Gold Silver Intel: Checking In On Abitibi Royalties, Golden Valley Mines

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Canadian Malartic Mine photo courtesy of Yamana Gold.

On August 5th we recommended that subscribers buy shares in Golden Valley Mines (TSX.v: GZZ) (GLVMF) as a way to play Abitibi Royalties (TSX.v: RZZ) (ATBYF). Recall that we had recommended Abitibi Royalties in November. Golden Valley owns about half of the company and its market capitalization is exceeded by the market value of its share of Abitibi Royalties. This discount has been in place since we’ve begun looking at the story, and we suggested that investors look at Golden Valley shares as well.

Both stocks have performed well since then, as have virtually all gold stocks, and the Abitibi thesis (and by extension the Golden Valley thesis) has improved. Recall that Abitibi Royalties owns various NSR royalties on land at/near the massive Canadian Malartic Mine owned by Agnico Eagle (AEM) (TSX: AEM) and Yamana Gold (AUY) (TSX: YRI). At the time, Abitibi Royalties traded at about the value of its holdings in these two companies, which it received through litigation over land claims in the area. Now it trades considerably higher, having out performed the value of its stock holdings. However, we should note that the prospects for the land on which it holds royalties has improved, particularly the Odyssey Zone. The Odyssey Zone was a key exploration target going into 2016, and Abitibi Royalties owns a 3% NSR royalty on this zone. Just recently Agnico and Yamana announced that they are expanding the drill program at Odyssey given how promising results had been. They are compiling data for an inferred resource estimate that will be released at the end of the year. Longer-term the Odyssey Zone should be included in the mine plan and Abitibi Royalties will collect its 3% NSR.

This has the potential to be a serious royalty that could be accretive to Abitibi shareholders, of which Golden Valley is the largest. But for whatever reason, the enthusiasm for Abitibi shares was not reflected in Golden Valley shares. Golden Valley has traded at a discount to its position in Abitibi. The reason is probably a combination of the following:

Golden Valley cannot possibly liquidate its position in Abitibi without depressing the price.
Golden Valley, unlike Abitibi, is a cash-flow negative company given it does not generate any revenue. This means forced asset monetization or dilution is coming.
Golden Valley has exploration claims to keep from lapsing.
Rob McEwen, while a Golden Valley shareholder, recently invested in Abitibi, giving the company visibility to the broader junior gold investing community.

The discount ballooned going into our decision to come out with a recommendation of Golden Valley. At the time it had a market capitalization of ~$24 million, where as Abitibi had a valuation of ~$72 million, or a whopping $35 million attributable to Golden Valley. Golden Valley also owns other equity positions, most notably ~4.2 million shares in Sirios Resources (TSX.v: SOI) (SIREF). It also owns a royalty on Sirios’ flagship Cheechoo Project, which has gotten a lot of attention lately (though it is still a very early stage project), some other minor equity positions, and some cash, thereby widening the valuation gap considerably from the apparent ~30%.

No More Arbitrage Trade

The bad news is that this “arbitrage” trade is no longer nearly as attractive as it was in early August. From August 4th to September 15th Abitibi shares are down ~3% while Golden Valley shares are up 26%. As things stand today Abitibi has a valuation of ~$67 million, with ~$33 million attributable to Golden Valley, which now has a market capitalization of ~$30 million–not much considering the wide bid/ask spreads you see with these junior mining stocks. Meanwhile the broader junior gold space has been correcting: the GDXJ is down ~11% during that time frame. So it has really paid to be in Golden Valley over this short period of time!

So technically there is still an arbitrage trade, and Abitibi shares make up the vast majority of Golden Valley’s valuation, though the differential is hardly worth exploiting anymore. In response to the much anticipated question–Should I buy Abitibi or Golden Valley?–buy Golden Valley if you want exposure to Sirios. If you just want exposure to Abitibi, it probably makes sense now to simply buy Abitibi and to keep an eye on the spread.

Keep Watching Canadian Malartic & Odyssey in Particular

Of course the justification for owning either of these has to go beyond “Golden Valley is a buy because it trades at a discount to the value of its marketable securities.” As mentioned above it is clear that Agnico and Yamana think there is something significant at the Odyssey Zone at the Canadian Malartic Mine. Recently, positive news came out of Agnico and Yamana regarding the Odyssey Zone (also here is a link to the Yamana presentation referred to in the PR, results are on page 38). Drill results show high grade gold mineralization that confirms the thesis that Odyssey contains viable and valuable feedstock for the Canadian Malartic mill. Considering the premium that investors are willing to pay for royalty cash-flow even a modest deposit at Odyssey has the potential to rerate Abitibi shares.

Abitibi Royalty’s Valuation

The company’s largest asset continues to be its equity portfolio: it holds ~3.55 million shares of Yamana Gold worth ~$15.4 million and ~444,000 shares of Agnico Eagle worth ~$22.8 million for a total valuation of ~$38.2 million. This is slightly more than half of the company’s current valuation of ~$72 million, leaving an implied value of the royalty portfolio at ~$33.8 million. Note that the company has sold call options against its stock holdings in order to generate cash-flow, and that this option portfolio had a value of ($3 million) as of the end of June, bringing the company’s valuation ex: equities to ~$37 million.

The company has several royalties on parts of Canadian Malartic. As already discussed, the Odyssey Zone is of particular interest to Agnico and Yamana. Based on drill results and the decision by these companies to increase an already substantial drill program we anticipate that this can be a sizable resource. The extent of it would likely yield a 3% NSR royalty worth more than $37 million (in today’s market that implies ~$3 million in annual cash-flow or production of 77,000 oz./year). Given the recent drill results and the size of the drill program we wouldn’t be surprised to see the initial resource estimate at >500,000 oz. or higher, with the potential for >1+ million ounces longer term. Abitibi also owns royalties on other Canadian Malartic zones that have already begun to generate revenues. Currently these are inconsistent (e.g. in Q2 royalty revenues came in at ~C$1,500). Nevertheless we can expect that the Jeffrey Zone and Barnat extension zones to produce 9,400 oz. next year (280 attributable) and 41,000 in 2018 ( 1,230 attributable).

Abitibi also owns royalties that it acquired through its Royalty Search Program. Essentially the company acquired royalties by paying claim fees on projects owned by financially strapped companies. These could have substantial value someday but do not have any tangible value for the time being.

The Bottom Line

The “sum of the parts” valuation thesis has played out for Abitibi Royalties: those who bought shares based on the relative value of its holdings in Agnico and Yamana have done very well. However, this hasn’t happened in a vacuum: Abitibi’s royalty holdings merit more market value considering the recent drill results and the aggressive drill program that was implemented, then accelerated, by Agnico and Yamana, at Odyssey. This merits a reassessment of the company’s valuation, though not until we have seen the resource estimate that is expected to be released at the end of the year.