Gold Standard Ventures Corp (NYSE: GSV) is a junior exploration company developing the South Railroad project in Elko County, Nevada, United States. On March 15, 2022, the company released a new feasibility study for this project. In my opinion, the results of this study are deeply disappointing. In this article, I discuss this thesis.
According to the recently released feasibility study, the South Railroad project is expected to generate an after-tax net present value of $486 million. This means that a share of Gold Standard Ventures is worth $1.41. Today, these stocks are trading at $0.50 per share, so at first glance they appear undervalued.
However, compared to the previous study (a preliminary feasibility study published in March 2020), I see a deep deterioration in terms of basic technical and financial measures. In other words, although the current valuation looks attractive, a prudent investor should sell the stock when its price approaches $1.4 per share.
Southern Railway Bases
The South Railroad project includes three gold deposits: Dark Star, Pinion and Jasperoid Wash. However, only the first two are addressed in the current economic study as the basis for the future mine. This mine will be an open pit operation using a conventional heap leach technique where rock mined from Dark Star and Pinion will be converted into golden gold as the end product. Incidentally, gilded gold is not a commodity. To convert it into a marketable product, the company will have to outsource this process to a refinery which costs money (I discuss this below).
Now let me come to the point.
The table below compares the mineral reserves declared in the current study and the old one (published in 2020):
Note that total gold reserves increased from 47.2 million tonnes of ore to 655.2 million (an increase of 38.1%). However, due to a somewhat lower gold grade, the gold grade increased by 28.6% (from 1,247,000 ounces in 2020 to 1,604,000 today).
In addition, all the growth in reserves is attributable to the Pinion deposit, whose gold content rose from 364 thousand ounces to 764 thousand.
In summary, the company has definitely replenished the Dark Star/Pinion reserves but… the South Railroad gold camp is still quite small. I expected more impressive results after two years of drilling. To be honest, I’m very skeptical that a major gold miner would be interested in taking over an exploration company developing a 1.6 million ounce gold deposit… This means that, in my opinion , Gold Standard Ventures will have to build a mine on its own. .
New and old economic study
Another negative point – in my opinion, the economy of the project has deteriorated compared to the previous study. Look at this table:
First, using the same gold price assumed in the previous study ($1,400 per ounce), it is evident that the value provided by the project has fallen (the red arrow) by $265 million ( previously) to only $142M (now) . Paradoxically, an after-tax net present value fell despite more ounces of gold to be produced by the future mine. What happened?
The answer is simple – according to the new PEA, the cost of mining has gone from $579 per ounce of gold in the previous study to $782 now (the green arrow). Moreover, the main factor behind this strong increase (35.1%) is the cost of mining. As the table (the blue arrow) shows, this cost jumped 63.1% compared to the previous study.
I took a closer look at this figure and found that:
- As mentioned above, the new study shows that the future mine will produce more gold than the previous study assumed (1,604,000 ounces vs. 1,247,000)
- However, to produce this greater amount of gold, the company will have to extract 366 million tons of rock (ore + waste), while in the previous study this measure amounted to 192 million tons; that means a whopping 90.6% increase!
- In addition, the amount of gold ore to be mined has increased by 53% while the amount of waste has increased by 103%. This means that there is more waste to extract than before. As a result, the stripping ratio (defined as waste/ore) went from 3.1 to 4.1. As a reminder, the higher the stripping rate, the higher the mining costs.
- Keeping in mind that the mining cost has not changed from the previous study ($11.23 per ton of ore now versus $11.54 per ton previously), a greater amount of rock to be mined will increase the mining cost per ounce of gold from $579 to $782
- Finally, the so-called “Payable Amount of Produced Gold” has also deteriorated. At first glance, there is an improvement – in the previous study this figure was 918,000 ounces whereas it is now 1,030,000. However, this means that in order to produce a marketable product (i.e. say high quality gold bars), the company will have to pay up to 35.7% of the market price of gold to a refiner instead of 26.4% as indicated in the previous study.
To note: Basically, a payable amount of gold produced is defined as the total gold produced minus a portion of the gold paid to a refiner in exchange for their services. For example, according to the current study, the future mine will produce 1,604,000 ounces of gold but only 1,030,000 ounces will be sold at market price and classified as corporate revenue. The difference (574,000 ounces or 35.7%) will go to a refiner.
In summary – I am negatively surprised by the new study. Despite higher gold reserves, the economics of the project deteriorated sharply.
What about the stock value?
Now, despite these drawbacks, we must remember that using a gold price of 1,900 an ounce, the project is expected to generate an after-tax net present value of $486 million, which translates to a company’s share value of $1.41 (assuming current share count). Today, these stocks are trading at around $0.50 a share, so they are undervalued.
However, a prudent investor should, in my opinion, sell this stock when its price approaches its net present value of $1.41 per share.
For a few years I was a big fan of Gold Standard Ventures. The South Railroad Gold Project is located in one of the best gold jurisdictions in the world (Nevada), so I thought it would be a big hit. The preliminary feasibility study published in 2020 reinforced my optimism. However, after two years of intensive drilling, the company released another study which, in my opinion, shows no progress. Also, as discussed above, it shows deterioration.
Therefore, I recommend selling the stock when the price, driven by the current gold bull market, approaches $1.4 per share.