Vista Gold: Ready for the Middle Tier

by: Thomas Tan posted on: August 07, 2008 | about stocks: VGZ    
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I have owned shares of Vista Gold (VGZ) since September 18, 2007, purchased at $4.75. Like many another junior mining company, it shot up to $8 in early November last year, then has slowly dripped down to the current $3.50 level in the last 8 months. What's interesting is, two years ago, Vista was actually traded at over $13 (pre-spinoff of Allied Nevada Gold Corp) at one point while gold was still around $600. But now that gold is 50% higher, Vista has lost almost 75% of its peak market cap  in last the 2 years.

The CFO of Vista Gold, Greg Marlier, was in New York City for a lunch discussion on July 30. Among the things I learned:

VGZ actually has a long history as a public company. It was first listed on the  TSX back in 1984, and on the AMEX in 1986. Since 2001, Vista has correctly predicted that gold prices would significantly increase for many years to come, and has acquired a number of impressive gold projects during 2001-2006 with 13 million ounces of gold resources at an average cost of $0.67/ounce. Currently, there are six major projects in their portfolio, and they have gone through a priority review process to allocate their capital and resources accordingly.

The foremost and core project for Vista right now is to advance the Paredones Amarillos project, including the preparation of a definitive feasibility study and the purchase of long delivery equipment items, so that construction can begin during the second half of 2008. In August 2002, Vista completed the acquisition of this project in Baja California Sur, Mexico, from Viceroy Resource for $2.3MM. This is planned to be an open pit mine, and Vista has purchased a used mill with plant capacity of 11,000 tpd (tonnes per day). The M&I (Measured and Indicated) gold resources for this project is 1.9MM ounces, with expected average annual production of 114K oz per year. The mine life should be over 12 years. From the press release in February, the pre-production capital need is about $169MM, and operating cost is estimated to be $419/oz.

In order to see the value of this project, I put together a quick spreadsheet with the following assumptions: today's $850/oz gold, $169M capital expenditure and $419/oz operating cost indicated above, discount rate at 10%, and only 12 years of mine life. The net cashflow will be $431/oz, or with 114K production per year, $49M per year for the next 12 years. Based on my NPV model, it gives me a value of $165MM, compared to the current market cap of Vista at around $120M. It seems that just this project alone would support the market cap of Vista. Vista has cash reserves of $28M now, but with the pre-production capital needs, managers are currently looking at various options of project financing to best serve the interest of shareholders. If everything goes smoothly, Vista is looking  to start production toward the end of 2009.

The second major project for Vista is the Mt. Todd project in Australia. Most recently, the M&I reserves have increased 65% to 2.9MM ounces of gold, with additional inferred 1.5MM ounces. The results of a preliminary assessment completed in 2007 were encouraging and additional technical studies are underway with a definitive feasibility study planned for completion by mid-2009. Again it is an open pit mine, with annual production estimated to be 266K oz of gold and 4.3MM lbs of copper. This copper credit pays for approximately $35 per oz of gold produced. Again, based on my NPV spreadsheet, with assumptions of $850/oz gold, $391/oz operating cost (including copper byproduct), discount rate at 10%, capital investment of $264MM, and 10 years of mine life, the NPV for this project is about $380MM. Once the Mt. Todd project, a bigger project than Paredones Amarillos, is in production in a few years, Vista would become a mid-tier gold producer.

Vista's other holdings include the Guadalupe de los Reyes Project in Mexico, Yellow Pine Project in Idaho, Awak Mas Project in Indonesia, and Long Valley Project in California. Including the Paredones and Mt. Todd projects, these six properties host 10.3 million ounces of measured and indicated gold resources and 3.9 million ounces of inferred gold resources. If we ignore the inferred reserves conservatively, and say roughly $100/oz for acquired value, the market cap of Vista would be valued at $1B, or more than 8 times of its current market cap. Let us use another approach, with M&I 10.3 million ounces on 42.8 million fully diluted shares, or 0.24 ounce behind each share (10.3/42.8). At today's gold price at $850 and Vista stock price of $3.5, a buyer of a Vista share gets gold in the ground for only $15 an ounce ($3.5/0.24 per share). As we can see, Vista is currently quite undervalued. And more importantly, Vista acts as a never expired long term gold call option, which provides investors a large leverage to gold price once this gold bull market continues.

Disclosure: I am long Vista Gold since September, 2007, and I believe it provides a good opportunity for a diversified mining portfolio for long term capital gain.

