Victoria Gold Corp: A Sleeping Giant Waits
Josh is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
I'll be the first to admit that I am a believer in the long term value of gold and silver. In a US economy that's continuing to grow ever more unstable and vulnerable, one can infer with substantial historical reference that intrinsic value is continuing to shift progressively more into hard assets. In terms of the long term value of gold I think most readers will agree that it is headed higher sheerly based on supply and demand alone. My intentions for this article however are not to make a case for the long term value of gold, but rather to shed light on a future junior gold miner with the potential to be a serious winner down the line. That company is Victoria Gold Corp (OTC: VITFF).
The area of junior gold mining stocks is one that often encompasses extremely high risk/reward scenarios and it is not for the light at heart. While my research in this field encompasses a holistic view, there are three main areas I am specifically interested in evaluating when making a decision on a miners true potential. These areas are reserves, cost of mining per ounce and financing.
When looking at Victoria Gold Corp's holdings we see current gold reserves equaling 2.6 million ounces and current resources of 6.3 million ounces. Where many novice investors get taken is when they fail to understand the difference between reserves and resources. A gold resource is estimated when the company contracts a geological firm to conduct an NI 43-101 compliant report. In this report a scientific estimate regarding what level of gold supplies a company has on their land is provided. What this survey does not determine however is whether or not this gold can be mined at a profit. In order to evaluate this the company must take the next step of having a pre-economic feasibility study completed. This study provides a reserves declaration which will be the catalyst as to whether the gold operation can be profitable or not. That being the case, investors who are familiar with the junior gold mining field might agree that VIT's gold reserves are significantly high compared to other junior gold mining competitors, which in turn gives Victoria the stamp of approval for me in the reserves department.
The next category taken into account with Victoria Gold Corp is their cost of mining per ounce. As I write this article today gold is currently selling at approximately $1,660.90 per ounce. In an interview conducted by Dr. Steve Sjuggerud found here, Anglo Gold Ashanti's(AU) CEO states that the industry average cost of mining gold(per ounce) is around $1,250. Interviewed as well in this article was Iamgold's(IAG) CEO Steve Letwin who stated that he believes it will be difficult for anyone to produce gold in the future for less than $1,200 per ounce. In 2012 Victoria Gold Corp had their Pre Economic Feasibility study conducted which stated that the company should be able to mine gold for a cost of $542 per oz for the first 5 years of production and $615 per oz for every year following. The study also stated that the Victoria would have the supply to produce over 200,000 ounces of gold per year. If we use the gold price of $1700 per ounce, that means Victoria would be cash flowing over $250,000,000 a year.
After concluding that the reserves and cost of mining per ounce categories are more than favorable, the last significant category left to evaluate is Victoria's financing. Here in turn is where we are able to see why the companies share price is so unfathomably low. Victoria has stated that they need to raise $430 million in order to make it into full production and that they currently only have $60 million in cash and receivables. The $430 million dollar cost is to be used for construction of their heap leach mining facility, pre-stripping and as working capital. In looking at Victoria's share price one could infer that the market has stated their belief that the company will not be able to acquire access to this financing and will need to undergo a major dilution or have to sell their asset. Regardless of the public sentiment, I am here to tell you that I strongly believe the opposite.
In Victoria Gold Corp's efforts to acquire financing they have managed to align with possibly one of the best connected global banking groups, Rothschild. If you are unfamiliar with the Rothschild family dynasty's history of investing, banking and sheer unfathomable wealth than you may reference it here. You can also reference their corporate website here. In working with Rothschild, Victoria has managed to have lined up a syndicate of banks including JP Morgan ), Credit Suisse (NYSE: CS), Common Wealth Bank (ASX: CBA), Societe Generale, ING Holland and CAT Financial. They are looking to line up financing from this group in the range of $210 to $260 million and state that they plan to have this finalized by the end of this Q1 2013.
My belief is that Victoria's financing deal is on the cusp of finalization and has been held up as a result of The Yukon Environmental and Socio-Economic Assessment Boards requests that Victoria provide them with an updated plan for the construction of their heap leach facility. According to YESAB's response to Victoria on December 17th, the board has asked that Victoria provide additional information in regards to their water management model prior to YESAB giving their finalization of the project. This revision has since been submitted by Victoria and in my opinion the approval could be received in a very short matter of time, possibly days. The Yukon territory of Canada has shown to be extremely amicable in it's past workings with the mining community and I cannot foresee why Victoria Gold will not be able to accommodate any questions or concerns YESAB's reviewers have.
