Post by
Ridgeback on Jul 07, 2022 11:18am
Sprott Update
Sorry no graphics.
Berry has come in above our expectations on a global ounce basis. With several parameters to the global resource change, we focus here on Berry, and our estimate of an inventory there which is the key value driver to this upgrade in our view.
We previously modelled Berry on 325koz inventory (subset of 640koz MRE), so yesterday’s lift to 1.3Moz (80% M&I) is very positive in our view as it unlocks future-value for existing investors, but given the stockwork nature of the mineralization, external (M&A) parties interest should now improve given the independent resource is now released.
Applying the same reserve conversion metrics as for other deposits lifts our inventory to SCPe ~620koz @ 1.6g/t. Marathon is definitively starting life as a two-pit operation per its permitting scope, which makes sense as clever scheduling, and stockpiling, allows ~2.4g/t in Y1-2y.
We model Berry contributing higher grade for ~3yrs from Y3 onward, albeit at a slightly higher 9:1 strip, with ~half the tonnes again processed at the end of a life. This adds C$190m to our NPV.
We look to the updated FS / tech report to refine our assumptions. Moreover, permitting remains a key catalyst for Marathon as equity appetite for pre-DFS / pre-permitted developers has waned as attention focuses on energy transition metals and DFS / permitted names for M&A.
As such we lower our 1.0xNAV multiple to 0.8x, in line with peers under coverage, and we maintain our BUY rating, but lower our PT from C$3.70/sh to C$3.40/sh.
Looking forward we are expecting both the FS update / tech report, as well as final permit approvals, in the balance of the year to be key price drivers. With the stock at just 0.3xNAV, the interplay between funding, value and dilution is key; our PT is based on 326m fully-funded fully diluted assuming funding at 0.4xNAV.
With debt agreed, finessing the timings of equipment lease facilities, incorporating inflation (we model +15% on published DFS) and mine funding is key, as of course are capital market conditions. Table 1. (A) 3Q22 Valentine Lake MRE vs old and SCP inventory, (B) modelling parameters ‘new vs old’ MRE lifts to 5.1Moz @ 1.8g/t ahead of engineering studies;
Berry 1.3Moz a beat on SCPe 1Moz Marathon reported an updated MRE for Valentine Lake, with a lift in global resource to 5.1Moz @ 1.84g/t (from 4.1Moz @ 1.72g/t previously) with 78% in M&I based on a combination of (i) new geological models, (ii) updated gold price to US$1,800/oz and (iii) exchange rate assumptions, plus (iv) costs assumptions and new Whittle pit shells (Table 1). Pit resources lifted +9% overall to 4.5Moz @ 1.8g/t including 3.8Moz @ 1.9g/t in M&I. Undergrounds resource now stand 540koz @ 3.4g/t (35% M&I). The Berry deposit lifted to 1.3Moz @ 1.85g/t (+109% ounces, +6% grade) and includes 100,000m of drilling over past two years.
Estimates for the Victory and Sprite Deposits remain unchanged.
Looking ahead, a study is underway to assess implications to reserves / mine planning which will constitute an Updated FS in 4Q22. The Updated FS will not include any changes to the Project’s mill flow sheet or processing strategy, the TMF design, its 07 July 2022 Page 2 camp, its major facilities, its road and power infrastructure, or the site’s overall footprint.
Site early works scheduled for 3Q22 are subject to release from federal Environmental Assessment and permit approvals.
Figure 1. Berry MRE 2Q21 vs 3Q22 long section showing Whittle pit shells Our view: Berry MRE adds HG ~300koz to SCPe inventory for C$1,070m 1xNPV5%-1850 Resource:
The clear win today is the lift at Berry, which falls mostly in a higher grade and larger pit shell. We previously modelled an inventory of 325koz @ 1.35g/t at 7:1 strip, a subset of the 640koz MRE. With today’s resource doubling to 1.3Moz @ 1.9g/t, we lift this to ~620koz @ 1.6g/t, conservatively based on 1.1Moz in M&I that will likely see quick turnaround to mine plan in the upcoming FS, leaving room for upside.
