Scorpio Gold Shares Seem Undervalued
With the Mineral Ridge mine coming to the end of its life, shares in Scorpio Gold Corporation (TSXV: SGN) (“Scorpio”) have naturally been slow to recover from the bottom end of the precious metals cycle, but the company’s plan to process heap leach material, while itself not the most enticing proposition, has become something much more. As such, we feel that anyone that invests now is likely getting in at the bottom.
Additional mineable, higher-grade mineralisation has been reported in the existing pits at Mineral Ridge, increasing available mineral resources to 348,200 oz in the measured and indicated category, and an initial total reserve of 272,200 oz in the proven and probable category. Once investment has been sourced and construction completed, this will provide a substantial value-add.
The updated feasibility study includes the economic results of processing the reserves in addition to the previously issued feasibility study, which considered only the processing of the heap leach pad reserves, indicating 250,500 oz of potential gold sales at a total cash cost of US$805/oz over an operating period of 7.5 years. As such, we calculate that the company’s current share price and market cap of CAD$0.035 and CAD$3.748m respectively, does not yet reflect the potential value of Scorpio’s current plans for Mineral Ridge.
The positive updated feasibility study describes a net present value (NPV) discounted at 5% (after-tax) of US$35.1 million and an internal rate of return (IRR) of 30.0%. In addition, the company believes future exploration at Mineral Ridge could extend the life-of-mine even further as the property remains highly prospective with exploration to date focusing on only a small portion of the overall 13,879 acre sprawl. The recent discovery of higher grades on the property suggests that it has much more to offer.
Mining was suspended in the first week of November 2017, but plans now exist based on the updated feasibility study for the construction of a 4,000 tpd milling facility with CIL recovery and dry stack tailings circuit. Construction will begin once financing is obtained and the Plan of Operations Amendment and Water Pollution Control permit are approved and issued, neither of which are expected to cause any difficulty.
Total gold production in 2017 slightly exceeded the company’s low-end guidance of 19,000 oz, and while annual output for 2017 decreased by 48% year-on-year due to the company’s lower extraction rates, average grades were much higher (+9%) as compared to the prior year. I feel that the current share price trend reflects a mine at the end of its life and has not yet responded to the company’s change in direction.
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The project’s long operational history under Scorpio and others means that infrastructure is not going to be an issue, and the management team are more than prepared to execute the next phase of the mine’s life as they’ve been running the show since 2012. The company holds a 70% interest in the conventional open pit mining and heap leach gold mining operation located in Esmeralda County, Nevada with joint venture partner Elevon, LLC (30%).
Scorpio also holds a 100% interest in the advanced exploration-stage Goldwedge property in Manhattan, Nevada with a fully permitted underground mine and 400 tonne per day mill facility. The Goldwedge mill facility has been placed on a care and maintenance basis but can be restarted immediately as required.
During a 2017 exploration program at Goldwedge, significant mineralization was encountered in 3 holes that intersected the target, including 9.39 g/t Au over 1.52 m, 11.11 g/t Au over 3.05 m, 11.14 g/t Au over 4.57 m and 5.38 g/t Au over 1.52 m. The company has both long and short term value in its assets and should perform well over the coming decade.
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