Aris Mining: Mid-Tier Gold Producer With A Lot Of Value

Nov. 28, 2022 2:35 PM ETAris Mining Corporation (GCM:CA)TPRFF

Summary

  • Aris Mining Corporation has been executing well for at least three years with a proven management team.
  • They have solid free cash flow and are growing production significantly.
  • They are attempting to build three large gold mines and to transform into a 750,000 oz. producer.
  • Unfortunately, their production growth will take at least five years to unfold.
  • Aris Mining Corporation has big-upside potential and is a growth story, although not in the near term.

 

Gold bars

 

Andy/iStock via Getty Images

 

Introduction

I’m a gold and silver mining investor. The sweet spot for me is finding an undervalued quality producer with strong production growth potential. Investors will ignore these stocks because the production growth is in the future. But if you don’t mind waiting, the payoff can be significant.

Aris Mining Corporation (OTCQX:TPRFF) is already a 250,000 oz. producer, but they are trying to build three additional large gold mines. Ironically, each of their projects is worth more than their current market cap. I think their low valuation is due to several reasons. First, the low price of gold has hammered the share prices of most gold miners. Second, production of their next mine will not occur until 2026. Third, investors are leery of development projects which can bring cost overruns and share dilution. Fourth, their projects are in Colombia and Guyana, which are not as enticing as some other, safer locations.

Aris offers amazing value at its current market cap. Segovia in Colombia gives them a solid foundation of FCF (free cash flow). With 225,000 oz. of production at $950 cash costs and a long-life mine, it creates a solid foundation for growth. They recently released a PFS for Maramato in Colombia to produce 150,000 oz. annually for 20 years. The capex is $315 million, and construction will likely begin in 2024 for full production in 2026.

Their third mine is Toroparu in Guyana. It is a 9 million oz. open pit. It has a PEA to produce 200,000 oz. a year with a capex of $350 million. It should get a PFS in 2023 or 2024. I would expect production in 2027 or 2028.

Those three mines will produce around 550,000 oz. annually and should increase production over time. Those three mines have 20 million oz. of gold. The odds are good that both Maramato and Toroparu will make it into production. So, Aris is heading towards 550,000 oz. of production and currently has an FD market cap of only $550 million.

In addition to those three mines, they recently acquired 50% of the Soto Norte project in Colombia. This project has 12 million oz. (they get half) and has a feasibility study and is well advanced. It could have permit issues, so I am not including it in its valuation. It could add another 225,000 oz. of annual production. Consider it an option for an even higher future valuation.

Stock Name

Symbol (US)

Type

Category

Share Price (US)

FD Shares

FD Mkt Cap (11/25/2022)

Aris Mining

OTCQX:TPRFF

Gold

Mid-Tier Producer

2.68

205M

$550M

Company Overview

Aris Mining (previously GCM Mining) is a mid-tier gold producer in Colombia. In 2022, they acquired Aris Mining and took their name. They now have 26 million oz. of resources and plan to expand production to 750,000 oz. over the next 5-6 years. In 2023, they will mine around 250,000 oz.

They are currently producing 225,000 oz at Segovia (Colombia) with cash costs around $950 per oz. and break-even costs (free cash flow) around $1350 per oz. It’s a long-life mine with strong free cash flow. They recently began production at Maramoto (Colombia) at around 25,000 oz.

A PFS for Maramato was just released to increase production to 150,000 oz. The capex is $315 million, with cash costs at $900 per oz. I would expect costs to be similar to Segovia. Guidance is for full production in 2026.

They completed a PEA for Toroparu (Guyana) in 2021. It will initially add 200,000 oz., with a capex of around $350 million. The cash costs will be much less than at Segovia and Maramato. It is a 9 million oz. deposit, so I expect production to increase substantially over time. I would expect a PFS in 2023 or 2024, and perhaps production in 2027.

The wildcard is Soto Norte (Colombia), which could add another 225,000 oz. It is an advanced project with a feasibility study, but still requires permitting. Once it is permitted, I would expect Aris to double in value. This project has had permitting issues in the past, and that is the reason they were able to acquire 50%. The previous owner didn’t have the connections that Aris possesses.

