Victoria Gold: A Higher 12 months Forward For This Struggling Producer (TSX:VGCX:CA)

Whereas most gold producers put collectively a strong 2022 efficiency operationally after a tricky 2020 and 2021 as a consequence of COVID-19 absenteeism and provide chain headwinds, Victoria Gold (OTCPK:VITFF) was actually an exception. Not solely did the corporate miss its FY2022 steerage mid-point of ~177,500 ounces, however it did not even come shut, with manufacturing coming in at ~150,200 ounces. That represented a 15% miss vs. its annual steerage, and much more disappointing is the truth that the corporate offered delicate steerage of 250,000 ounces in 2023 when teasing its Project 250 plans.

Provided that Victoria barely eked out a 150,000-ounce yr in FY2022, simply making an attempt to satisfy the elusive 200,000-ounce mark can be a greater near-term goal for the corporate. That stated, whereas the previous two and a half years have been disappointing (to say the least), expectations lastly seem like low sufficient to beat, and Victoria is up towards simple year-over-year comps. Therefore, we should always see significant progress in monetary/working metrics year-over-year. Let’s take a more in-depth take a look at the This fall outcomes and why this title is price monitoring as a possible turnaround story:

All figures are in United States {Dollars} except in any other case famous.

This fall & FY2022 Manufacturing

Victoria Gold launched its preliminary This fall outcomes final month, reporting quarterly manufacturing of ~43,700 ounces, an 11% decline from the year-ago interval. This was associated to a decline in tonnes stacked in This fall (~1.4 million tonnes) as a consequence of decrease mechanical availability of the crushing and conveying circuit, with a splice failure of the conveyor belt reported in Q3 and never repaired till mid-October. The sharp decline in tonnes stacked was partially offset by greater grades year-over-year (0.90 grams per tonne of gold vs. 0.83 grams per tonne of gold), however it was not almost sufficient to avert a double-digit decline in annual gold manufacturing.

Given the mediocre end to the yr, annual manufacturing did not are available in remotely close to the preliminary steerage mid-point of 177,500 ounces for FY2022 and even missed the underside finish of steerage (165,000 ounces). The outcome was an almost 9% decline in annual output for Victoria regardless of lapping a straightforward yr provided that steerage missed by a mile in FY2021 as properly (~164,200 ounces vs. ~190,000-ounce steerage mid-point). Given this lackluster efficiency and the truth that the gold worth spent most of This fall beneath $1,900/oz, I’d anticipate a weak margin efficiency in This fall 2022, with AISC margins prone to are available in beneath $350/oz and full-year AISC prone to are available in above $1,500/oz, translating to razor-thin margins.

Thankfully, whereas FY2022 was a troublesome yr for the Eagle Mine with the failure within the overland conveyor, brutally chilly climate in Q1, and inflationary pressures, 2023 is shaping as much as be a greater yr. For starters, FY2022 was an costly yr from a sustaining capital standpoint (water remedy plant building and cell fleet rebuild). Secondly, diesel costs had been elevated for a lot of the yr, which might severely affect a high-volume low-grade operation like Eagle. Lastly, the gold worth did not cooperate to assist offset the upper unit prices as a consequence of decrease gross sales volumes, elevated sustaining capital, and the affect of inflationary pressures (diesel, cyanide, labor).

Since Q3, we now have seen diesel costs cool off, and they look like settling at a decrease stage which is able to present some aid from a price standpoint for Victoria. Secondly, the gold worth must be a lot stronger in Q1 and Q2 except it retraces a good portion of its latest transfer, offering some assist from a margin standpoint with a a lot greater common realized gross sales worth. Lastly, even when Victoria solely produces 190,000 ounces this yr in comparison with my estimates of 192,000 ounces, this could be a 27% improve in output year-over-year. That mixture of decrease sustaining capital (US$55 million guided for FY2022), barely decrease diesel costs, the next gold worth, and elevated gross sales volumes ought to enable Victoria to report extra respectable unit prices this yr.

