Barkerville Gold Mines: High Upside Potential
Canadian (British Columbia) development story.
Developing a 4 million oz. (4.5 gpt) underground mine.
Highly undervalued versus their potential cash flow at higher gold prices.
Excellent risk/reward profile.
Stock Name | Symbol (US) | Type | Risk | Share Price (US) | FD Shares | FD Mkt Cap (8/29/2019) |
Barkerville Gold Mines | Gold | Moderate | $0.31 | 603M | $187M |
I've followed this stock for years. I think they have some of the best properties in Canada. Currently, they are developing a 4 million oz. underground project. This will be their first mine.
I prefer to invest in gold or silver producers, but I also own a lot of gold development stocks. I'm more a fan of producers because I think they have a much better risk/reward profile, and I expect them to perform well as gold/silver prices rise.
I have had a lot of bad luck with development stocks. The reason why is that I tend to own a lot of stocks, so that means I buy many of the highly undervalued development stocks that have quality projects. So, guess what happens? Usually, these development stocks dilute shares and then get acquired by larger companies. This is often painful because you hold these stocks for years as they develop the projects and then right before they build the mine they get acquired.
Barkerville Gold Mines is yet another of these development stocks that I own. Will they get a chance to build the mine and explode in value? Perhaps, but probably not. Nearly all of these high-quality projects that are undervalued get taken out by larger companies.
I'm writing up Barkerville because I like their first mine and their potential to expand production. Plus, they have very high insider ownership, with Osisko Mining (OTCPK:OBNNF) and Osisko Gold Royalties (NYSE:OR) owning 48% of the shares. So, the only company that is likely to acquire Barkerville is Osisko Mining.
I don't want Osisko Mining to acquire Barkerville, but if they do, I would still expect a large return, just not as large if Barkerville is not acquired. However, I can't see a scenario where Osisko Mining does not acquire Barkerville.
Eric Sprott traded 17% of Barkerville's shares for Osisko Mining shares in 2016. One of the reasons he probably made that trade is that he would rather own the acquirer's stock (Osisko Mining) and not the acquired (Barkerville). I also think one of the reasons Osisko Mining has such a large market cap is its inside track to acquire Barkerville. Instead of Barkerville getting a high valuation for its quality properties, the market is giving it to Osisko Mining, who will likely become the owner of Barkerville's properties.
I believe the only reason Osisko Mining has not yet acquired Barkerville is that it does not want to dilute their shares to drill/develop the project. This has worked out perfect for them. They have been able to dilute Barkerville's shares and not their own. However, once the dilution phase is over, you can expect a merger. I would expect that to happen in the next two years, which is all Barkerville needs for completing permitting and a feasibility study.
The risky part of an investment in Barkerville is that you are really buying Osisko Mining. I say risky because the upside won't be as a good as Barkerville going it alone. The returns will likely be less than half of what I would expect if Barkerville remains independent.
So, this looks like a pretty good stock, although what you are probably buying is Osisko Mining plus Barkerville. In the GSD database, Osisko Mining is pricey and only has a 2 rating. It's valued at almost 4x Barkerville with an FD market cap of $728 million. That is a huge market cap for a development stock. As an analyst, I rarely see development stocks fully valued like Osisko. I wonder how many Osisko shareholders understand the value that Barkerville can bring, and that is pushing up its value? For instance, I like Barkerville's properties more than Osisko when you include the surface gold.
The big wild card for Barkerville, in my opinion, is their surface gold, which they don't even mention on their website. However, even if you exclude Barkerville's surface gold (probably an additional 5 million oz at 1 gpt), they likely have at least 5 million oz. of underground gold. That will create production of at least 200,000 oz. annually. As a Canadian miner, it will likely get valued at premium when it reaches production. The potential market cap at higher gold prices ($2,500 gold) would be somewhere around $2 billion (see valuation below). Knowing that and knowing Osisko's inside track to acquire Barkerville, Occam's Razor implies that investors are buying Osisko instead of Barkerville.
Company Overview
Barkerville Gold Mines is developing a large gold project in Canada. Their market cap jumped from $37 million to $235 million but is now back to $185 million. They have a new CEO and he is focusing on high-grade underground mining. In fact, they do not even list the Cow Mountain open-pit resource (4.8 million oz.) on their website. He has stated publicly that open-pit mining is environmentally challenging. That's code for I don't want to do any open-pit mining on Barkerville's properties. However, at higher gold prices, it has millions of ounces of surface gold that can be mined.
Barkerville has a completely new management team and new board. It is led by Sean Roosen, who is the Chairman and CEO. He is also the Chairman of Osisko Mining and Osisko Gold Royalty. He has put together a high-quality team at Barkerville. Osisko Royalty and Osisko Mining own 48% of Barkerville, so there won't be a hostile takeover. I don't think Barkerville will get acquired, unless it is a merger with Osisko Mining.
In 2017, they released their first underground resource at about 3.5 million oz. at 5 gpt. In 2019, they released a PEA with a capex of $230 million to produce 185,000 oz. annually. The after-tax IRR is not great at 26% at $1,300 gold (refer to company presentation), but it will get built. The recovery rate is 92%, with all-in costs between $1,100 and $1,200 per oz. (free cash flow).
