Revival Gold (RVG) - How to Value the Best Gold Companies

Mining assets and in particular gold companies are challenging to value at the best of times and intimidating at most. The various factors to consider regarding the valuation of a gold company may lead to anyone getting lost in the world of valuation. We gathered insight from Hugh Agro and Tim Warman regarding what factors to consider when valuing a gold company and we use Revival Gold Inc. as a case study.

Revival Gold Inc. is a gold exploration and development company focused on the advancement of its Beartrack-Arnett Gold project located in Lemhi County Idaho. The project is the largest past-producing gold mine in Idaho and holds a NI 43-101 compliant mineral resource estimate of 65.0 million tonnes of mineralisation at a grade of 1.01 g/t gold totalling 2.11 million ounces of gold in the Indicated category and 46.2 million tonnes of mineralisation at a grade of 1.31 g/t gold totalling 1.94 million ounces of gold in the inferred category. The company has initiated engineering work for a pre-feasibility study (PFS) which is aimed at evaluating the economic viability of restarting the project’s heap-leach operations.

Below we will look at what factors are of importance in the valuation of gold companies and we will apply these to Revival Gold Inc. as a case study. The factors which will be investigated and applied to the company include the company’s peer group as well as the conducting of a peer-group analysis, the company’s enterprise value, the engineering studies which have been conducted regarding the Beartrack-Arnett project and its de-risking and the company’s interaction with the market. The case study of Revival Gold Inc. will be aimed at answering one simple question: is the company under- or overvalued?

The professionals

Hugh Agro is the President and CEO of Revival Gold Inc. and holds a Bachelor’s degree in Mining Engineering from Queen's University as well as a master's in business administration (MBA) from UBS and London Business School. Agro’s experience includes serving as the Executive Vice President of Strategic Development for Kinross Gold Inc. as well as co-founding Carbon Arc Capital Investments Inc., a private-equity backed investor in mining and metals. During his time at Kinross Gold Inc. Agro was responsible for the strategic and operational leadership for the commercial activities of Kinross Gold Inc. in Russia. He has also served on the board and Audit Committees of Victoria Gold Corp., Chantrell Ventures and Americas Silver Corp. He has also held various senior executive positions in investment banking with Deutsche Bank’s Global Metals and Mining Group as well as with Placer Dome and Senator Capital Partners.

Tim Warman holds more than 30 years of experience in the resource industry and has been involved with mineral projects from grassroots exploration to operations. Warman is currently the CEO of Atacama Copper Corp. and previously served as the President and CEO of Fiore Gold Ltd. During his time at Fiore Gold Ltd., he managed the company through the successful start-up of the company’s Pan Gold Mine and the development of its Gold Rock project. He has also served as director for Continental Gold Inc., president of Dalradian Resources Inc. and Vice President of Corporate Development for Aurelian Resources Inc. Warman has also held various senior positions with mining and exploration companies throughout Europe, North America and Africa.

The company’s peer group

The first factor to consider in the valuation of a gold company according to the professionals is its peer group. Peer group analysis is essentially the comparison of a company with others in its peer group. Peer group analysis aims to identify if a company is under- or overvalued and may be conducted with various factors such as the size and average grade of a project vs another in its peer group. Enterprise value vs mineral resource size (EV/oz) may also be used as a comparison.  Peer group analysis assists an investor to identify valuation anomalies and as such proves to be a valuable and efficient method in the valuation of a company.

EV per ounce equivalent

Enterprise value (EV) per ounce (EV/oz) is the ratio of a company’s enterprise value vs the total amount of mineral resources in the ground. Enterprise value differs from market capitalisation (cap). The market cap of a company is the market value of a company's outstanding shares and is the most commonly used metric when valuing a company. The enterprise value of a company is defined as a company's market cap plus its debt, minority interest, and preferred shares, minus cash and cash equivalents. The enterprise value of a company can therefore identify strengths and weaknesses that market cap cannot.

Engineering Studies to de-risk the project

The de-risking of a project also plays an important role in the valuation of a company. Preliminary studies such as a preliminary economic assessment (PEA) are conducted in the initial phases of a project and as the project develops and advances the study thereof move to feasibility studies and definitive feasibility studies.

The primary engineering studies conducted on mining operations are a preliminary economic assessment (PEA), a pre-feasibility study (PFS) and a feasibility study (FS). A PEA is often referred to as a scoping study and is in essence an economic valuation of the project at an early exploration stage. The greatest difference between a PEA and a PFS or FS is that the PEA can include results that are based on inferred mineral resources. General results included in a PEA are capital costs (CAPEX) required, the life of mine, payback period, rate of return, net present value and cash flow annually or over the life of mine.