If we look at Victoria Gold's financial position after the syndicate bank financing is lined up we find that the company still has $170-$220 million in financing to line up. The company has stated their plan to acquire this financing via a royalty streaming agreement/forward sale, as well as through selling off their non core assets. As of 1/24/13 Victoria Gold Corp's CEO John McConnell has disclosed that the company is currently in royalty and streaming negotiations with Franco Nevada (NYSE: FNV), Royal Gold ) and Sandstorm Gold (NYSE: SAND). Mr. McConnell states that Victoria has term sheets in their possession which are currently being reviewed. In regards to Victoria's non core asset sales, the majority of these properties have already been sold via deals with Pershing Gold Corp (OTC: PGLC), Premier Gold Mines (OTC: PG) and Barrick Gold (NYSE: ABX).
While the public market has neglected to recognize Victoria Gold Corp's value, such has not been the case for institutions and it's gold mining competitors alike. The companies stock is currently 55% institutionally owned. In turn, VIT's largest shareholder is gold mining veteran Kinross Gold Corporation (NYSE: KGC) which owns 16% of the companies stock and has participated in every financing Victoria has done thus far. Kinross has also gone out of its way to provide key technical advice regarding Victoria Gold's main territory, "The Eagle Gold Project". Where Kinross's expertise comes into play is due to the fact that their own, "Fort Knox" gold mine is located nearby and has a very similar geography. Kinross has divested full access to the information from their own Fort Knox mine's workings, allowing Victoria to use their designs and learn from their mistakes as well as successes.
A final area of Victoria Gold Corp I must touch on is the companies extremely large exploration potential. The company sits with a large territory surrounding it's flagship Eagle Gold Project which has undergone little exploration thus far. Yet from the little exploration that has been conducted there the company has identified a belt of mineralization which CEO John McConnell believes could likely have the potential to contain 3 more Eagle Gold Project size deposits. To recap, the Eagle Gold Project contains 2.3 million reserve ounces of gold and 6.3 million ounces of gold resources. If Mr. McConnell is right in his 3x estimate than that would equal 6.9 million ounces of gold reserves and 18.9 million ounces of gold resources. This still only encompasses a small amount of territory in the whole scope of Victoria's Yukon holdings. Management has stated that they do not intend to sell any Yukon territory as part of their financing plan.
With Victoria Gold Corp reaching a volatile inflexion point, one can't help but wonder whether or not the company will be bought out before they manage to enter full production in 2015. In this past year we saw similar mines such as Andina Minerals and Prodigy Gold receive buyouts for premiums of 106% and 54% from bigger miners Hochschild Mining (OTC: HCHDF) and Argonaut Gold (OTC: ARNGF). In my opinion a buyout is a very real possibility, but will be fought tooth and nail by management and Kinross due to the fact that the company's longer term shareholders paid even more for their shares than a 100% premium from today's price would allow them to break even at. It is my hope that a buyout does not occur since the potential gain for shareholders is much better if Victoria makes it into full production intact.
Since the return of Victoria Gold's management from the Precious Metals Summit in Hong Kong last week, Chinese investment interest appears to be at an all time high. The interest was so apparently overwhelming that Victoria Gold Corp has made all of their current investor information available in Chinese, and has added this translated material to their website as well. In the event that a Chinese gold company or financial institution is interested in grabbing a piece of the gold pie, we might see this investment opportunity be snatched up rather fast.
Victoria Gold Corp is certainly not a stock for one without any risk tolerance. The market has been scared straight by her current financial needs and has shunned her for it. However, it is my belief that Victoria's obstacles are more than achievable and in a short period of time at that. In the event that this sleeping giant is awakened by the trumpets of Royal Gold, the gongs of China or horrific insolvency, I intend to be along for the ride.
I am long VITFF. I wrote this article myself and it expresses my own opinions. I have no business relationship with any company whose stock is mentioned in this article.