All of their mines are economic at around $1500 gold, which sets them up to generate a large amount of FCF at higher gold prices. They don’t have a great balance sheet, with $389 million in cash and $352 million in cash. Plus, they will have to finance building three mines, with both Maramato and Toroparu under development. So, their debt will be increasing, and likely significant share dilution. The good news is that the debt includes the capex spending needed for Maramato.

Company Info

Cash: $352 million

Debt: $389 million (includes a future gold stream obligation).

Current Gold Resources: 5 million oz.

Estimated Future Gold Resources: 15 million oz.

Estimated Future Gold Production: 550,000 oz.

Estimated Future Gold All-in Costs (breakeven): $1,400 per oz.

Scorecard (1 to 10)

Properties/Projects: 8

Costs/Grade/Economics: 7

People/Management: 7.5

Cash/Debt: 6.5

Location Risk: 7

Risk-Reward: 7.5

Upside Potential: 8

Production Growth Potential/Exploration: 8

Overall Rating: 7.5

Strengths/Positives

Significant upside potential

Significant production growth potential

Good management

Large resources

Risks/Red Flags

High debt

Potential share dilution

Potential cost overruns

Potential cost increases

Location risk in Colombia

Valuation ($2,500 gold prices)

Production estimate for the long term: 550,000 oz.

All-In Costs (break-even): $1,400 per oz.

550,000 oz. x ($2,500 - $1,400) = $600 million annual FCF (free cash flow).

$600 million x 8 (multiplier) = $4.8 billion

Current FD market cap: $550 million

Upside potential: 700%

Note: I used a $2,500 gold price to identify their future value because I am a long-term investor who plans to wait for higher gold prices.

Note: My All-In Costs are the expected costs that will generate FCF (free cash flow).

Note: I used a future FCF multiplier of 8 because of the potential for them to permit Soto Norte and the potential to grow production. Normally, I would use a 5 multiplier to be more conservative.

Balance Sheet/Share Dilution

Aris Mining Corporation has $352 million in cash and $389 million in debt (including the gold stream they have to pay). Plus, they are generating around $50 million a year in FCF at $1,750 gold. With that cash, they have to fund the $315 million capex of Maramato. It will take about three years to reach full production at Maramato, during which time they can generate more FCF.

Hopefully, they will not have to take on any more debt or share dilution for a couple of years. They won't need to fund the Toroparu capex until around 2026. My expectation is that Aris Mining should either pay down a chunk of their debt or accumulate a lot of cash between now and 2026.

Risk/Reward

The main risk for Aris Mining Corporation is the gold price. Unless it rises, the upside potential could not only be limited, but negative. In fact, a volatile gold price could put you underwater at some point and perhaps significantly down.

Debt and share dilution are major risk factors, since they have to build three mines. Plus, cost overruns and ramp-up issues could create problems.

Another risk factor is taxes and royalties, which can increase and zap the share price. Inflation or other factors can push up costs. A myriad of things can go wrong.

To take on that risk, the reward has to be high. A 100% or 200% return, in my opinion, is simply not enough for accepting high risk. I want outsized returns. For Aris, I think those outsized returns are likely if the price of gold trends higher. Anything above $2,000 and Aris should take off higher.

Investment Thesis

I want to be overweight gold producers, and own as many high-quality mid-producers as I can find. Moreover, I like to find undervalued producers that are likely 5-baggers at $2,500 gold and potential 10-baggers. Aris Mining Corporation fits this strategy.

I don’t know which gold miners will perform the best, so I use a low cost-basis strategy to lower my risk for individual companies. Instead of using concentrated positions, I prefer to allocate 1% or less per stock. This takes the emotion out of it and reduces the need to trade. As a result of this strategy, I tend to own a lot of stocks.

The more quality stocks like Aris that I own, the better. But these types of stocks are hard to find, especially at good entry prices. A company like Aris, I plan to hold for the long term. I will consider selling 80% at around $3,000 gold, and then let the last 20% stop-out on its own using a trailing stop. Quality names like Aris I will sell last, and not likely before $3,000 gold.