April 20, 2014

Northern Freegold Resources – Analysis of Preliminary Economic Assessment

Northern Freegold Resources

Last week Northern Freegold Resources (NFR-X) released their first preliminary economic assessment (PEA) on their Freegold Mountain property.  The property had been staked and prospected by a local prospector named Bill Harris who formed the company in 2005 together with Tim Termuende, the CEO of Omenica Resources.  Therefore, it was effectively staked by the company, with a purchase price of zero, and the company continues to own 100%.

The details of the PEA are as follows:

  1. Production of 200,000 ounces per year gold, 17.3 million pounds copper, 4.2 million pounds molybdenum, and 355,000 ounces silver.
  2. Capex: $499.7 million
  3. Cash Cost: $399/ounce
  4. NPV (5%):  $615 million
  5. IRR (after tax):  17.5%
  6. Payback Period:  4.2 years.

The assumed metal prices were $1,455/oz gold and $3.65/lb copper.

The Analysis

This is a preliminary study, with all of the resources in the inferred or indicated category.  The break even metal price level is around $1,000/ounce which is fairly high for new deposits.  With about 2 million ounces, the deposit is too small to be on the radar of the majors like Barrick, but the intermediates are probably watching (or going to be watching at some point).

The metal prices being used are aggressive in relation to other feasibility studies being performed, but they are still conservative.  I would be willing to bet that by the time the next feasibility study comes out these prices will be standard, so I don’t really object.  Besides, I am a believer in using today’s prices together with a sensitivity analysis, instead of low balling the base case and working from that.

I believe Northern Freegold has a winner here, for the following reasons:

  • The size.  Two million ounces is enough to be in a small league of deposits out there.  All of the producers, whether major, intermediate or small,  are having reserve replacement issues and that makes this an asset with value.
  • It is likely the resource is larger.  The company is continuing with infill drilling and step-out drilling to advance the resource, and future feasibility studies will probably have better economics.

Because the company has 152 million shares outstanding and trades at $0.10, we are adding this one to our portfolio.  A producer could purchase the company for $15 million, securing 100% of the deposit (an asset worth $615 million) profiting $600 million if metal prices go down to the study level.

To put it another way, the current value of the company is a rounding error compared to the numbers they are dealing with on their primary asset.  All junior gold stocks are risky, but at 10 cents per share the possible reward here looks really, really big.

Comments

  1. Hey Bernie,
    I didn’t understand something…..

    you said that the NPV is 615M, but you subtract the 500M of the intial capex.

    isn’t it a mistake? isn’t the 615M already assumes investing 500M (I mean, isn’t the project already forecast a stream of payment, in which at the beginning you pay 500M and then gets the the 200K ounces each year?)

    thank you very much for the help and the great analysis,
    Eylon

  2. Yes, you are correct, a major could buy the company for $15 million and have an asset worth $615 million (i.e. $600 million profit). Upon re-reading that, I realize it came out wrong, I meant to say the major has to put up $515 million up front. I have edited the article to be a bit clearer.

    Thanks for pointing that out, and good luck on this one.

  3. thank you!

Speak Your Mind

*