Nevada’s Newest Gold Miner

Nevada is well known as the United States’ top gold-mining jurisdiction.  The numerous mines within its massive gold trends combined to produce a whopping 5.4m ounces in 2013, which accounted for 74% of total domestic output.  This output ranks Nevada as the world’s fourth-largest gold producer, behind only the countries of China, Australia, and Russia.

With Nevada’s geopolitically-stable mild desert region pumping out more gold than global juggernauts South Africa, Peru, and Canada, it is naturally a top destination for mining companies looking to hit it big.  And emerging producer Midway Gold has hit the trifecta with a trio of advanced-stage projects poised to add to Nevada’s gold-mine tally.

Midway has been actively exploring for gold in Nevada for many years.  And its skillful exploration has delineated several fantastic gold deposits that show excellent mining potential.  The most advanced is the Pan deposit located within the prolific Battle Mountain-Eureka gold trend, 35km southeast of historic mining town Eureka.

When Midway acquired this project in 2007 it had already seen a fair amount of modern exploration.  The past operators had succeeded in discovering a strong complex of sediment-hosted bulk-tonnage Carlin-type deposits, a common occurrence in Nevada.  But for a variety of reasons, including low 1990s gold prices, Pan was never mined.

Seeing huge potential to expand Pan’s resources, Midway dug right in with aggressive exploration of its own.  And within a few years it was able to double the inventory to 1.2m ounces.  Midway used Pan’s higher-confidence resource base to feed advanced feasibility work.  And by the end of 2011 it had drawn up a mining plan that showed excellent economic potential.

Amidst Midway Gold’s transformation from exploration to development-focused company it brought onboard Kenneth Brunk to spearhead things.  Brunk had just come off a COO gig at Romarco Minerals where he guided a successful feasibility study.  But more importantly he brought with him the expertise of knowing how to develop a gold mine in Nevada.

Prior to Romarco Kenneth Brunk spent time as an executive with Nevada stalwart Newmont Mining.  And interestingly he was an instrumental member of the team that pioneered Nevada’s ascent to dominance.  This rise was facilitated by the advent of heap leaching, a mining processing technology that Newmont was the first to roll out on a commercial scale.

Heap leaching has revolutionized the gold-mining industry over the last several decades.  And no jurisdiction has benefited more than Nevada’s prolific Carlin trend which Kenneth Brunk had a direct hand in building out.  Brunk’s knowledge of heap-leach and refractory-ore development was highly sought after.  And he obviously liked what he saw in Midway Gold’s pipeline of heap-leach-amenable projects.

Interestingly not too long ago a sub-0.60 g/t deposit would have been scoffed at.  But today some of the largest and most profitable gold mines in the world are running ore at much lower grades.  And a Brunk-led Midway determined that Pan’s 0.56 g/t reserve base had great potential to join the ranks of profitable heap-leach mines.

Midway ended up procuring Pan’s permits in record time of just 20 months, with the Record of Decision received in December 2013.  And within weeks it broke ground on developing Nevada’s next gold mine.

2014 has been an exciting year for Midway Gold, with mine construction moving forward without any major delays.  Just recently Midway started mining and stacking ore on the leach pad.  And with the ADR plant and refinery scheduled for completion in mid-December, Pan will see its first gold pour right around the New Year.

Another big benefit to heap leaching is the mines are relatively inexpensive to build.  Since near-surface oxide ore is the only type amenable to high recoveries via this method, mining is from an open pit.  And since processing doesn’t require a full-blown mill, the plant facilities are much-lower cost.  Pan’s price tag was originally estimated at $99m.  But as a result of favorable economic conditions and some shrewd optimization work, this mine will come in well under budget around $75m.

On the economic front, Midway was able to sign on a contract mining fleet much cheaper than it could have a few years ago when it performed the feasibility study.  And this obviously greatly reduces equipment costs since it doesn’t have to buy its own shovels and trucks.  It also determined it could still get high recoveries from one of the pits without having to crush the ore.  So by dumping run-of-mine ore directly onto the leach pad, Midway can delay the purchase of a two-stage crushing circuit that’ll be necessary for the other pit.

Operationally Midway will be able to produce Pan’s gold at costs in the lower quartile of industry average.  Per the feasibility study and build-out plan Pan’s life-of-mine (9 years) annual volume of 81k ounces is expected to be produced at total cash costs of only $585/ounce, and at fully-loaded all-in costs (including sustaining capital) of only $824/ounce.  At $1200 gold this allows for a capex payback period of only 2.6 years and an after-tax internal rate of return of 32% (the former/latter would obviously decrease/increase at higher gold prices).

Midway’s Pan mine is a very good value proposition for investors.  Construction is fully funded via a combination of equity and debt financings.  And future cash flow will support ongoing exploration as well as a potential expansion.  Pan’s mineralized zones remain open in several directions.  And Kenneth Brunk and team smartly permitted this mine for twice the current size.  Pan ought to easily exceed what was drawn up in the original mining plan.

Midway’s next mine is located only 10km southeast of Pan.  Its Gold Rock project saw a small amount of mining back in the 1990s.  But its true potential wasn’t realized until Midway started exploring it in 2008.  Midway was able to delineate a Pan-style deposit.  And it commenced the permitting process last year in order to meet a 2017 production target.

