It’s been a tough past couple of months for the Gold Juniors Index (GDXJ), with several high-flyers have been hit with relentless selling pressure as valuations rose to frothy levels. A few names that have been hit with a flood of sell orders are Spanish Mountain Gold (OTCPK:SPAZF) and Azimut Exploration (OTC:AZMTF), with the hardest-hit name being Auteco Minerals (OTC:MNXMF). At Auteco’s peak in mid-August, the company had a US$250 million valuation, a lofty price for a junior with a 1-million ounce resource, regardless of its premium jurisdiction. The recent 40% correction has helped to cool off the valuation a little, but I still don’t see much of a safety margin at current levels. Therefore, while the waterfall decline we’ve seen since August is a step in the right direction, I remain neutral on the stock for now.
(Source: Company Presentation)
Just over two months ago, I wrote on Auteco Minerals and warned against chasing the stock above A$0.18. Many writers were heavily promoting the stock for its top-notch team that’s been able to breathe new life into the Pickle Crow Gold Project in Red Lake, but the valuation was getting ahead of itself short-term. Since that time, the stock is down considerably, even though Auteco has increased its JORC compliant resource by 170,000 ounces to 1 million ounces of gold at 11.3 grams per tonne gold. This is impressive progress given that Auteco only gained control of the project in January, and early drilling suggests that the resource is likely to grow as we’ve seen solid step-out drill intercepts. Let’s take a closer look at the company below:
(Source: Seeking Alpha Premium)
For those unfamiliar with Auteco Minerals, my first article is a good primer, which better outlines the Auteco story. Digging in quickly, the company is a junior gold company that picked up the Pickle Crow Gold Project off of First Mining (OTCQX:FFMGF) earlier this year, establishing a significant land package in the prolific Red Lake region. Auteco can earn up to 80% of the project with future payments to First Mining, and thus far has made substantial progress proving up a resource here. The investment thesis is helped by the fact that Auteco’s Executive Chairman Ray Shorrocks was the previous Chairman of Bellevue Gold (OTCPK:BELGF), one of the top-performing gold juniors on the Australian Stock Exchange. Meanwhile, the company’s Managing Director and Technical Director both hail from Bellevue Gold and have been responsible for its enormous success. Currently, directors hold 31% of the company, a sign that they’re strongly aligned with shareholders.
(Source: Company Presentation)
The story here is a little similar to Pure Gold Mining (OTCPK:LRTNF), which I recommended in 2017, with the Pure Gold team also having an experienced team that was acquiring a historical producing asset in Red Lake with existing infrastructure. The Pickle Crow Mine produced over 1.5 million ounces of gold at 16 grams per tonne until 1966, but the mine was closed with the gold (GLD) price below $50/oz. However, the Auteco team has come in and proven up a resource of 1 million ounces in less than nine months by combining current drilling with historical intercepts, and we’ve seen solid results from outside the resource area as well that are as follows:
- 0.6 meters of 99.4 grams per tonne gold
- 1.6 meters of 25.8 grams per tonne gold
- 1.6 meters at 19.6 grams per tonne gold
- 3 meters at 7.37 grams per tonne gold
While most of these intercepts are relatively narrow, on average, they are above the current grade of the Pickle Crow resource, which comes in at 11.3 grams per tonne gold. Therefore, these intercepts should not only help to increase the current resource if we can see tight enough drill spacing, but they should also help to maintain or improve the average resource grade. The other good news is that the company recently increased its drill program from 10,000 meters to 45,000 meters and is well cashed-up to complete this drilling with A$31 million in cash [US$22 million], and a low-cost of drilling in of below C$180/meter [US$135/meter] in Red Lake. Even if we assume that drilling costs are slightly higher for Auteco at US$160/meter, this means that the company can complete its drill program for US$7.2 million, leaving ample cash in the company’s till, and no need for further dilution for 12 months.
(Source: Company News Release)
I would argue that a company with a high-grade 1 million ounce resource in a Tier-1 jurisdiction with a solid management team is one worth watching closely, but the valuation dictates whether it’s a story buying into. While Auteco Minerals is more than 40% off of its highs at A$0.145, the company will only be able to secure 80% of the Pickle Crow Gold Project based on the current earn-in agreement, and the valuation is still a little hard to justify at current levels.
(Source: Company Presentation)
As shown above, Auteco will need to pay First Mining another C$4 million to receive its 80% ownership, and will also have to grant First Mining a 2% net smelter return on the project. This can be funded from the current cash balance even after drilling and G&A expenditures, but we’ll likely need to see further share dilution as we head towards scoping studies in 15-18 months. For valuation purposes and given that the increase in ownership from 51% to 80% does not require any further payment in shares, I have used 80% ownership to calculate the valuation.
(Source: Author’s Photo)
Based on Auteco Minerals’ 1,568 million shares outstanding and a share price of A$0.145, the company currently has a market cap of A$227 million. If we subtract out A$31 million in cash, we arrive at an enterprise value of A$196 million, which, after converted to US Dollars, comes in at US$141 million. While US$141 million doesn’t seem like a hefty amount to pay for an explorer with the potential for 80% ownership of 1 million ounces of gold and a massive land package in a Tier-1 mining jurisdiction, the enterprise value per ounce is US$176.25 ($141 million / 800,000 ounces). This figure is more than 80% above the 4-period moving average of the price paid per ounce in past takeovers, which currently sits at $90.74 as of the most recent acquisition. While I would argue that Auteco deserves a small premium as its resource grade is well above the average, I believe the current premium is quite high.
(Source: Author’s Chart)
While Auteco Minerals is a very compelling story given the success on the project to date and the Bellevue Gold team that’s at the helm, I do not see any margin of safety in the valuation at current levels. In order to justify the current valuation, the company would need to increase the resource to 1.8 million ounces in the next 12 months, which I do not believe will be easy. This does not mean that Auteco can’t trade higher from here or that the story is unattractive; it merely means that I don’t see an attractive entry at current levels. Therefore, while I think the stock is worth keeping an eye on for investors, I remain neutral for now and see better opportunities elsewhere in the junior sector.
Disclosure: I am/we are long GLD. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
Additional disclosure: Disclaimer: Taylor Dart is not a Registered Investment Advisor or Financial Planner. This writing is for informational purposes only. It does not constitute an offer to sell, a solicitation to buy, or a recommendation regarding any securities transaction. The information contained in this writing should not be construed as financial or investment advice on any subject matter. Taylor Dart expressly disclaims all liability in respect to actions taken based on any or all of the information on this writing.