At $2,500+/oz., BFS-stage Troilus Gold is undervalued

Anyone watching the price of gold (“Au“) should be amazed at how well it’s done, above US$2,400/oz. for two months, and > $2,300/oz. for five months. Many expected a pullback to $2,200 or $2,100, which never happened. Today’s $2,514/oz. is tremendous when compared to PEA/PFS/BFS report assumptions.

The 12 most recent studies used an average Au price of ~$1,950/oz., with several at $1,900, and B2Gold Corp’s Gramalote using $2,048 and Cerrado Gold using $2,100! That $1,950 average is 22% below the spot price. Readers are reminded that Au has soared this year before interest rate cuts have begun.

Central Bank buying continues to be a major driver, as well as geopolitical tensions in the Middle East, [NATO/Russia/Ukraine] and the U.S./China. UBS, BofA, Citi, RBC & GS continue to see Au hitting $2,700-$3,000/oz—next year. As strong as Au is, I also love copper (“Cu“), which has held above US$4.00/lb. despite a weak Chinese economy.

Chinese weakness won’t last forever, and Cu fundamentals point to higher prices as it is indispensable for decarbonization (clean energy power plants + EVs & other transport) + new & replacement electrical grid infrastructure + telecom/electronics + new & replacement construction + new wireless applications + military needs.

Troilus Gold Corp. (TSX: TLG) / (OTCQX: CHXMF) has a very large, BFS-stage, Au project (13M Au Eq. ounces) in north-central Quebec with a valuable Cu kicker. After selling off on the BFS news back in May, CEO Justin Reid says many of the Top-15 largest shareholders increased their positions.

Therefore, in my view, as long as the Au price remains strong, Troilus shares have support in the low-to-mid $0.30s and could rise substantially upon news of non-equity project financing. {see new 3-minute corporate video}

On September 3rd, Troilus released drill results as part of a 1,866-meter drill program on the newly discovered West Rim zone (“WRZ“) VMS target, near zones 87, J & X22.

Highlights include 20 meters at 1.66 g/t Au Eq., incl. 3.1 g/t over 8 m, starting at 87 m downhole, and 11 m of 1.05 g/t Au Eq., incl. 7.1 g/t Au Eq. over 1 m from 27 m.

“Our team is actively reviewing the data to refine our targeting strategy for the next round of drilling, set to commence in the coming weeks. Our primary objective is to identify & add higher-grade ounces that could be incorporated early in the mine plan. With the scale of this prospective trend (~4 km) remaining largely unexplored, and its proximity (~150 m) to the planned North Reserve pit, we believe the WRZ has the potential to enhance the mine model.”

Over the next three years, management has the opportunity to improve upon the BFS-defined mine plan by finding higher-grade ounces that can be exploited during the early years. If so, that 20 m @ 1.66 g/t Au Eq. –> [1.64 g/t Au] is a great intercept.

Red Cloud analyst Timothy Lee notes that since the WRZ is far more Au-weighted, there’s potential to pour doré bars onsite, reducing processing costs & increasing payables. Meaningfully increasing the grade in years 1 to 5 could add hundreds of millions of dollars to the after-tax NPV.

Subject to more drilling, replacing existing BFS ounces with better ones from the WRZ (or elsewhere) could add nearly 100,000 oz./yr. to the BFS average of 264.5k oz./yr. in years 1 to 5. Troilus has several prospective areas of growth…

While it’s early days at the WRZ, imagine what a much larger partner or acquirer could do there. Troilus has been substantially de-risked but remains meaningfully undervalued. Today’s enterprise value {market cap + debt – cash} of ~$96M is just 8% of the after-tax NPV of ~$1.2B, and the Company is valued at just $7.4/oz.

Many projects, including ones at earlier stages, are valued at 20% to 40% of NPV. Importantly, Troilus could reach production within five years. By contrast, many large (> 6M Au Eq. ozs.) peers are 6-10+ years away, making them at higher risk.

At 13M Au Eq. ounces, Trolus is one of the largest undeveloped Au/Cu assets in N. America. Notably, 86% of booked ounces are in the NI 43-101 compliant Indicated category. Over a 22-yr. mine life, annual output averages 303k Au Eq. ozs., peaking at 536k/yr., and 453k ozs./yr. in years 5 to 8.

Yet, that’s only about half the total resource. CEO Justin Reid thinks a strategic partner could help extend mine life to 30 years, (plus, in my view, significantly increase annual production).

Globally, not including places like Russia, Indonesia & Pakistan, I’m aware of nine junior-owned, pre-production projects with 6M+ ounces. A company like Newmont, Agnico Eagle, or Barrick Gold, with increasingly bulletproof balance sheets, could comfortably afford to acquire & commercialize multiple Troilus Golds!

Pace of M&A in #gold sector picking up…

Imagine the operating synergies & economies of scale that Agnico could gain by adding Troilus to its East Canadian portfolio highlighted by Canadian Malartic, Detour Lake & LaRonde.

