Novo Resources Corp T.NVO

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[bull_runz]

Novo Resources: Making The Shift From Explorer To Producer

Feb. 04, 2021 1:38 PM ETNovo Resources Corp (NSRPF)10 Comments13 Likes

Taylor Dart

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Summary

• Novo Resources made a major shift in its business model recently, acquiring a mill next door to its Beatons Creek Project, and aiming to head into production before H2 2021.
• Assuming the operation is successful, this should allow the company to begin exploring its other tenements in Australia without significant share dilution, which was previously weighed on the stock's performance.
• While this is positive news, Novo is not valued attractively relative to peers considering its small global gold resource.
• Therefore, I continue to see better opportunities elsewhere in the sector, and I would view any rallies above US$2.90 as an opportunity to book profits.

Novo Resources (OTCQX:NSRPF) was one of the worst-performing gold stocks in 2020, down 37% vs. a 28% return in the Gold Juniors Index (GDXJ). Fortunately, the company has made a major pivot in its business model, acquiring a mill next door to its Beatons Creek Project and aiming to head into production before H2 2021. If Novo is successful and can become free-cash-flow positive, this should allow the company to explore its highly prospective Australian ground without significant share dilution. However, while Novo is getting ready to make the leap from explorer to producer, it's already valued like a junior producer at a market cap of roughly $500~ million. Therefore, I see better value elsewhere in the sector, and I would view any rallies above US$2.90 as selling opportunities. All figures are in US Dollars.

(Source: Company Presentation)

It's been a rough start to the year for the junior mining sector, but Novo Resources has been one name that's managed to buck the trend. The stock is up 13% year-to-date, likely tied to excitement related to gold production at its Golden Eagle Mill. Previously, most would have expected it would have taken until at least FY2024 for Novo to begin commercial production, but the transformative acquisition of privately held Millennium Minerals Limited has made this a reality. This is because Novo scooped up a gravity-CIL plant in the acquisition that was responsible for over 530,000~ ounces of gold production over seven years. Over the past five years, throughput has averaged 1.88~ million tonnes per annum. Let's take a closer look at recent developments below:

(Source: Company Presentation)

As shown above, Novo was previously a very risky exploration story with barely 1 million ounces of NI-43-101 resources, even though the company had a massive land package in the most attractive mining jurisdiction worldwide. Fortunately, the Nullagine Processing Facility (Golden Eagle Mill) has de-risked the company with a clear path to gold production. The acquisition made perfect sense given that it was just 10 kilometers from Novo's Beatons Creek project, which holds 0.93~ million ounces of gold resources. As of the most recent update, the company has received all of its regulatory approvals to allow for commissions of Beatons Creek material, as well as approval to deposit Beatons Creek tailings product into the Golden Eagle Mill's tailings storage facility [TSF]. This has placed the company in a position to start commissioning its plant and commercial production potential before the fall of this year. Generally, this leads to a significant re-rating for a stock as it moves from explorer to producer, but this may not be the case for Novo, given that the valuation is already sitting near the half-billion mark.

(Source: Company Presentation)

Valuing near-term producers can be difficult, especially without a Feasibility Study in place to confirm what an operation might look like. However, we do not have a Feasibility Study in place for Beatons Creek, and a Feasibility Study would not yield very exciting results anyways, given that the company only has 457,000 ounces of indicated material at Beatons Creek. If we look at Novo on an enterprise value per ounce basis, it's quite clear that the stock is expensive, trading at above $400.00/oz relative to other pre-revenue gold juniors that typically trade well below $100.00/oz.

(Source: Company Presentation)

Some investors might argue that Novo Resources is only months away from being a producer, and therefore it should receive a massive premium relative to explorers. This is certainly a fair point, but Novo is not cheap compared to producers either, as the below charts will show. While the total resource at Beatons Creek is 930,000~ ounces, only 457,000 would make it into a Feasibility Study given that this is what is considered higher-confidence material vs. inferred ounces, which do not make the cut-off for mine plans.

(Source: Author's Chart)

 

[bull_runz]

It looks like he was wrong about 2.90 Ha haha

[roberto146]

2.90 USD - or about 3.75 Can dollar. It's an opinion.

[ronreagan]

Wow, even after I informed him that he failed to take into account the fact that MOY itself had some NI 43-101 ounces (about 200k'ish) AND the fact that Novo's conglomerate/gravel resources are not really susceptible to a NI 43-101 resource estimate, HE STILL downs this stock. According to him, I guess an investor is not smart to invest in an exploration stock unless and until there is an

[WisGuy1]

He's written 2 hit pieces on Novo full of carefully worded negative bias.