North American Palladium

PDL Triples Dividend

Impact: Positive

North American Palladium has released positive Q1/19 results that beat our FCF estimates, despite some operational hiccups. More importantly, management had the confidence to boost its dividend to $0.10/sh (was $0.03/sh). While operational challenges impacted the quarter, the company was able to fully repay its debt and had the confidence to more than triple its dividend. This is expected to be a strong positive signal to the market. As a result of the company’s improved balance sheet, we have increased our fair value estimate to C$25.07/sh (was C$23.50/sh) suggesting 104% upside potential. Highlights:

  • Strong FCF provides confidence for a significant dividend increase. Based on a much higher than spot palladium price, the company delivered better than expected FCF of C$56.8M (RCKS est. C$33.7M). This allowed the company to fully repay its debt and substantially increase its dividend. We highlight that with the dividend at $0.10/sh, the annual cost is only C$23.5M and when placed in context with our 2019E FCF estimate of C$151M (was C$128.0M), a further dividend improvement is possible.
  • Maintenance issues impact throughput but other signs encouraging. Milling operations were impacted by equipment availability, resulting in substantially lower throughput (8,984 tpd vs. RCKS est. 12,000 tpd). However, this was partially offset by better than expected grades and recoveries, resulting in only slightly lower than expected production (Figure 1). Considering the nature of these issues, our view is that they are easily resolvable, and we do not expect a significant impact in subsequent quarters.
  • Company still on-track to meet guidance. North American Palladium, reiterated its 2019 guidance of 220-235k oz of Pd at AISC of US$785-815/oz. We expect the company to produce 222k oz (was 225k oz) at cash costs of US$600/oz (was US$580/oz); however, as a result of strong financial performance in Q1 our 2019E EBITDA has increased to C$215M (was C$213M).
Improved balance sheet increases our fair value estimate to C$25/sh (was C$23.50/sh). Using US$1,300/ oz Pd, our fair value of C$25.07/sh is based on 6.0x our one-year forward, NTM EBITDA estimate of C$241M (was C$224M). The combination of better FCF, allowing the company to fully repay its debt and rolling our model forward one quarter has increased our estimates. We believe the company’s ability to deliver FCF should materially re-rate the stock. Upcoming catalysts include: 1) Exploration updates (ongoing) and 2) Q2 Operating and Financial results (Q3/19)



Atico Mining corp

Strike Over, Shovels In, Drills Turning

Impact: Positive

Atico has announced the end of its labor-strike and is resuming all regular activities including production and exploration drilling. This should allow the company, to get back to generating FCF from operations and testing the exploration potential of El Roble. Our fundamental view is unchanged, we believe Atico is a low-cost producer with exploration upside that should generate significant free cash flow providing the capital required for growth.

  • Back to work – operations and exploration resumes. While the disruption was longer than expected, we expect the strong operating momentum the company had prior to the disruption to resume during Q2. Additionally, the company is now able to resume exploration efforts on its high-potential targets. We view exploration success as one potential avenue for Atico to expand its production profile.
  • Guidance for 2019 adjusted. Due to a shutdown for nearly 70 days, the company has issued updated guidance for 2019 (Figure 1). New guidance is outlined as 17-18M lbs Cu, 9-9.7k oz Au at US$1.55-1.60/lb Cu. We note that prior to the strike, Atico was on pace to meet its original guidance. Despite losing ~20% of the year to the shutdown, adjusted guidance only represents a 14% and 9% decrease for copper and gold production, respectively as well as a 3% increase of cash costs.
  • Drilling key for growth. Along with operations being shutdown, the company also had to pause its aggressive exploration program. The El Roble mine, is effectively a single VMS deposit; however, VMS deposits typically occur in clusters so there should be more to find. Generative work over the last several years has identified a number of targets on its 3,600ha land package and the company has planned its most aggressive regional exploration program for 2019. Exploration success should drive a further increase in production.
Thesis unchanged, steady ops and exploration should deliver rerating.
Assuming its regular operating run-rate, our preliminary estimates suggest that Atico trades 1.4x-1.7x EBITDA or at an 15-19% FCF yield. When you consider that other base metal producers trade at 3.9x EBTIDA, Atico’s strong balance sheet and exceptional exploration upside significant re-rating is expected. Upcoming Catalysts include 1) exploration update (Q2/19), 2) 2018 financial results (April 2019), 3) Q1 financial results (May 2019), and 4) Q2 operating and financial results (Q3/19).



Blue Sky Uranium Corp

Demonstrating the "Blue Sky" Potential

Impact: Mildly Positive

Blue Sky released positive step-out channel sampling outside of the Ivana deposit which provide evidence that suggests the current resource at Ivana has the potential to materially grow. Blue Sky is in possession of a PEA stage uranium-vanadium resource within a potential district-scale project and could see a re-rating with further exploration success. 

