn down. The company finished Q1/23 with a cash balance of $130M and US$50M drawn from its US$225M credit facility, and in Q2/23 announced additional funding through the sale of a 1.5% royalty to Franco-Nevada for US$45M (previous note). Marathon will release updated financial statements for Q2/23 in the coming weeks.
Strong Summer Construction Progress: At the end of June, engineering was 87% complete, procurement 60%, construction 15% and overall permitting 89%. The new permanent camp has been completed and occupied and a second mining shift has been mobilized. Earthworks have also been completed at the plant site and the foundations have begun to be poured. Marathon expects to be hooked up to the Star Lake generating station and energized by November. First gold production remains on track for Q1/25.