Share dilution is probably their only red flag, considering the potential of their properties. Although, there is something about this company that investors do not like, which I have not figured out. The grade is good and the exploration potential is better, yet investors have given it a low valuation. They have an excellent property on 500,000 acres. They have 3 parallel trends that each span about 40 miles. That is a lot of drill targets. I think this is one of the best properties in Canada.
For the long term, they have three very large potential surface mines. Cow Mountain (4.8 million oz.), which is an open-pit project with a pre-feasibility study. Then, they have Island Mountain with a target of 5 to 10 million oz. based on preliminary drilling. And they have Barkerville Mountain which has 3 to 6 million oz. based on preliminary drilling. Combined they have a potential 10 to 20 million oz. of surface gold at 1 to 2 gpt. They currently have no plans to mine their surface gold, but at some point, I think it will get mined (if environmentally possible).
Project Information (refer to company presentation)
Location: Canada (British Columbia).
Cariboo Project: 4.2 million oz. (4.5 gpt).
Underground mine.
$230 million capex.
$800 per oz. cash costs/$1,200 all-in costs (my free cash flow estimates).
185,000 oz. annual production (likely to increase).
92% recovery rate.
26% after-tax IRR (at $1,300 gold).
Potential production in 2023 (my estimate).
Management
They have a strong management team. The Chairman and CEO is Sean Roosen, who is also the Chairman of Osisko Mining.
Balance Sheet (refer to Sedar)
They have $12 million in cash and no debt. They are still drilling aggressively and still need a feasibility study and permitting. This means they will be diluting shares to raise more money for development.
Concerns/Red Flags
My two main concerns are share dilution and the possibility of getting acquired before production. Also, the payoff for this stock will not occur until around 2022 or 2023 when they begin production. The other concern I have is their lack of interest in surface mining. They seem to be leaving a lot of money on the table.
Future Valuation
Note: I'm going to use several gold price scenarios and you can pick the one you prefer. I personally prefer the most optimistic scenario because I believe that when the next recession hits, gold will reach a new all-time high. I am using a free cash flow multiplier of 8, which I think is realistic if gold prices rise and there is good investor sentiment for gold miners.
Scenario #1 (gold $1,800, cash flow multiplier of 8, all-in cost $1,200)
Estimated future free cash flow: 200,000 oz. x ($1,800 - $1,200) = $120 million
Estimated future market cap: $120 million x 8 = $960 million
Upside potential for scenario#1: $185 million vs. $960 million = 400%
Scenario #2 (gold $2,000, cash flow multiplier of 8, all-in cost $1,200)
Estimated future free cash flow: 200,000 oz. x ($2,000 - $1,200) = $160 million
Estimated future market cap: $160 million x 8 = $1.28 billion
Upside potential for scenario#1: $185 million vs. $1.28 billion = 600%
Scenario #3 (gold $2,200, cash flow multiplier of 8, all-in cost $1,200)
Estimated future free cash flow: 200,000 oz. x ($2,200 - $1,200) = $200 million
Estimated future market cap: $200 million x 10 = $2 billion
Upside potential for scenario#1: $185 million vs $2 billion = 900%
In 2011, when gold reached $1,935, several 100,000 oz. producers were valued at $1 billion. For instance, San Gold (a Canadian producer) was valued at $1 billion and it was not even a quality producer or had significant resources. In fact, their high costs eventually forced them into bankruptcy. To forecast that a Canadian producer of 200,000 oz is going to be worth $1 billion at $1,800 gold prices is very conservative, in my opinion.
For scenario #3 (the most optimistic), you could look at this 900% estimated future valuation increase in two ways. First, you could consider it optimistic because they are likely to dilute shares for development costs. Also, you could consider the projected free cash flow to be too high.
However, you could also consider this 900% estimate to be low if they realize their potential. If they do not get taken out, their starting point is a 200,000 oz. producer in Canada. This does not include their potential 5+ million oz. of surface gold. For this reason, I think their cash flow is going to be much higher than my estimate.
Also, their starting production of 200,000 oz. only includes plans to mine 2 million oz. This is already a 4 million oz. project that has been increasing in size. Limiting our valuation to 200,000 oz. of production is likely a conservative number for the long term. Perhaps a more realistic number is 250,000 oz.
As a caveat, this valuation assumes that Barkerville will reach 200,000 oz. of production and they will reach $120-200 million in free cash flow. This high cash flow is based on the assumption that gold prices will reach $1,800-2,200 per oz. This is a best-case scenario for the long term.
Conclusion
Whereas, producers look much more attractive at the moment, Barkerville does have a quality gold project in Canada that is highly undervalued. As a long-term speculation bet, it might pay off big. If they can avoid a takeover (probably unlikely) and then expand their resources and production, their upside potential is excellent.
Note: You can check the data included in this analysis at Barkerville Gold Mines website.
Disclosure: I am/we are long BGMZF. 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.
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