Some investors doubt we will see much higher gold prices. Many base this on the fact that its already gone up so much without necessarily researching why its gone up and if the reasons why its gone up would justify the current price, a lower price or a higher price.
I was one of those investors years ago. I was bullish on gold in 1989-2000 simply because the price was so low compared to cost of production because of heavy central bank selling. I decided to buy a gold producer that had strong earnings despite the gold price knowing I had a good investment that would do even better if POG went up. When gold was hitting $500-600, I started thinking it might not go any higher simply because it had gone so far (not a logical reason). I thought those calling for the old $850 level to be reached again were way too bullish.
These days I have done a lot of research and understand why POG is up here and which leads me to believe the price is way too low still. I think the Agnico CEO is probably going to be right, but until I see more money circulated I keep my target around $2500-2800.
Even at spot gold, using the conservative top cut resource of 427,000oz for OP, with our EV at 100mill, those ounces are valued at $234/oz. That’s despite cash margins of over $1000/oz (after royalties and admin) over the first two years of mine life.
Hyperion has another 202,000 oz. That drops us to an EV/oz of $159/oz. That may be appropriate for a high cash cost/ high capital cost deposit but it’s definitely not appropriate for OP resources and Hyperion has toll treating options so probable low capex there as well. The other reason value per resource ounce is too low is that there is such strong exploration potential at OP. We will know more on that potential very soon.
The reason I mention the Agnico CEO’s gold price forecast of $3000, or mine with a min target of $2500 is this;
All of the above numbers exclude Buccaneer. I have mentioned before that I have not tried to value Buccaneer because the grades make it guesswork without the thorough analysis of a FS. Therefore I have only used OP to value ABU. However one thing I really like about ABU is the massive upside that would come with significantly higher gold prices thanks to Buccaneer. If POG rose by another $1000 then we get an extra 260mill cashflow out of OP compared to the current estimated 257 net cash flow (based on the initial planned 261,000oz recovered by open pit). Or if I allow for cash costs to jump $500 with a $1000 rise in POG, the cash flow increases by 131mill (or 50%). So NPV (0% discount rate to keep it simple) for OP jumps 100% with flat cash costs or 50% with $500 cash cost increase (double the current cash costs). Consider the Buccaneer resource. Just hypothetically, if I assume it is marginal now (little free cash flow after all costs inc. capital) then at $1000 higher gold it has a net cash flow of $500/oz if I again assume $500 increase in cash costs. This all seems conservative enough to me considering there are mines operating at profit with spot gold and similar grades to Buccaneer. Buccaneer has 2.6mill ounces. At $500 net cashflow per ounce, that works out to $1.3 BILLION free cash flow.
The point here is to show that OP is a very valuable asset already worth more than double our current EV and around double our market cap, with very likely further upside from exploration. That exploration upside gives us strong leverage for further upside. However its low costs mean it has relatively low leverage to the POG (very good in case of weak POG but not too exciting with higher POG.). On the other hand the Buccaneer resource sitting next to OP is currently is not given any significant value by the market for the ounces but offers huge leverage in case I am right and we get $2500 gold. Much more upside than OP would give just based on POG. OP does also offer strong leverage but through exploration rather than through POG. ABU as a company offers very strong leverage both through exploration and POG with the safety net of high margins AND LOW CAPEX on OP in case I am wrong and I don’t see much higher POG. That is a very good combination.
ABU Price at posting:
3.7¢ Sentiment: Buy Disclosure: Held
(20min delay)