  • Results highlight higher grades than current resource. Pit sampling to the southwest of the Ivana deposit returned banner results of 1,881 ppm U3O8 and 640ppm V2O5 over 2m (AGI-CAL103). The results compare well to the resource at Ivana which grades 370 ppm U3O8 and 190ppm V2O5. Pit sampling has proven to be an effective and inexpensive method for testing near-surface targets, and we expect follow-up drilling will test areas where mineralization extends beyond the reach of western pit grids (pits test up to 2.9m of depth).
  • Follow-up drilling could expand the resource with higher-grades. The mineralization encountered with pit sampling appears to possess similar qualities to the mineralized body at Ivana thus suggesting the deposit could extend further west than previously thought. With the PEA already implying a relatively low-cost project, these higher-grade areas to the west could improve project economics. To prove this potential the test pitting completed to date, needs to be followed up with drilling.
  • Exploring along a 145km trend. The company is planning an RC drill program to test the depth potential of these western targets which remain open to the west. We note that the wider ~250,000 ha Amarillo Grande Project consolidates several targets across an immense 145 km trend and we expect that drilling could lead to multiple discoveries. We highlight that the Ivana deposit covers less than 2km of this massive trend.
Expansion drilling could provide lift on the current discounted valuation. Blue Sky trades at US$0.58/lb U3O8Eq relative to peers at US$0.73/lb U3O8Eq. The company’s PEA suggest that the Amarillo Grande project is one of the lower cost uranium development projects out there. This combined with the significant exploration potential, partially offset by country risk suggests to us that Blue Sky should trade in line with or at a slight premium to peers. Upcoming Catalysts include 1) RC drill results from western targets.



North American Palladium Inc

Positive Drilling Ahead of Q1/19 Results

Impact: Mildly Positive

North American Palladium released good drill results from Sunday Lake as part of the company’s regional exploration program. We continue to highlight that the imminent release of Q1/19 operating results should be an important catalyst for the company. We believe the company is undervalued relative to peers and with continued operating execution, along with a strong palladium market it should re-rate.

  • Increased confidence with second drill program at Sunday Lake. These are the final holes from the 7,300m program at Sunday Lake which expanded the mineralization to the west. The results returned a weighted average grade of 3.53 g/t 3E (Pt, Pd, Au) over an average length of 51.1m and centrally located holes continue to hit higher-grades. Work to date suggests the deposit consists of a large (1.5 km x 0.9 km) near-continuous blanket of mineralization comprising three or more anomalous structures (Figure 1 & 2.
  • No value Sunday Lake in our estimates, at this time. Our current NAVPS estimate (C$22.11/sh) has no value for this regional target; however, continued success would change our view. Sunday Lake likely represents a longer-term resource growth opportunity and is ~60km from the Lac des Iles mill. Should a resource develop, it would be mined after the other, closer to the mill targets. The company can earn a 51% interest with a C$610,000 payment by June 20 and has the potential to earn 75% interest with an additional C$3M in exploration expenditures and C$2.75M in payments.
  • Strong Q1 could push the dividend higher. We are expected a strong Q1 and based on our estimates (Figure 3, we believe the company is likely in a position to further increase its dividend as outlined in our March 31st note. The company is reporting after the close on Thursday, with a call on Friday morning (8AM EST).
Strong Q1 results should drive the share price higher, as the overhang created by the secondary offering lifts.
We are maintaining our fair value of C$23.50 is based on 6.0x our one-year forward, NTM EBITDA estimate of C$224M (unchanged – using US$1,300/oz Pd). We believe recent share price weakness relates to the recent secondary offering at C$13/sh, followed by a subsequent clean-up trade by the underwriters at C$12.25/sh and that a strong Q1, should refocus the market on the company’s ability to generate substantial FCF and drive the share price higher. Upcoming catalysts include: 1) Q1 operating and financial results (Q1 2019) and 2) Exploration updates (ongoing).

Gran Colombia Gold Corp

Going Deep at Marmato

Impact: Mildly Positive

Drill results from Gran Colombia’s Marmato operation align with our view that this project could represent a longer-term step change in production profile, from the Deeps Zone. We maintain our fair value estimate of C$6.00/sh and expect operating execution, exploration updates from Segovia and the Marmato PEA to drive a progressive re-rating towards our estimates.

  • Marmato Deeps zone getting bigger. Gran Colombia has released the final eight holes of its 2018 drill program at the Deeps Zone at Marmato. Overall, the results returned a weighted average grade of 1.5 g/t Au and 2.4 g/t Ag over an average width of 169m. While grades are below the existing resource grade (20.2 Mt at 2.3g/t Au and 3 g/t Ag), the zone has expanded and is now 700m strike at ~165m wide (was 450 along strike, with width not reported) and remains open at depth and to the east.
  • New high-grade zone could improve economics. The company drilled a higher-grade zone in 2018 which returned >2.5 g/t Au grades and is a priority target for 2019. The definition of a highergrade zone would benefit the economics of what is expected to be large-scale underground mining operation. A PEA is expected later this year, and we expect the Deeps zone to be a higher productivity stand alone operation.
  • Higher grade material from test block should benefit 2019 production. Twelve additional holes were drilled in to a zone similar to the Deeps zone, that is planned to be used as test mining area. The test block which appears to be ~360k tonnes (100m x 60m x 20m) returned a weighted average grade of 3.3 g/t Au and 6.5 g/t Ag. The block is planned to be put into production this year and has the potential to provide a boost to production in H2/19 at Marmato. Should this occur our current estimates for 24.4k oz of production at US$1,106/oz is likely to be conservative.
PEA at Marmato could provide a boost to our longer estimates. Our fair value estimate of C$6.00/sh is based on 4.0x our one-year forward, NTM EBITDA estimate of C$112M, suggesting 83% upside from current estimates. Gran Colombia trades at 1.6x 2019E EBTIDA, while peers are at 5.3x and it trades at 0.57x NAV, peers at 0.63x. We believe that continued operating and financial success should drive a re-rating. Upcoming Catalysts include 1) Q1/19 financial results (May 15, 2019), 2) Exploration results (ongoing), Marmato PEA H2/19.

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