North American Palladium Ltd.

A Clean Air FCF Machine

With materially improved operations and a rising palladium price, we believe North American Palladium is poised for a significant re-rating and its shares should be worth C$23.50/sh suggesting 52% upside, inclusive of the dividend. With recent operating improvements and a new LOM plan that points to production growth, we believe the company is poised to generate substantially more FCF and EBITDA than its share price reflects.

Investment Thesis:
  • Materially improved operations, and solid growth plan. Operations have steadily improved over the last 3 years and we believe production is set to increase from 202koz payable Pd in 2017A, to 265koz payable Pd by 2021E, once the underground expansion is complete (Figure 1). The operating improvements have been driven by a new management team and a new mining method for this unique deposit.
  • North American Palladium is trading at 13.5% FCF yield for 2019. At a palladium price of US$1,300/oz, we expect the company to generate C$122M of FCF (CFO+CFI) in 2019 and C$156M in 2021. To put this into perspective; precious metals producers currently trade at -4% FCF yield, suggesting a significant re-rating is likely (Figure 5). We believe that this amount of FCF is likely to result in a further return of capital in 2019.
  • Exceptional leverage to strong palladium fundamentals. For every US$50/oz increase in the palladium price, our 2019 EBTIDA estimate increases by ~7% and FCF ~11% (Figure 4). Over the medium-term we expect the palladium price to remain strong as it is benefiting from flat supply and increasing demand (Appendix A).
We believe that as the company demonstrates its ability to generate FCF, a significant re-rating is likely. Our fair value of C$23.50 is based on 6.0x our one-year forward, NTM EBITDA estimate of C$224M, suggesting 52% upside to the current share price. We believe that as the company demonstrates its ability to deliver the FCF we expect, it should materially re-rate. Additionally, a further return of capital to shareholders via a dividend increase or buyback would be a significant catalyst. Upcoming catalysts include: 1) Q1 operating results (Q2/19), 2) Q1 financial results (Q2/19) and 3) Exploration updates (ongoing).



Bonterra Resources Inc

Drilling Continues to Expand Gladiator

Impact: Mildly Positive

Results from Bonterra’s ongoing drilling program demonstrate the significant expansion potential of this deposit, beyond the ~2Moz that we believe already exists. With a mill in-place and a basket of growing deposits, we believe the company is likely to be the first company in production in the rapidly growing Urban-Barry camp.

  • Gladiator continues to grow. Step out holes at Gladiator extend the North and Rivage zones to the Southwest where the company is encountering the same distinctive sphalerite mineralization as seen at the main Gladiator deposit. The extension which dips to the east, was intersected near surface (<150m) returning highlights of 40.2g/t Au over 2m (BA-19-09) and 20.7g/t Au over 1.5m (BA-19-07). These results are step-outs from the portion of the deposit that we believe contains up to 2Moz. 
  • Titan is further away, but more of the same. The company is still developing an understanding of the newly discovered Titan target where it hit a quartz vein stockwork mineralization with many similarities to Gladiator. Results intersected high-grades highlighting 7g/t Au over 2m (BA-19-01) and the the structure remains unconstrained in all directions. Results to date suggest that, together with Coliseum, Gladiator’s strike could span as much as 5km (a 3.8x increase over the current footprint). 
  • Assembling the pieces for the Urban Barry camp. With an expansion planned for the Urban Barry Mill in H1/19, the company is well positioned with multiple growing deposits, to quickly become the next Canadian producer. We highlight that operating assets in Canada of this scale (100 to 200k oz/year), have been prime takeover targets in recent years, suggesting to us that Bonterra is on the cusp of becoming an endangered species.

Mill expansion and coming resource update show this company’s fundamental value is ahead of its current pricing. Based on currently reported resources for Gladiator, Barry and Bachelor, Bonterra trades at US$42/oz, a premium to peers but once we factor in our estimate of ~C$50M for the Urban-Barry mill, and what we estimate could be a ~2M oz Au deposit at Gladiator, Bonterra would trade at a substantial discount to peers at US$13/oz. Upcoming catalysts include, 1) Ongoing exploration results. 

Red Pine Exploration Inc

Surluga Results Bode Well for Update

Impact: Positive

Drilling results announced today by Red Pine at Surluga validate the company’s geological model and suggest the company is on track for Surluga resource update in Q2 2019. We continue to believe the Wawa Gold Corridor hosts a large gold system and that Red Pine is positioned to deliver multiple gold discoveries.