Assuming all-in-sustaining prices [AISC] had been to dip beneath $1,325/oz in FY2023, this could be a greater than 12% decline from estimated FY2022 prices of $1,510/oz, and we may see an $80/oz profit on every ounce offered if the gold worth continues to cooperate. The outcome can be significant margin growth on a year-over-year foundation, even when that is the minimal we might anticipate after vital margin compression final yr and two very poor performances operationally. Whether or not that is associated to simple comps or not, I’d anticipate this to end in a significant enchancment in sentiment, suggesting we could have seen a backside for the inventory in September.

Future Upside & Mission 250

Whereas it is fairly clear that Mission 250 (250,000 ounces each year) will not be coming to fruition in 2023, I’d not be shocked to see the corporate ship near this purpose in 2024, with manufacturing bettering to 220,000 to 225,000 ounces at sub $1,150/oz AISC. This could possibly be achieved by bettering stacking instances to 11 months of the yr with only one month of upkeep downtime for the crushing circuit, plus including two 785 haul vans and a loader, as mentioned within the preliminary Mission 250 plans. This could symbolize 45% plus manufacturing progress from FY2022 ranges at rather more engaging prices if profitable.

In the meantime, if the corporate can ship on its Mission 250 purpose in 2025 (I’m purposely utilizing a extra conservative timeline given the workforce’s incapability to satisfy targets so far), this could symbolize greater than 60% manufacturing progress over the subsequent three years. This could end in a major improve in money circulate per share even when we had been to see a flat gold worth surroundings, making Victoria stand out amongst a few of its friends. Plus, at a 240,000-ounce each year manufacturing price, Eagle ought to be capable to function at sub $1,125/oz AISC, which might transition it from a high-cost producer at this time (~$1,500/oz) to a producer with prices beneath the trade common.

On this occasion (and assuming continued exploration success), the inventory may be capable to reclaim its premium a number of it traded at when it first started business manufacturing. So, with sentiment for Victoria actually a lot weaker than it was in 2020 when the inventory traded above US$13.00 per share and the corporate benefiting from a brand new Common Supervisor at Eagle, this is not a nasty turnaround story price keeping track of, particularly provided that the Eagle Mine continues to carry out properly relative to projections (grade and recoveries performing to plan), which is the important thing to a profitable turnaround (no main points with the asset itself).

The reason being that Victoria Gold’s underperformance vs. friends hasn’t been a lot associated to disappointing outcomes at Eagle however principally as a consequence of extraordinarily optimistic steerage offered by administration that the corporate has did not ship so far. Nevertheless, a better-capitalized operator with extra expertise could take a look at the appreciable regional potential (Raven, Lynx), the seemingly 15+ yr mine life, and the chance for prices to constantly are available in beneath $1,200/oz with optimization work as a possibility so as to add a strong ~225,000 to 275,000-ounce each year operation in a secure jurisdiction (Yukon).

To summarize, there are two paths to a possible re-rating, a turnaround with traders regaining confidence on this story or a takeover. Having stated that, I do not see a takeover provide being as seemingly after the latest rally within the inventory. The reason being that whereas Victoria is not costly at an enterprise worth of ~$670 million, I do not see it as low cost both. Plus, most producers seem targeted on returning capital to shareholders and rising off current infrastructure, akin to SSR Mining (SSRM) and Alamos (AGI) vs. buying. Let’s take a more in-depth take a look at Victoria’s valuation beneath to see whether or not there’s a big sufficient margin of security to justify going lengthy on the inventory:

Valuation

Primarily based on ~69 million totally diluted shares (year-end 2023 estimates) and a share worth of US$7.50, Victoria Gold trades at a market cap of ~$518 million and an enterprise worth of ~$670 million. It is a cheap valuation for a corporation with a mission able to producing 200,000+ ounces each year in a Tier-1 jurisdiction and one with an estimated internet asset worth of ~US$900 million. That stated, I do not assume there’s any method to justify a 1.0x P/NAV a number of for Victoria (given its depressing execution so far), and I feel a a number of of 0.85x is extra conservative. Utilizing this extra conservative a number of and after adjusting for internet debt and company G&A, I see a good worth for Victoria of US$725 million [US$10.50 per share].