High-grade ounce additions: Berry is higher grade than much of the asset base, so it could well support an impressive high-grade starter pit, very close to the mill, in the future post the twin-pit mine plan permitted and built. As such, although production can’t start at Berry, we think it could slot in very nicely ~Y3, before which the scheduling of other pits is enabling ~2.4g/t ROM feed anyway, which could see a lift given +9% lift in grade at both Leprechaun and Marathon M&I.
In our view, this effectively provides ~1.5 years of high-grade feed to our modelledmine plan, nudging LOM production over 180koz pa—driving a significant lift in LOM FCF. With SCPe 17-year mine life vs DFS 13 years, we see room for future expansions beyond the Y5-6 lift to 4Mtpa—especially with Victory and Sprite in the pipeline for additional satellite growth.
Strip: We note plenty of higher grades at Berry comes with greater depths, and, naturally a higher strip so we lift strip 9:1 from DFS 7:2 during these years.
Still, we think this could improve further from optimizations to strip / stockpile / schedule in the upcoming tech report / DFS in 4Q22. Table 2. SCP modelled assumptions for Valentine Lake ‘new vs old’ MOZ MOZ Valentine (100%) DFS Old New D (%) Valentine (100%) DFS Old New D (%) Mining inventory (000t) 47.0 54.4 58.9 8% Total build capex (C$m) 305 351 351 0% Grade (g/t) 1.36 1.35 1.41 4%
Expansion capex (C$m) 44 44 44 0% Mining inventory (000oz) 2,049 2,370 2,670 13% Total sust. capex (C$m)* 312 125 125 0% Strip ratio (x) 7.2 7.2 7.6 5% Gold price (US$/oz) 1,500 1,850 1,850 0% CIL Recovery (%) 94.2% 94.2% 94.2% 0% LOM FCF (C$m) 973 1,451 1,799 24% ROM ore throughput (000t pa)^ 3,654 3,371 3,298 -2% Discount rate (%) 5% 5% 5% 0% ROM ore grade (g/t)^ 1.62 1.68 1.75 4% Post-tax asset NPV (C$m) 600 877 1,067 22% ROM ore prod'n (000oz pa)^ 173 177 180 2% IRR post-tax (%) 42% 35% 38% 10% LOM grade (g/t) 1.36 1.35 1.41 4% Payback (years)+ 1.40 2.25 2.00 -11% LOM production (000oz Au pa) 146 146 150 2% Mining cost (US$/t)* 2.27 2.68 2.59 -3% LOM AISC (US$/oz) 833 979 937 -4% Processing costs (US$/t) 9.38 11.46 11.17 -3% Source: Marathon Gold, SCP estimates SCP SCP 07 July 2022 Page 3
Valuation update: maintain our BUY rating & lower PT to C$3.40/sh on tough market conditions
Based on the changes above, this lifts our SCPe NAV5%-1850 by +22% to C$1,067m for Valentine. We now apply US$50/oz valuation to material outside our inventory for Berry for a nominal C$44m. Based on changes discussed above, yesterday’s MRE update is clearly a value add, with significant implications on the DFS mine plan/economics still to come in our view.
Moreover, permitting remains a key catalyst for Marathon as equity appetite for pre-DFS / pre-permitted developers has waned as attention focuses on energy transition metals and DFS/permitted names for M&A.
As such we lower our 1xNAV multiple to 0.8x in line with peers under coverage. Hence, we maintain our BUY rating, but lower our PT from C$3.70/sh to C$3.40/sh based on 326m fully-funded fully diluted assuming funding at 0.4xNAV. Looking forward, we are expecting both the FS update / tech report and final permit approvals in the balance of the year to be key price drivers.
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 Catalysts
2H22: Permitting approval
2H22: Equity financing
2022: Drill results from Victory, RC grade control program, and Scott Zone
2H22 / 1Q24: Construction starts / first pour