A pre-feasibility study is similar to a PEA, but is conducted when the mining project is at an advanced stage and as such includes more precise and detailed information. The values used in a PFS are specific to an operation whilst a PEA may use industry-standard values.

A feasibility study is similar to a pre-feasibility study with the only difference being the amount of detail used to conduct the studies. Feasibility studies are primarily seen with companies that plan to enter production, as most often the market will expect a construction decision thereafter.

The various studies allow a company to show to the market that it will be able to get to scale, i.e. reach production as well as provide returns to its shareholders.

Delivering on its promises

The importance of delivering on promises cannot be overlooked when valuing a mining company. Warman sums up this importance as follows:

“…the projects that never seem to get any traction are the ones that are always promising and under delivering or not delivering, and then pushing those promises continually into the future.”

A mining company worth its salt should show that it delivers on its promises. The market will react favourably should a company promise a PEA by Q3 of a certain year and deliver it to the market in that time, as this shows commitment and trustworthiness. The opposite is also true, should that same company promise a PEA by Q3 a certain year, but deliver the PEA in Q1 the following year the market will react unfavourably as this suggests a company is not trustworthy nor committed.

The importance of communication with the market cannot be overstated, should factors beyond the control of a company result in the delay of deliverables, effective communication with the market may prove the difference between good and bad market perception and value.

Revival Gold Inc. study

We will now use Revival Gold Inc. as a case study, from where we will apply the above-mentioned factors and evaluate the company.

The peers of Revival Gold Inc. include companies such as O3 Mining Inc. and Perpetua Resources Corp. O3 Mining Inc. has an enterprise value of USD$ 51.64 million and total mineral resources of 3.5 million ounces of gold combined at its Marban and Alpha projects. The EV/oz value for O3 Mining Inc. equates to USD$ 14.75 per ounce, whilst that of Perpetua Resources Corp. is USD$ 14.18 per ounce of gold. The EV/oz ratio of Revival Gold Inc. is USD$ 8.49 per ounce of gold and is almost half that of its peers. Hugh Agro also notes this as follows:

“You can see we compare very favourably with some of our peers like Marathon or Perpetua or O3 Mining, much better in terms of grade than some of our other peers in the space and yet our valuation is pretty compelling. Compared to our peers, which are trading at $31 an ounce on average, we're trading at $8 an ounce on average. Compared to the average takeover price of companies in the space recently from RBC $65 an ounce, quite a bit upside here"

We next look at the engineering studies that have been conducted on the Beartrack-Arnett project and the findings thereof. The PEA includes highlights such as the production of 72,000 ounces of gold per year for a total of 506,000 ounces of gold over the project's initial 7-year life of mine and pre-production capital costs (CAPEX) of USD$ 100 million. The project will produce gold at an all-in sustaining cost of USD$ 1,057 per ounce of gold according to the PEA and the project will have an after-tax payback period of 3 years. The PEA values show that the project can produce gold economically. Revival Gold Inc. plans to publish a PFS of the project by Q2 2022 from where it will move into a feasibility study and construction decision, Agro explains:

“We're working towards a PFS, we completed the PEA in late 2020, which encompassed about a third of the resource at the time. We're currently drilling on more of that resource to include it in the PFS and we'll get our PFS out. And then we'll move to feasibility and plan of operations. Our intention is to be in construction mode by 2024.”

The PEA of the Beartrack-Arnett project further shows scalability as Agro explains:  

“This PEA contemplated 72,000 ounces a year of production, about the same sort of order of magnitude of Fiore plus or minus, but what we've got with this deposit is the opportunity to put to build scale and something that will have a subsequent follow-on phase, orogenic follow-on phases that will allow us to get up over 150 to 200,000 ounces of gold per year.”

The commitment of Revival Gold Inc. regarding delivering on its promises may also be seen through the company’s meeting of target dates set to itself and the effective communication of the company with the market. The exploration drilling initiatives of the company are such an example, with Revival Gold Inc. meeting its set out dates timeously.  

The above case study shows the potential of Revival gold Inc. should it continue to effectively advance the Beartrack-Arnett project. The PEA of the company shows a net present value of USD$ 88 million with the company’s market cap at USD$ 41.30 million and its enterprise value at USD$ 34.40 million. The NPV of the PEA compared to the company’s current enterprise value and market cap results in the company being valued at 40% of its true value and as such undervalued. 

To find out more, go to the Revival Gold website