LYD... TD 12-Month Target Price: C$4.00?
Lydian International Ltd.
(LYD-T) C$1.64
Resource Ounces Up 18%, Grade Up 13%
Event
Yesterday morning, Lydian International published an updated resource
estimate for its flagship Amulsar (100%) heap leach gold project in Armenia,
which is expected to be the basis for reserves in an updated Feasibility Study
(FS) expected in July.
Total open pit gold resources grew 18% to 4.3 Moz grading 0.89 g/t (from 3.7
Moz grading 0.79 g/t in January 2012) using a 0.3 g/t cut-off (US$1,200/oz).
The increase was largely the product of significantly higher grades.
Impact - POSITIVE
Given the substantial increase in grade, Lydian is positioned to report
markedly improved project economics at Amulsar in the upcoming study, in
our view.
Within the revised estimate, total M&I ounces were essentially flat at 2.5
Moz, while the average grade rose 19% to 0.95 g/t (from 0.80 g/t). We expect
this figure to be the basis for the FS, implying a substantial improvement
relative to the current reserve of 2.3 Moz at 0.75 g/t.
We are revising our project model to incorporate the updated estimate with an
adjustment for expected mining dilution, modeling a reserve of 2.5 Moz at
0.89 g/t. With the modeled increase in grade, average LOM production in our
model rises to 230 koz at total cash costs of US$447/oz (from 184 koz at
US$530/oz). To reflect the recent pullback in the stock, we are also lowering
our equity issuance price assumption to $1.50/share (from $2.50).
Net of these changes, our corporate NAV5% increases to $5.10/share (from
$4.97). We apply a 0.8x target multiple to reach a 12-month target price of
$4.00/share (unchanged). The company trades at 0.32x NAV5% versus its
developer peers at 0.42x, with permitting risk the major limiting factor in its
valuation, in our view. Nevertheless, we believe Amulsar is one of the most
robust development-ready gold projects of a significant size globally and
together with its relatively modest developments costs (estimated at $270mm)
positions the company as a particularly attractive acquisition target. We
maintain our SPECULATIVE BUY recommendation.
Revised Estimate Continues Record of Significant Resource Growth at Amulsar
? 18% Increase in Total Resources: The updated statement, prepared by AMC Consultants, included
results from an additional 19,867m of diamond and RC drilling (for a total of 109,650m), which were
completed subsequent to the January 2012 estimate. Overall, total resources increased 18% from the prior
estimate and have now grown by over 40% in the past 12 months.
? Growth Driven by Increase in Grade: The increase was largely the product of significantly higher
grades, in our view. We note that the average grade in the M&I category rose 19% to 0.95 g/t (from 0.80
g/t). In comparison, the current reserve of 2.3 Moz averages 0.75 g/t. We believe this positive variance
suggests the potential for a significant improvement in project economics, given that the new estimate
will be the basis for an updated reserve that will be incorporated in a revised FS.
? Change in Resource Methodology not a Concern: The resource was prepared using multiple indicator
kriging grade interpolation whereas the previous study was based on inverse distance (ID)
methodologies. We understand the change was influenced by the company’s newly developed 3D
geology model that has reportedly improved the company’s understanding of grade boundaries and
continuity. Furthermore, we understand if the company applied the ID methodology, the difference in
total ounces reported would have likely been less than 5%, with an increase in tonnes offset by a slight
decrease in reported grade.
? Good Potential for Further Growth: The company plans to continue infill, extension and exploration
drilling this year in an effort grow its resource base further, with another resource update expected in
Q1/14. Management commented that there is the potential to find additional gold resources particularly
towards the north, east and to depth at the Erato, Tigranes and Artavasdes deposits, while Arshak remains
open along strike towards the south-east.
Outlook
We anticipate the following timeline of key developments:
? Additional results from 25,000m drilling program at Amulsar – Ongoing
? Updated Feasibility Study – July
? Completion of the remaining permitting milestones (EIA, ESIA, etc.) – H1/13
? Updated resource estimate – Q1/14
Valuation
We calculate that Lydian is currently trading at 0.32x our corporate NAV5%. This is below the average for
development-stage companies, which trade at an average of 0.42x NAV5%.
Exhibit 2. Lydian International: P/NAV Peer Comparison
0.29 0.32 0.32
0.37 0.38 0.38
0.53
0.58
0.62
0.00
0.25
0.50
0.75
1.00
GUY XRC LYD CNL BSX RMX AUM TXG THO
P/NAV (x)
Average = 0.42x
Source: TD Securities.
Justification of Target Price
We generate our target price by applying a 0.8x target multiple to our fully-financed corporate NAV5%
calculated at a gold price of US$1,650/oz. We use this multiple to balance our view of the high level of risk
associated with our valuation and the strong exploration upside potential we see at Amulsar.
Key Risks to Target Price
Gold and fuel price risk; foreign exchange rate risk; forecasting risk relating to deposit size; financial and
market risks; technical risk; risk related to the cost and availability of financing; capital and operating cost
risks; timing risk; political risk; permitting risk; environmental risk; title risk and risks related to the
acquisition of surface rights; the proposed use of controversial mining techniques; illegal mining risk; and
staffing and key personnel retention risk.
TD Investment Conclusion
We believe Amulsar is one of the most robust development-ready gold projects of a significant size globally
and together with its relatively modest developments costs positions the company as a particularly attractive
acquisition target. We maintain our SPECULATIVE BUY recommendation. |