This article has 9 comments! Add yours below...
Thomas Tan

Thomas Tan

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This article has 9 comments:

  •  
    LarryH
    Aug 07 11:30 PM
    Your analysis is insightful, but the value that the market places on the company right now contradicts your hope of what might be. It is only worth what someone is willing to pay. Also, where do production costs enter your analysis? One of the main problems with mining companies is the rising cost of getting the metal out of the ground and processed. I certainly would not say you are wrong in your conclusion that the company is under valued, but the current price is offering a different opinion.
  •  
    jimmy46
    Aug 08 01:52 AM
    VGZ actually has a long history as a public company. It was first listed on the TSX back in 1984, and on the AMEX in 1986.'''''

    That's not always a good sign, sometimes crooks buy a defunct company and retool it so as to avoid the review that new companies get by the SEC etc
  •  
    Clavis
    Aug 08 08:52 AM
    Viable, I like open pit, costs should be less and gold is going $1000+ this year.
    I am concerned by the current take over of Aurelian Resources by Kinross where the offer is currently worth around $4.50; including worthless warrants; for shares that I value at a minimum $20.
    I hope that this is not the future for Vista Gold or other mines.
  •  
    iman
    Aug 08 10:00 AM
    My Website
    Aurelian is in Equador, thats why their got bought out so cheap. Vista has concentrated on mining friendly countires to aquire resources.
  •  
    bill sanders
    Aug 08 10:26 AM
    Re the three previous comments:
    I've semi-followed VGZ for some time now (almost bought in three or four years ago). I'd look at cost of production (it's obviously no Goldcorp, but may or may not be over industry avg, now that costs have skyrocketed); but would not worry about fraud (not a whiff that I know of).

    Don't know if VGZ has a shareholder rights plan in place -- or how effective it might be if it exists. Some seem to have worked for other companies -- but active participation of shareholders to file proxies is vital.

    bill
  •  
    bobjou
    Aug 08 08:14 PM
    My Website
    Many of these small gold mining companies live only on stock sales. Notice all the referances above to "Measured", "Indicated", "Inferred", etc. But where's the production...?? I've bought in to several of these in the past, did well in perhaps 5% of them, lost in all the others. As I learned to do more investigating, I found out about how they survive by selling stock and writing great reports!
  •  
    jayminho
    Aug 09 02:35 AM
    ohh i thought that was a new msft o.s to be released.. is it a company ?

    good..
  •  
    thomast2
    Aug 10 03:54 PM
    Thank you all for the comments.
    LarryH, my analysis includes production cost per oz as indicated in the article. Jimmy46, I don’t think it is the case here for Vista.
    Clavis, I don’t know much about Aurelian but since you mentioned it, I looked it up quickly at the web. It seems that Aurelian has 13.7m gold inferred resources at Ecuador. This is actually comparable to Vista which has 10.3m M&I, and another 3.9m inferred gold resources in 6 separate projects but in more geopolitical safer countries.
    So if KGC feels comfortable to pay $1 billion for Aurelian, Vista should be worth the same too, if not more. Another way to look at it is that KGC pays roughly $60-70/oz (?) of gold in the ground for Aurelian, but based on my analysis above, Vista is now only traded at < $15/oz.
    Bill sanders, I agree with your point on proxies. Bobjou, most of the companies I follow have production or near production, including Vista which is also at the verge of production.
    Utiwiq and others raised the cost issue which is always my concern too, and probably the reason why the whole sector is currently depressed. But if energy cost stays at this level, and gold bull market returns to life and goes over $1,000 again, higher production cost will be offset by higher gold price.
  •  
    utwiq
    Aug 11 11:35 AM
    Thomas, I appreciate you replying to the comments but I think with respect that you haven't grasped the nature of Vista's business model. The company built its portfolio of projects by picking up cheap gold properties that were marginal at lower gold prices, reasoning that when gold shot up their projects would become robustly economic. That was not a silly line of reasoning but it hasn't worked out. If anything, this is a much tougher operating environment for gold producers than when gold was at $500. It sounds bizarre but it is plainly true. The problem is not just the price of oil, but also the rise in steel prices and perhaps most importantly major shortages of qualified labour. There are a great many quality gold companies out there, which offer great value and leverage to the price of gold. Vista's strategy is extremely high risk, alas, because the prospects for gold to outpace operating and capital costs - at least by enough to transform the economics of their projects and underpin debt financing etc. - are not good.

    Incidentally, the comparison of Aurelian to Vista is crazy and confirms, I fear, that you haven't grasped the nature of Vista's projects or the cost problems they face. Yes, Vista may have the same number of ounces in the ground as Aurelian, but this is split across several projects, most of which are low-grade and face particular processing difficulties. Aurelian by contrast has a single extremely high-grade and enormous gold deposit, with plenty of expansion potential. Kinross is getting a bargain because of political risk (overstated in my view) but Aurelian's project is amongst the very best - most economic, most promising for expansion - in the world. All ounces in the ground are not equal and Aurelian's, political risk aside (which explains the price), the best there are. You absolutely should not use the price they receive to value Vista's set of projects.
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