  • More good grades/widths from Surluga. Red Pine continues to demonstrate drilling success at Surluga – this bodes well for the upcoming resource update. Hole SD-18-241 targeted gaps within the resource envelope and returned 4.9g/t Au over 16.3m and so should be additive. Infill Hole SD-18-235 was confirmatory, returning 1.9g/t Au over 38.5m where expected within the deposit.
  • Results validate model. Continued drilling success at Surluga and Minto South suggests Red Pine’s improved understanding of controls on mineralization is paying dividends. Importantly, these insights could be applied in the future to more efficiently grow resources both at Surluga and Minto South and at other emerging high-grade structures, such as the Hornblende Zone or the recently identified Cooper Structure.
  • Surluga resource update on the way. We expect the upcoming Surluga resource update expected in Q2 2019 to be designed with a bulk underground mining operation in mind, given vein thicknesses have ranged between 3m to 30m at grades above 3 g/t Au. We note that much of the Surluga deposit is proximal to historic workings which should help reduce future development costs of an underground mining project at Surluga.
Red Pine trades at US$11/oz AuEq versus peers at US$38/oz AuEq, despite ongoing exploration success. We note that the company is well funded with roughly  C$5M in cash to fund its ongoing drill program and we expect ongoing exploration success to close the valuation gap to peers. Additionally, we view the eventual consolidation of the projects ownership structure to likely be a major catalyst for Red Pine. Upcoming catalysts include 1) Results from ongoing drilling in addition to results expected for 40 holes with assays pending at Surluga 2) Updated Surluga Resource estimate in Q2 2019 



GT Gold Corp

Saddle South Results Highlight Potential

Impact: Positive

Drill results from the last of GT Gold’s 2018 drill program demonstrate a greater understanding of the geological controls of the Saddle South mineralization, which we expect to grow in 2019. Alongside the sizeable potential of Saddle North, we believe this company is working towards a meaningful epithermal gold discovery at Saddle South.

  • Combination of infill and step-out holes support our view of the potential for an economic deposit. The company returned both wide high-grade intercepts (18.08g/t Au and 313.38 g/t Ag over 2.13) in the Southwest portion of Saddle Ridge and wider intervals like 1.07g/t Au over 126.2m. In our opinion, infill holes, like, TTD103 and TTD091 suggest improved continuity, while a step-out like TTD105 suggests the deposit has room to grow.  
  • Mineralization remains open in the southwest. Already approaching a scale that is potentially economic, Saddle South remains unconstrained to the southwest. With a mineralized strike of over 1300m, widths of up to 600m and depth extensions of over 600m, we believe that GT could uncover a deposit with at least 1Moz, not at the top-end of our previous range (750k-1Moz).
  • Saddle South likely underpins the valuation of the current company. With an expanded footprint at Saddle South, and gold North American exploration company’s trading at C$50/oz, this suggests to us that Saddle South has a potential value of ~C$50M which compares to GT Gold’s current market cap of C$68.6M. While we understand why the management and market is focused on the much larger Saddle North project in our view, Saddle South provides a back-stop value for GT Gold.
Despite a ~14% increase since the end of January lows, GT Gold’s value still does not properly reflect Saddle North. As highlighted in our recent note on the potential of Saddle North, we believe that it could easily deliver an NPV of over $2B. Taking that into account, the necessary capital spend to move this project forward, we believe the company is substantially undervalued at C$73M market cap. This is particularly true, when considering our view that there we believe Saddle South is worth ~C$50M. Upcoming catalysts include 1) Compilation of 2018 exploration work for Saddle North and South (Q1/19) 2) 2019 exploration plans (Q2/19) and 3) Restart of Exploration (Q2/19).



Aurion Resources Ltd

Aurion Delivers Another High-Potential Target

Impact: Positive

Highlights from Aurion’s newly prospected Launi project, located to the south of its flagship Risti asset, further demonstrate the scale of undiscovered potential across the Company’s tenure in the Central Lapland Greenstone Belt. Our fair value estimates, reflective of continued exploration success, value Aurion’s shares at C$2.29/share with upside potential to C$5.57/share.

  • Visible gold in grab samples and outcrops at new target. Preliminary reconnaissance across the East Launi project, located within 10km of the company’s more advanced Risti Project and along strike to the Sirkka Shear Zone – a known deposit generator, delivered both outcrop visible gold assaying up to 379g/ Au in quartz boulder and outcrop for an average grade of 2.47g/t Au over 2km2. Uniquely, East Launi is the company’s first target to return visible gold in grab samples and outcrop without trenching.
  • Progressing multiple targets. Aurion acquired the East Launi Exploration Licence in early 2019 and the property has no history of exploration making it the newest, and least explored target to date. While it is very early days, the property adds untapped exploration opportunity to the company’s pipeline of assets while it continues to drill at its flagship Risti project where it recently drilled 42g/t Au over 4m.
  • Major discovery in Finland is coming. This update is an example of the widely under-explored potential of Finland’s Central Lapland Greenstone Belt. We continue to believe that a major discovery is coming as drills are turning across multiple targets, as highlighted in our recent report . With exceptional infrastructure, a mining culture and favourable mining policy, Finland is poised to become an emerging mining jurisdiction.

Further exploration success should bring Aurion closer to our estimates. We continue to believe that Aurion’s shares are currently worth C$2.29/share (unchanged) with upside potential to C$5.57/share (unchanged). Our fair value estimate is based on our probability-based valuation method that incorporates three possible scenarios adjusted for the time and capital to achieve each scenario. Upcoming Catalysts include 1) Further assay results from Aamurusko (Q1/19) and 2) Follow-up exploration from Notches, YNot and East Launi  H1/19).


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