Interestingly Midway believes Gold Rock has the potential to be larger than Pan.  Its 1.0m-ounce resource already grades much higher (0.79 g/t in the M&I categories).  And its wide-open zones are smack in the middle of a robust mineralized trend that has seen very little systematic exploration.

Midway will resume drilling at Gold Rock with funds generated via cash flow from Pan.  And it will also conduct regional exploration between the two projects in search of potential replicating deposits (Midway already owns the mineral rights to this land).  These sister projects ought to generate a lot of exploration-driven news flow in the coming years.

Midway’s third potential Nevada mine, Spring Valley, is currently operated under a joint venture with the state’s other gold titan Barrick Gold.  Barrick quickly took a liking to this project, and it easily completed the $38m in expenditures necessary to earn its initial interest.

Barrick of course doesn’t mess around with small projects.  And the latest resource estimate defining 5.4m ounces showed Spring Valley to have behemoth potential.  Midway is now riding this project as a non-operating 25% carried-interest partner.  And Barrick has committed to fund everything to production with Midway’s portion of capex to be recovered from cash flow.

Barrick is currently in the process of performing a pre-feasibility study that is targeted for completion in H2 2015.  And if everything falls into place Spring Valley is looking at a 2019 production target.  This would be a large-scale mine.  And even a 25% interest would generate substantial cash flow for Midway Gold.

Overall Midway’s impressive pipeline of advanced-stage projects ranks it as one of the elite junior gold stocks.  And within a few months it’ll achieve the rare accomplishment of graduating from explorer to producer.

Considering Pan’s potential to profit even at lower gold prices, I suspect Midway Gold will quickly hit the radars of a whole new class of investors.  And it won’t take much new interest to give this stock a boost considering its ridiculously-low valuation.  Based on MDW’s recent activity, this new interest may already be coming into fruition.

It’s no doubt been a tough road for gold-stock investors in recent years.  And as you can see in this chart, Midway Gold has taken its fair share of punches.  Sadly this 3+ year chart looks practically the same for nearly all gold stocks given their tight correlations with the underlying metal.  It really is hard to believe how quickly they went from rock stars to market pariahs.

As an elite junior MDW was a rock star, greatly leveraging gold on the road to its 2011 high.  From its mid-2010 low it soared nearly 600% to almost $3 per share.  MDW naturally sold off hard following such a powerful run higher though.  And as you can see it just couldn’t hold up during gold’s post-apex consolidation.

Though these last few years have been nasty, investors have been able to evaluate gold stocks based on their performances during gold’s periodic uplegs.  In general the strong ones will respond well to any concerted move higher.  Unfortunately Midway really missed the boat in the first upleg in early 2012, actually losing ground as gold gained 15%.  Though the majority of gold stocks underperformed gold during this upleg, I’ll chalk up MDW’s underperformance to the all-too-common post-feasibility hangover.

As you can see, MDW performed way better during gold’s next two uplegs in Q3 2012 and Q3 2013.  Provocatively though it still underperformed its peers.  While most junior elites leveraged gold’s 15% and 18% gains by at least 4.0x, MDW was only able to muster 2.4x and 1.8x positive leverage.

But while MDW’s 36% and 33% gains were somewhat disappointing, it’s important to remember where it was in the development cycle at the time.  With discovery, resource growth, and initial economic reads occurring prior to these uplegs, this junior’s sweet spot had already passed.  During 2012 and 2013 Midway was in limbo as it awaited permitting.  Investors tend to lose interest during this stage.  And to make matters worse it was happening during a distressed market environment for the yellow metal.

Thankfully as expected Midway procured Pan’s permits.  And also as expected investors returned, making MDW one of 2014’s top-performing gold stocks.  MDW soared a very impressive 75% to positively leverage gold 4.6x in its latest upleg early this year.  And perhaps even more impressive is MDW’s ongoing run that’s seen it gain 35% from its Q2 low.  This rally is bucking a gold downtrend!

Overall Midway is one of only a handful of gold stocks to gain ground in 2014.  With permits in hand, financing in place, and a strong pipeline, investors have finally begun to realize the potential held in this emerging gold producer.  And this should be just the beginning of much better things to come as more and more investors learn about this spectacular company.

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Given its superb fundamentals and bright future, Midway Gold was an easy pick to make the cut in our most recent research report focused on advanced-stage junior gold stocks.  This winnowing left us with our 12 favorites out of 600+ junior golds trading in the US and Canada.  And it is these dozen that are poised to lead the way in developing the next generation of gold mines.  To have their detailed and fascinating fundamental profiles at your fingertips, buy your brand-new 23-page report today!

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The bottom line is Midway Gold is on track to become Nevada’s newest gold producer.  Its excellent Pan mine is in the final stages of development, with its first gold pour targeted for late-December/early-January.  This mine is set to be one of the industry’s lowest-cost producers, which ought to make it very profitable even at today’s anomalously-depressed gold prices.

Midway also has a strong pipeline of secondary projects.  And considering the pedigree of its management team, I wouldn’t be surprised if it eventually grew to become a low-cost multi-mine mid-tier producer.  With production imminent a new class of investors has already taken a liking to this elite junior, propelling it to be a market outperformer so far this year.  And there’s still plenty of upside remaining as the gold market inevitably recovers.

Scott Wright

October 3, 2014

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