Ann: Korbel Gold Project Starter Pit Scoping Study, page-420

We’re in unique and challenging times across world economies, and anywhere you look (equities, crypto, real estate) there is pain being felt, and conversely opportunity being seized. I have taken time to reconsider all of my investments & positioning, in an effort to ensure I can make the most of what is otherwise a dark time worldwide. My largest shareholding currently is Nova, and I have been considering my thesis and the counterarguments that might dissuade further or continued investment here. I wanted to post my thoughts for comments from this board, considering that a majority of SHs are in a similar boat (either breaking even, slightly ahead or, more likely, well in the red). Please respond with any and all counter-thoughts, feedback, criticisms, etc.

I started by re-reading the starter pit Scoping Study for Korbel Main, the first ‘economic’ study conducted to demonstrate the viability of Nova’s deposit. To recall some key figures from this study, Nova only considered Korbel Main Resources (i.e. they didn’t include the maiden 1.5 Moz at RPM at 2g/t due to it being Inferred), and presented an NPV (pre-tax, 5% discount rate) of USD$381m with a total Capex of USD$483m, and a gold price assumption of USD$1,750. The IRR was 20% (pre-tax). This study was considered to be a demonstration of the economic viability of Korbel as a standalone pit, noting that the Capex included consideration of the full-scale Production requirements once neighbouring deposits (such as RPM) were included. Hence, it was indicated that inclusion of further gold deposits would represent upside on a valuation vs. Capex basis, particularly higher grade feeds from the likes of RPM and Cathedral.

Since releasing this study, the Share Price has been hammered. Of course, this also coincides with a number of key macro events, namely: the Ukrainian war and the global impacts of this; significant supply chain constraints/impacts across the world; a surging US dollar impacting the equivalent $USD Gold price/Oz; and material inflation affecting costs of goods, monetary supply, and equity valuations. In short, the world is under significant pressure, and a lot more risk-averse than it was merely 2 years ago particularly in the financial markets. As a product of the above, coupled with Nova-specific risks such as high Capex requirements, geographical unfamiliarity, and a weakened Golf Price, our current Market Cap is AUD$120m.

But what are we actually worth? Since releasing the study, we have seen extensive high-grade results from RPM, demonstrating continuity of the significant assay from late last year at RPM005 – this has given NVA confidence in this prospect. It is also appears likely that the Inferred Resources (1.5Moz at 2g/t) will very likely convert to higher confidence Indicated/Measured Resources, and hence they will be included in further studies. Nova also took the opportunity to sell down Snow Lake (LITM) shares over this time, delivering a multiple-1000% return on their equity and cementing their balance sheet for the continuation of drilling at key prospects. This cash also ensured that studies could continue in parallel on the SS2 (delivery early 2023) and PFS (delivery unknown, I’d guess early 2024). It was a move criticised at the time, but I see it as excellent foresight from our Management team, so much so that I am confident they have a real understanding of the macro environment we’re facing. This is good to see.

In the original study, the following chart was presented detailing the upside or downside depending on key assumptions in the study. This included Capex, Opex, Grade, etc:



Now, stepping through them one at a time, I consider the following:

• Grade – this was a significant sensitivity on the overall project NPV (+10% could see +USD$200m NPV improvement). Seeing the results of RPM in recent assays, and considering the original 1.5Moz was not included in the prior study, I am very confident we will see material upside in this category. Previously posters have speculated it could be a grade improvement of +30% based on what we know so far, but I haven’t calculated this in detail. I’d welcome thoughts on this one. At 30% increase, the NPV would essentially more-than-double (all other factors remaining constant, which isn’t the case, see below). In any case, this will be a great improvement.

• Gold Price – the original assumption was USD$1,750, we currently sit around USD$1,640. This is a downside of ~6%, which represents a significant hit to the NPV. However, the price of gold is at a low point, driven by the US dollar rally and GBP weakness. It’s reasonable to assume that investors will flock to this commodity throughout the next few years of significant inflationary impacts (as would usually occur), so I don’t expect to see downside versus the SS1 assumption come 2026 (first gold pour target, where this will actually matter). But, the world is a crazy place, things that used to be true may have changed. This is a risk to consider, particularly as a lower gold price assumption will reduce our project NPV, and hence affect things such as capital lending, MC valuation, etc.

