Analyst site visit. There were 10 analysts on tour at the Marathon camp. This is the TD update from the visit more to follow as the reports are published. For those with access to ongoing coverage look for updates from your brokerage house.
Event: TD..... We are currently attending an analyst tour of Marathon Gold's flagship Valentine gold project (100%) in central Newfoundland.
Impact: NEUTRAL The tour is well-attended by the sell-side, with most of the banks represented. During the tour, we expect to visit the exploration camp and Marathon/Berry deposits and discuss these, along with the company's plan for next year, with the Exploration Managers (Nic Capps and Adam Wall). We expect to participate in presentations on:
(1) the company's exploration and development plans;
(2) the mine's permitting status; and (3) the mine's geology.
Our long-held view has been that Valentine is a robust development project, with manageable capital requirements in a geopolitically safe jurisdiction. The project appears well-managed and we continue to believe that Marathon possesses an attractive project for the company to bring to production on its own, or to be acquired in the current environment.
Year-to-date, MOZ has strongly outperformed its peers in a down market (up 1% while the GDXJ is down 21%). We expect the re-rating to continue as the company advances the project, with the next major milestone, release from the EA process, anticipated in Q4/21 or Q1/22. As a reminder, the March 2021 Valentine Feasibility Study (FS) contemplates a 6.8 ktpd mine (increasing to 11 ktpd in year 4), with average annual gold production of ~146 koz (173 koz/year over the first ten years) at AISC of US$833/oz over a 13-year life. Initial capex was estimated at $305mm (TD: $340mm). We currently model first-gold in Q1/24. The company is expected to announced a revised firstgold anticipation date in Q4/21 (October 2023 as per the March FS).
The company last reported cash of $105mm and no debt. Most recent development projects have been financed with packages that include debt from alternative lenders, a stream, and equity. We would suggest that the current market remains robust for this type of financing. TD Investment Conclusion Marathon appears to possess one of the few quality development projects in Canada with manageable capital requirements and robust economics. We expect the company to continue to re-rate by derisking the project through completing project permitting and final project financing thereafter.
Details Permitting Marathon continues to consult with regulators at both levels of government and is targeting a release from the Environmental Assessment (EA) process in Q4/21 or Q1/22 (if completed in Q4/21, site construction could begin in early 2022). The completion of the EA process (and the initiation of site-specific permitting work), is the principal schedule driver of the Project. Balance Sheet
Marathon last reported ~$105mm in cash (includes ~$13mm from warrant exercise), down from $107.5mm (as at June 30), and no debt.
On July 20, the company also entered in an exclusive non-binding Indicative Term Sheet with a non-bank lender for a US$185mm senior secured project financing facility.
Ongoing Exploration Efforts The company currently has four diamond drill rigs operating for the 2021 exploration program which includes one rig at Berry, two rigs at Victory, and one at a zone near Berry.
Recall, the 2021 exploration program (not including Berry) is comprised of a total of up to 8 km at Sprite and Victory, and up to 6 km on grassroots initiatives.
The company's planned drill program at Berry (completion expected in summer 2022) would bring total drilling to ~120 km (including the ~40 km completed in 2020).
12 km (302 holes in Phase 1 Pits of Leprechaun and Marathon) of RC drilling has been completed and results are expected by year-end.
Resources Total Measured and Indicated Resources at Valentine are presently defined by 3.14 Moz at 1.72 g/t. Inferred Resources are 1.64 Moz at 1.72 g/t.
As reminder, in April, the company released its maiden resource for Berry. Total open pit Inferred Resources were 566 koz at 1.65 g/t, representing 89% of the total estimate (639 koz at 1.75 g/t o/p and u/g). The Resource was based on 42 km of drilling (to end of November 2020).
Upside to the March 2021 Feasibility Study We see additional opportunities for Marathon that were not discussed in the Feasibility Study including: (1) Acceleration of the Phase 2 Mill Expansion (from 2026 to 2024); (2) Potential for future Reserve growth via upgrading Inferred Resources (OP Inf of 0.61 Moz within mining pit shells); and (3) An opportunity to bring in additional open-pit ore sources (e.g. Berry) through exploration.
Outlook We have updated our model for the company's revised cash balance. Overall, our corporate NAV5% decreases slightly to $3.21/share (from $3.23/share). Anticipated Timeline • Exploration Results – Ongoing • Main Permit — Q4/21 or Q1/22 • Updated Resource – Mid-year 2022 • First Gold – Q1/24 (TD estimate) Valuation Marathon is currently trading at 0.91x our corporate NAV5%. This is slightly above the other development-stage companies in our precious metals coverage universe, which are trading at ~0.79x NAV5%. For reference, at spot gold (~US$1,750/oz Au), Marathon would be trading at 0.69x NAV5% (peers at 0.67x NAV5%).
Justification of Target Price We arrive at our rounded target price by applying a 1.3x target multiple (gold developer range of 0.9-1.5x) to our corporate NAV. Our key assumptions: a long-term gold price of US$1,500/oz; a 5% discount rate; production commencing in 2024; and equity dilution of $75mm as part of a larger project financing package. We believe that our target multiple is reasonable for a company we would characterize as having one of the very few high-quality development projects, in a quality jurisdiction with manageable capital requirements and robust economics. Our multiple assumes that the project is fully permitted within the next 12 months.
Target price $4.25