Transferring to the technical image beneath, Victoria Gold has sturdy help at US$4.85 and resistance at US$7.95, making beginning new positions right here a lot riskier (provided that it is buying and selling within the higher 10% of this vary). If one was concerned about betting on a turnaround in Victoria, the perfect time to purchase the inventory was beneath US$5.50, not above US$7.00, with it now greater than 45% off its lows and within the higher portion of its buying and selling vary. Actually, I went lengthy the inventory on December eighth at US$5.50 and offered my place for a ~30% acquire final month after the inventory grew to become prolonged short-term, and the straightforward cash had been made following a pointy rally.

Usually, I would take into account holding my place for a bigger acquire. Nevertheless, provided that this workforce has struggled to execute since starting manufacturing in 2020, I do not see any worth in being grasping, and I see Victoria as a swing-trading candidate solely. Therefore, the point out of “three strikes, you are out” relating to the inventory being investable. That stated, if Victoria Gold had been to slip again beneath US$5.50, the place it will commerce close to help earlier than Could, I would view this as a possibility to start out a place within the inventory from a swing buying and selling standpoint. At present ranges, I do not see almost sufficient margin of security, and I feel there are far safer methods to get publicity to this asset, akin to Osisko Gold Royalties, which holds a 5.0% NSR royalty on Eagle.

Actually, not solely does Osisko Gold Royalties (OR) provide related natural progress to Victoria Gold, however it has a number of hidden property in its portfolio that it is receiving restricted worth for at present. One instance is the latest ultra-high-grade lithium discovery made in northern Quebec by Patriot Battery Metals (OTCQX:PMETF) that might generate upwards of $1.7 billion in annual income by 2030, relying on spodumene costs. This may translate to annual attributable income of ~$24+ million each year for Osisko Gold Royalties and upwards of $30 million at peak manufacturing, assuming 70% royalty protection and its 2.0% NSR royalty, or ~12,000+ GEOs each year (12% progress from present ranges).

As famous above, Osisko Gold Royalties holds an enormous NSR royalty on Victoria Gold’s Eagle Mission, with a 5.0% NSR, giving it fascinating publicity to Eagle with the advantage of insulation from inflationary pressures. Within the case of producers firing on all cylinders and trouncing estimates, like Lundin Gold (OTCQX:LUGDF), proudly owning the producer outright and getting full publicity to the asset is sensible. Nevertheless, in the case of firms with a poor observe report of execution and higher-cost mines (like Victoria Gold), I want to personal the royalty/streaming firms so long as they supply related progress at an inexpensive worth.

In Osisko Gold Royalties’ case, the inventory stays attractively valued with publicity to the Eagle Mine, superior diversification, superior margins, and higher shareholder returns with common dividends and share buybacks. Therefore, whereas I feel a guess on Victoria Gold if it returns to the low finish of its buying and selling vary (US$5.50 or decrease) is sensible, I do not see the inventory as investable at present ranges, and it is robust to put money into the inventory in any respect when it is robust to belief administration steerage, and we proceed to see unfavorable surprises. Therefore, my most well-liked method to get publicity to Eagle is thru its royalty, particularly with Victoria not providing a significant margin of security after its latest rally.

Abstract

Victoria Gold has had a tricky two years with giant steerage misses, and understandably, the market has misplaced some confidence within the firm’s capacity to execute. The excellent news is that expectations at the moment are low as we start 2023, and the corporate is up towards very simple year-over-year comps, suggesting a beat is probably going this yr. If I purchase a turnaround story, I desire a minimal 40% low cost to truthful worth, which might require a dip beneath US$6.30 based mostly on what I see as a conservative truthful worth of US$10.50. To summarize, I see extra engaging bets elsewhere within the sector, and I do not see a positive sufficient reward/danger setup to justify investing in Victoria right here at US$7.50.

Editor’s Be aware: This text discusses a number of securities that don’t commerce on a serious U.S. trade. Please concentrate on the dangers related to these shares.