Gold Developer A Steal At Current Levels

While the major market averages have resumed their upward trajectory following a brief departure amid fears of bank runs last month, the real winner this year has been the Gold Juniors Index (GDXJ), which is sporting a 13% year-to-date gain.

However, not all companies have performed the same and some have suffered violent declines, with most of these names being in the gold developer space.

This divergence between gold developers and gold producers has provided a unique opportunity to invest in the sector with margins of safety at a time when several other names are becoming much less attractive after enjoying 100%+ rallies off their Q3 2022 lows.

One name in particular that stands out as diverging from a performance standpoint, a gold developer based in Atlantic Canada that expects to move into production by Q1 2025.

Trading At A Deep Discount

Marathon Gold (MGDPF) is a ~$290 million gold developer based out of Atlantic Canada with its focus being its Valentine Gold Project.

The company recently began construction on the project (24% complete) and as it stands, the project has a 14-year mine life, 2.7 million ounces of proven & probable reserves at well above average open-pit grades, and an estimated production profile of 195,000 ounces per annum.

Based on the current construction schedule, Marathon hopes to pour its first gold in Q1 2025, with 2026 being its first year of commercial production.

Unfortunately, the company has had a rough past year, with the company’s upfront capex to build the project increasing materially due to inflationary pressures.

The result was that Marathon had to go back to the market to raise considerable capital, leading to significant share dilution and the market punishing the stock to the tune of a ~70% decline.

However, while painful for existing shareholders, this has opened up an opportunity for shareholders that sidestepped the decline to invest at a very attractive valuation, with Marathon’s Valentine Project to generate average annual free cash flow of ~$120 million per annum.

This leaves Marathon trading at just 2.4x FY2026 free cash flow estimates vs. a free cash flow multiple closer to 10 for the rest of the sector.

The Fundamental Case

Looking at the fundamental case, the value proposition here is quite clear and becoming extreme following Marathon’s recent underperformance.

This is because the stock is now trading at just ~$107/oz on mineral reserves which compares quite favorably to Sabina Gold & Silver which was acquired ~$300/oz on reserves and Great Bear Resources which was acquired for ~$230/oz on reserves even if it proves up 6 million ounces of gold.

Given that Marathon has a high-quality asset in a Tier-1 jurisdiction with arguably a much more favorable location than Back River (Newfoundland vs. Nunavut), I see this massive disconnect as unjustified.

In fact, given Marathon’s deep discount to fair value relative to past acquisitions, I would not be surprised to see a suitor look at acquiring the stock given that it’s less than two years from first gold pour and has a project with costs more than 20% below the industry average ($1,000/oz vs. $1,300/oz).

So, investors today have two clear paths to an upside re-rating in the stock: waiting for the stock to revalue as it gets closer to first gold pour or potentially benefiting from an acquisition that would lead to an accelerated re-rating.

The Technical Picture

At first glance, Marathon might not seem like a very attractive bet with the stock stuck beneath its 50-day, 100-day, and 200-day moving averages.

However, while it might seem like it’s catching a falling knife, the stock has returned to a major support level in the US$0.55 – US$0.60 region dating back to its November 2018 and March 2020 lows.

At both of these majors lows, the gold price was considerably lower, and while inflationary pressures and a higher share count have certainly weighed on the stock’s valuation, I don’t see these levels in the stock as sustainable and I think a suitor could come in and bid for Marathon if it stays at these levels much longer.

See the Full Technical Analysis Report for MGDPF

Besides, Marathon has not participated at all in the recent gold price rally which has made it more attractive from a relative valuation standpoint.

It’s possible that some investors might look at starting new positions in the stock as they rotate out of names that have become somewhat expensive following the sharp rally we’ve seen since Q3 2022.

So, from both an absolute and relative value standpoint, Marathon looks like a steal below US$0.60.

The Bottom Line

Based on what I believe to be a conservative fair value of US$473 million for Marathon Gold and a conservative share count of 520 million fully diluted shares which most warrants are exercised and a small financing to provide a small contingency, I see a fair value for the stock of US$0.91 per share, translating to a 51% upside from current levels.

However, this fair value assumption is based on an 8% discount rate vs. a 5% discount rate as the industry standard, so I would argue that my price target is ultra-conservative.

Plus, this fair value estimate assumes an $1,800/oz gold price long-term, and there’s certainly the possibility that is the new floor for gold, not the average, by the time first gold is produced in 2025.

To summarize, even under brutally conservative assumptions, Marathon Gold looks like a steal at current levels, and I see the current correction to US$0.59 as a gift.

Disclosure: I am long MGDPF

The above analysis of Marathon Gold (MGDPF) was provided by financial writer Taylor Dart. Taylor Dart is not a Registered Investment Advisor or Financial Planner. This writing is for informational purposes only. It does not constitute an offer to sell, a solicitation to buy, or a recommendation regarding any securities transaction. The information contained in this writing should not be construed as financial or investment advice on any subject matter. Taylor Dart expressly disclaims all liability in respect to actions taken based on any or all of the information on this writing. Given the volatility in the precious metals sector, position sizing is critical, so when buying small-cap precious metals stocks, position sizes should be limited to 5% or less of one’s portfolio.

Is Marathon Gold (MGDPF) A Buy or Sell?

Based on MarketClub’s technical analysis tools, Marathon Gold (MGDPF) is showing some rallying power, but still remains in the confines of a long-term downtrend. Keep an eye on MGDPF as it may be in the beginning of a reversal.

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