• OPEX – Inflation, inflation, inflation. There is no doubt this will have moved to the downside (higher costs), but due to the strength of the US dollar and the location of the deposit, I’d be curious to see the underlying impact here. In my workplace we’ve seen supply chain cost impacts of 20-30%+ in the last 12 months, and worldwide there are impacts on parts, labour, freight, diesel, etc. This will be an interesting factor in the SS2 calculations.

• CAPEX – Similar to Opex, with further risk in raising capital (due to the tightened lending market). Depending on when this capital would be required, there could be risk here and I’ll be eager to see the strategy regarding this Capex. By early next year, Nova will be in a position to freely trade Snow Lake shares (out of escrow) should this be required, so I’d hope that as the valuation of LITM grows, and we approach critical lead timelines for the deposit, they choose to leverage this shareholding to preserve SHs against dilution. Depending on the PFS, we may see a significant cornerstone investment/ increased appetite, so this may not be a concern. Time will tell, but it’s a big consideration (the Capex requirement is close to 5x our current MC, for reference).

• I can’t fully comment on the last two aspects (Grade control & Mill recovery), they are outside of my knowledge base, but I am cognisant that we’ve seen improvement in projected recovery rates since the study was released. Will have to see how this sits in the SS2.

Now, our current Market Cap sits at around $120M AUD, which is roughly 20% of the pre-tax NPV of the SS1. Based on the above sensitivity analysis, and the continuation in growth of the RPM deposit and infill drilling across RPM & Korbel, I am confident that we will see overall upside in the project NPV in the SS2 on a net basis (i.e. considering the Gold price, Gold grade, deposit size, deposit confidence (Indicated), Opex, Capex, and Discount rate). However, in considering all of these inputs against the broader macro environment, I am not expecting a blockbuster improvement personally. Whilst we will see significant upside in the grade, the gold price yields a similar impact to the NPV, and we are seeing a depressed price in current times. We also have headwinds in the Opex and Capex assumptions (I would assume, depending on Nova’s modelling here), which will have a flow on impact to the NPV and cashflows. However, inclusion of the RPM deposit will yield a significant step-change in the scale of the project modelling, so I’m excited to see this (particularly the size of the cashflows & margin on an annual basis). If they manage to keep the Capex roughly similar (i.e. decoupled from overall Moz growth), this could be a surprisingly great result.

I’ll be very interested in seeing the PFS calculations at a later stage, to understand a more in-depth view of the entirety of the Korbel system and the associated economies of scale we would see through unlocking these deposits, fed through a more centralised production plant.

In saying the above, do I think the current Market Cap of $120m represents our present value? No (I think it is extremely cheap, and I have been buying). Do I think it represents our future value? Absolutely no. Considering the deposits so far unlocked, the assays of recent times, the investment in Snow Lake (situated in a prime Lithium investment area, look at LG and GM in recent times), and the expectation of a turnaround in the Gold price once the US dollar weakens, I think there is significant value here. A back-of-the-envelope calculation of the cashflows over time (@wombat777 and @Jopie have both shared this) shows significant upside on a rough forecast. I believe there is multi-bag potential for sure. One only needs to consider the MC of De Grey ($1bn) and compare the deposits, to understand our potential upside. I personally don’t value the geographical familiarity of DEG at a 10x premium to Nova, but that’s how it sits in the current time.

One other point to mention is the recent suggestion by Nova management to provide an incentive plan for Employees, which is activated once the NPV of the project reaches a pre-tax $1 Billion level. Offering this kind of carrot to employees, whereby this is insinuated as probable in the short-medium term, is bullish in itself.

Thanks for reading, I hope this doesn’t read like a long vent, even just writing this helped me talk through my thoughts on Nova at a time when investing has become a lot more difficult. As per the video another poster shared, the best time to buy is when there is blood on the streets, and to buy quality companies with great prospects and resilient balance sheets. I think Nova fits squarely in that category.

As always, do you own research, and make you’re your own decisions. Cheers.

I'd welcome your thoughts @GMoney79, @wombat777, @Jopie, @Magic2000, and everyone else I've missed!