Midway Gold Corp V.MDW

RBC: Underperform rating and $0.40 target for Midway Gold

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According to RBC Capital Markets:

https://personal.crocodoc.com/Vbw0AyG

Midway Gold Corp.

Rating: Underperform (prev: Outperform)

Speculative Risk

Price Target: CAD 0.40 ↓ 1.75

20% lower grades make life much more difficult

Our view: We lower our rating to Underperform from Outperform (and maintain Speculative Risk qualifier) after the updated resource at the Pan mine decreased ounces and grades by ~20%, and a delayed ramp-up has pressured the balance sheet. We would be more positive on the story if the Pan mine begins to demonstrate positive operating metrics, drilling improves the resource, and the balance sheet can be strengthened.

Key points:

Resource update results in ~20% lower grades/ounces at Pan

• M&I resource grades are down by 15% to 0.44g/t from 0.52g/t after including additional drilling and shifting ounces to inferred, which resulted in a 36% decline in contained ounces in the M&I resource. For the M&I+I total resource, grades were down by 21% to 0.41g/t from 0.52g/t and contained ounces were down by 19% to 645koz from 799koz.

• The company intends to complete additional drilling based on a revised geological interpretation and update the mine plan within 45 days.

• Cash costs up sharply: Lowering mined grades from 0.56g/t to 0.44g/t together with slightly higher unit costs increased our cash cost estimates to U$951/oz from U$690/oz.

Balance sheet a concern

• Lower margins make it more challenging to service the project debt (U$47.5MM), subordinated debt (U$10.5MM), and the U$70MM preferred shares that are redeemable for cash in late 2017.

• Limited funds for exploration/project development: This does not leave much room for exploration to increase the value of the projects or develop the Gold Rock project. If Midway could sell its 25% stake in the Spring Valley project, this could improve the balance sheet (our NAV for 25% is C$46MM).

• Liquidity constrained in the near term: Midway arranged a U$10.5MM subordinated debt facility on April 17 and made an initial $3.5MM draw. We believe liquidity could remain constrained in the short term as the Pan mine ramps up.

Reducing price target to $0.40 from $1.75

• We have lowered our modeled grade and ounces for the Pan mine and increased unit costs following the updated resource. These changes resulted in a significant decline in our NAVPS. We also lowered our ounces and grades in our Spring Valley resource following Barrick's recent resource update, which had fewer ounces than Midway's estimate. These changes reduced our NAVPS from $1.77 to $0.35 (based on $1,400/oz gold and a 7% discount rate for Pan and 10% for Gold Rock and Spring Valley).

• Our price target declines to $0.40 from $1.75 and is based on 1.0x NAVPS and an EV/oz multiple of U$40/oz; these multiples are in line with peers.