If not acquired outright, I strongly believe securing a partner like Newmont, Agnico, Barrick, Freeport McMoRam, Teck Resources, Sumitomo, Gold Fields, Kinross, AngloGold Ashanti, Alamos Gold, Boliden AB, IamGold, Evolution Mining, Lundin Gold or Hudbay Minerals is a reasonable expectation in the next 3-6 months.

Mining cost inflation is running rampant. A recent infographic showed 16 of the largest Au producers with 2Q/24 vs. 2Q/23 operating costs up a weighted average of +8.5% to US$1,422/oz. vs. Troilus’ All-in-Sustainable Cost (“AISC“) is much lower at $1,109/oz. Newmont & Barrick have AISCs of $1,562 & $1,498/oz.

Inflationary pressures, and extended timelines to reach production. S&P Global Market Intelligence recently reported that major discoveries in 2020-23 will take an average of 18 years to commercialize! These factors suggest a tsunami of M&A is coming… It may already have started. (See image below).

The Troilus project is worth considerably more as part of a portfolio than as a stand-alone mine. Majors enjoy very significant economies of scale, operating synergies, and access to low-cost capital. With the U.S. Fed about to cut interest rates, au Majors should be able to borrow at long-term rates below 6%.

Competitive tension for large-scale N. American projects is growing, majors need to replenish pipelines. Newmont & Barrick expect ~4%/yr. production growth through 2028 & 2030, respectively, but that assumes all new projects & mine expansions come online on schedule.

If in production today, Troilus would have the sixth largest mine in Canada, (see above chart) but it could climb to #3 as there are ~5.4M Indicated ounces in the resource estimate that are not in the BFS.

Readers should also consider jurisdiction. Quebec’s ranking in the latest Fraser Institute of Mining Survey improved from 8th best of 64 (Top 13%) to #5 of 86 (Top 6%). Some peers are in more challenging places like –> Côte d’Ivoire, Africa, Namibia, Alaska, Guyana & Mexico.

One of my favorite parts of the Troilus story is its strong Cu kicker. The Project has 382M lbs. of the red metal. What is the potential value of a Cu royalty/stream? I’m confident management could get $500M+, but they don’t want to monetize Cu in this way unless they have to. {see new 3-minute corporate video}

Mr. Reid believes a silver (“Ag“) royalty/stream on the Project’s 9.9M ounces could potentially be monetized for US$50-$80M. Combined, Ag + Cu royalty/streaming deals could cover > 50% of upfront cap-ex.

The levers management can potentially pull for non-equity funding include; 1) debt funding for 60%-66.67% of upfront cap-ex, 2) a minority strategic partner, 3) pre-payment for off-take of gold and/or copper, 4) royalty/streaming deal(s), and 5) equipment financing.

Therefore, assuming a continued strong Au price, the Troilus project should be financeable without onerous equity dilution. Management believes permits could be in hand by 4Q/25 or 1Q26, leading to commissioning & pre-production in 2H/28 or 1H/29.

At $2,514/oz. gold, possible improvements in BFS economics from adding higher-grade ounces, ample non-equity funding options, first production in 4-5 years, and mining-friendly Quebec government, institutions/agencies & investment funds — Troilus Gold (TSX: TLG) / (OTCQX: CHXMF) seems meaningfully de-risked & undervalued. {see new 3-minute corporate video}

Disclosures/disclaimers: The content of this article is for information only. Readers fully understand and agree that nothing contained herein, written by Peter Epstein of Epstein Research [ER], (together, [ER]) about Troilus Gold, including but not limited to, commentary, opinions, views, assumptions, reported facts, calculations, etc. is not to be considered implicit or explicit investment advice. Nothing contained herein is a recommendation or solicitation to buy or sell any security. [ER] is not responsible under any circumstances for investment actions taken by the reader. [ER] has never been, and is not currently, a registered or licensed financial advisor or broker/dealer, investment advisor, stockbroker, trader, money manager, compliance or legal officer, and does not perform market-making activities. [ER] is not directly employed by any company, group, organization, party, or person. The shares of Troilus Gold are highly speculative, and not suitable for all investors. Readers understand and agree that investments in small-cap stocks can result in a 100% loss of invested funds. It is assumed and agreed upon by readers that they will consult with their own licensed or registered financial advisors before making investment decisions.

At the time this article was posted, Troilus Gold was an advertiser on [ER] and Peter Epstein owned shares in the company purchased in the open market.

Readers understand and agree that they must conduct due diligence above and beyond reading this article. While the author believes he’s diligent in screening out companies that, for any reason whatsoever, are unattractive investment opportunities, he cannot guarantee that his efforts will (or have been) successful. [ER] is not responsible for any perceived, or actual, errors including, but not limited to, commentary, opinions, views, assumptions, reported facts & financial calculations, or for the completeness of this article or future content. [ER] is not expected or required to subsequently follow or cover events & news, or write about any particular company or topic. [ER] is not an expert in any company, industry sector or investment topic.