...As the grade should
increase again over the next few quarters,
so will the operational cash flow on the
back of the higher production rate. The weak
Canadian Dollar is now working in Metanor’s
favor, but the production rate will have to
increase again to reach the free cash flow
neutral/positive stage again. If we would
reach a production rate of 10,000 ounces per
quarter again in the next few quarters,
Metanor Resources will very likely be able
to generate quite a bit of free cash flow as
our estimates would point in the direction
of C$5M of free cash flow at a gold price of
C$1575/oz.
But after Metanor’s most recent exploration
update, our focus has shifted a bit from the
production-story to the exploration story,
as a recent IP-survey and follow-up drill
program has uncovered a potential new
game-changer.
A new
exploration target might boost the company’s
valuation again
As Metanor continued to
explore on its rather extensive and
promising land package, a new exploration
target suddenly popped up on the company’s
radar screen, and Metanor is now even so
optimistic to call the Moroy target ‘the
next gold mine’. This target was discovered
through an IP-survey that was conducted
below the tailings facility of the Bachelor
Lake mine.
Fine, that’s an interesting description, but
what exactly is this exploration target and
what could it mean for the company’s total
operations?
Moroy is located less than one kilometer
away from the Bachelor Lake mine and this
means it already ticks our first and second
boxes. The first box is the proximity to the
mill. As the IP-target identified a specific
zone of interest very close to an existing,
permitted and operating mill, Metanor
Resources won’t have to figure anything out
on the processing front, and the haulage
distances will be negligible.
New Discovery Site – Moroy Project
A second box is the proximity
to the existing underground developments at
the Bachelor Lake mine. As the Bachelor Lake
shaft and the underground workings at the
mine are also extremely closeby the Moroy
zone, it would make a lot of sense to just
push an exploration drift from the Bachelor
Lake mine towards this new Moroy zone as it
will be cheaper to conduct an underground
drill program rather than continuing to
drill holes from surface (as the sweet spot
of the IP target is located approximately
600 meters below surface).
The discovery hole was already very
interesting (with an intercept of almost 6
meters at 10 g/t gold) in hole 15-14, but we
weren’t too excited just yet. And then we
talked to the company’s management team at
the past Cambridge House show in Vancouver.
Metanor now has an exploration target of 500
meters by 570 meters (and the most
aggressive expectations are now pointing in
the direction of a 500 X 700 meter zone of
interest), and is assuming an average width
of 4 meters.
That’s roughly in line with the first
exploration results at Moroy which returned
for instance 6.6 meters (true width: 3.6
meters) of almost half an ounce (!) of gold
per tonne of rock, as well as 10 meters at
5.4 g/t (with a true width of 8 meters!).
These exploration results are very
intriguing and as the higher grade
mineralization seems to be starting close to
surface, Metanor could still upgrade the
current exploration target as the Moroy
mineralization could be more widespread than
originally thought.
If we would now base a rough exploration
target based on a 500 X 600 X 4 meter target
zone, this zone would contain 1.2 million
cubic meters of ore. Using a density of 2.65
tonnes per cubic meter, we are talking about
an exploration target of 3.2 million tonnes
of rock. It’s of course way too early to
discuss numbers, but if Moroy would have an
average grade of 6 g/t, these 3.18M tonnes
of rock would contain almost 600,000 ounces
of gold.
Should the internal target of 500 X 700
meters be realized, this exploration target
would increase to in excess of 700,000
ounces of gold. We compiled a table with
different tonnages as well as average grades
to give you a better idea of how sensitive
the total amount of ounces is versus the
total tonnage and average grade.
Again, these are just preliminary back of
the envelope calculations and Metanor will
have to spend quite a bit of cash to drill
the mineralized system, but we just wanted
to explain how interesting this target
really is. 2016 will be a very important
year for Metanor on the exploration front as
the Moroy project has the potential to
increase the mine life of Bachelor Lake
quite substantially.
The deal with Sandstorm Gold
As you might remember, Metanor Resources has
signed a deal with Sandstorm Gold (SSL.TO,
SAND) whereby Sandstorm acquired a gold
stream on the ounces produced at Bachelor
Lake. According to the original agreement,
Sandstorm is entitled to purchase 20% of the
Bachelor Lake production rate at a fixed
cost of US$500/oz.
Of course, the most important question on
our minds was to know whether or not
Sandstorm Gold would also be entitled to
receive proceeds from any potential future
production of the Moroy target. According to
Metanor Resources’ management team, this is
indeed the case, as Sandstorm would be
entitled to 20% of the ounces that will be
produced from ore zones within a 1.5
kilometer radius from the Bachelor Lake
shaft.
If Moroy turns out to be what it looks like,
Metanor could be a very interesting
acquisition target
We would like to take a step back now and
have a look at the bigger picture. Bachelor
Lake by itself had a short mine life and the
Barry project (which contains in excess of
780,000 ounces of gold) was too low grade to
truck the ore from Barry to the Bachelor
Lake mill.
This doesn’t mean the Barry project is
worthless, not at all. The production stop
only means the trucking distance was too far
compared to the average grade of the Barry
project, so the economics didn’t make any
sense. But you should also keep in mind the
production was ceased when gold was trading
at C$1200/oz, whereas we’re closing in on
C$1600 per ounce right now, so the economics
of trucking the ore to Bachelor Lake could
be looking much better.
This does NOT mean the economics of a new
mill at the Barry project (or perhaps just a
concentrator to upgrade the ore before
trucking it to Bachelor Lake) will be
negative as well, and we would actually
expect Barry as a standalone project to be
quite profitable as the grade is in excess
of 1g/t and the weak Canadian Dollar is
definitely providing a very nice tailwind
for Metanor Resources.
Moroy IP Survey
Not only is this exciting for Metanor’s
shareholders, we’re certain the developments
on Metanor’s exploration front will also
draw a lot of attention from other companies
that are either active in the Abitibi
greenstone belt or would be interested in
gaining exposure to a safe region with
proven gold production. Barry has the
potential to be enormous and the new Moroy
zone is now also shaping up to become a new
source of high-grade underground material
that could keep the Bachelor Lake mill up
and running.
In any way, Metanor Resources now seems to
be fully focusing on bringing a second asset
into production to reduce its reliance on
the Bachelor Lake mine. Barry seems to be
the easiest solution as Metanor can simply
truck the ore to the mill. But should
Metanor find a decent average grade at Moroy,
developing that zone could be more exciting.
Conclusion
Metanor Resources seems to be moving away
from a pure production play towards an
exciting exploration play supported by a
pretty decent gold production at the
Bachelor Lake mill. It will be important to
indeed increase the average grade of the ore
that will be processed at Bachelor Lake as
it obviously doesn’t help anyone if the mine
is losing cash.
Our first impressions of the new Moroy gold
zone are quite positive, and the size of the
IP hotspot might be even larger than what we
were anticipating and the potential to
discover at least half a million more ounces
of gold is actually very realistic now.
Metanor is now waiting for the ice bridge to
be completed before it will go back in with
some drill rigs to gather more information
about this ‘area of interest’. After having
closed a C$3.5M placement, Metanor can spend
quite a bit of cash on defining how big
Moroy could be.
Yes, the company has a lot of shares
outstanding, but with an operating mill, an
exciting exploration target at Bachelor Lake
and almost 1 million ounces of gold at Barry
(which is still open in most directions),
the current market capitalization of C$17M
(and enterprise value of around C$30M),
Metanor is still very reasonably priced. And
should Moroy confirm our expectations,
there’s no reason why this stock couldn’t go
back to a double-digit share price.
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