April 8, 2022 – ANALYST SUMMARY
Price as of Publication: $0.36 | Price Target: $1.00
Drill is turning. Allegiant Gold recently began its drilling at Eastside and has expanded the program to over 14,000 meters from 12,000 meters of drilling. Allegiant intends to drill up to 30 reverse circulation holes to an average depth of 200 meters in the East Pediment area immediately east of the Original Pit Zone. The rig will then be moved to the West Anomaly where 10 reverse circulation holes will be drilled with an average depth of 300 meters. Core drilling will begin in early May to test the high-grade zone within the western edge of the original pit zone. We expect two rigs to be in operation at Eastside through the remainder of the year.
High grade zone could be a game changer. Recall that in May 2021, results from Allegiant’s nine-hole drill program returned strong gold intercepts for Holes 239, 243, 244, and 245. With the recent C$4.0 million investment by Kinross Gold Corporation (NYSE: KGC, TSX: K), along with its technical advisory support, deeper core drilling will help to better assess Eastside’s high-grade potential. While Eastside is generally conceptualized as a low grade, bulk tonnage open pit mining scenario, the high-grade zone offers the potential to enhance the project’s economics, including the possibility of a high-grade starter pit. Investors will likely focus on the core drilling program since it could change how the project is conceptualized and influence the trajectory of Kinross’ involvement.
Fully funded. Allegiant’s expanded drilling program is fully funded. With a high-profile strategic investor on board and a well-conceived drill program in place, along with an expanded permitted area to enable new prospective targets in and around the original pit zone, this year could be pivotal for Allegiant.
Rating is Outperform. Results from the company’s drilling programs could provide catalysts for the stock. While Eastside already has an inferred resource of 1.4 million gold ounces and 8.8 million silver ounces, we think Eastside could develop into a multi-million-ounce gold resource representing significant upside potential for shareholders.
Allegiant Gold is a mid-stage exploration stage company with 10 highly prospective projects in the southwest United States, including 7 projects in the State of Nevada. Allegiant’s flagship project is Eastside, a district-scale project in Nevada with inferred resources of 1.4 million gold and 8.8 million silver ounces of inferred resources and significant potential to add size and scale. The company’s shares trade on the TSX Venture Exchange under the ticker symbol “AUAU” and on the OTCQX under the ticker symbol “AUXXF.”
Fundamental Analysis – 3.0/5.0
Our fundamental assessment rating, separate from our investment rating and valuation, is based on five attributes. We assign 3.0 checks out of 5.0, which falls within our “Average” range of 2.5 to 3.0 checks. In our opinion, the company benefits from a shareholder-friendly management whose interests are aligned with shareholders. Management and insiders own ~17.0% of the company’s outstanding shares. Allegiant Gold’s projects are in favorable mining jurisdictions. Our rating reflects the fact that the company is a mid-to-late stage exploration company, does not generate substantial revenue from operations, and may require external financing to fund its growth. For further explanation of our fundamental analysis, please refer to the disclosures at the end of this report.
We rate AUXXF shares Outperform with a price target of US$1.00 per share or C$1.25. For our valuation, we have employed an Enterprise Value/Resources methodology. We round to the nearest $0.05. Allegiant Gold recently announced a financing and strategic investment by Kinross Gold Corporation (NYSE: KGC, TSX: K) which is expected to accelerate exploration and development activities at the Eastside Gold project in Nevada. While the equity issuance may be near-term dilutive, we have increased our price target to US$1.00 or C$1.25 per share from US$0.90 and C$1.15 per share given that we think a more robust drilling program could enhance the economics of the project by accelerating the magnitude of resource expansion and potentially increasing the average grade.
At year-end fiscal 2023, we forecast shares outstanding of 113.2 million, no debt, and a cash balance of C$3.5 million. We note that the ending cash balance is sensitive to the timing and amount of exploration expenditures. Assuming Allegiant can increase its resources to at least 2.5 million gold ounces (up from 2.0 million gold ounces) based on the current drilling program that is fully funded, we estimate an enterprise value of C$137.5 million based on C$55 per gold ounce. Subtracting debt and adding back cash, we forecast a per share value of ~C$1.25, or ~US$1.00 per share. We believe upside exists to our estimate based on increasing resources beyond 2.5 million ounces.
Investment risks include but are not limited to: 1) Allegiant Gold’s failure to develop economic mineral resources, 2) uncertainties associated with the availability and costs of future financing, 3) changes in capital market and macroeconomic environments, 4) fluctuations in exchange rates, 5) changes in supply and demand fundamentals for metals, including gold and silver, 6) delays in development, 7) the potential for operating and financing costs to vary from management expectations, and 8) potential environmental liabilities.
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Company Specific Disclosures
The following disclosures relate to relationships between Noble and the company (the “Company”) covered by the Noble Research Division and referred to in this research report.
The Company in this report is a participant in the Company Sponsored Research Program (“CSRP”); Noble receives compensation from the Company for such participation. No part of the CSRP compensation was, is, or will be directly or indirectly related to any specific recommendations or views expressed by the analyst in this research report.
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The fundamental assessment rating system is designed to provide insights on the company’s fundamentals both on a macro level, which incorporates a company’s market opportunity and competitive position, and on a micro/company specific level. The micro/company specific attributes include operating & financial leverage, and corporate governance/management. The number of check marks that a company receives is designed to provide a quick reference and easy determination of the company’s fundamentals based upon the following five attributes of the company (weighting reflects the importance of each attribute in the overall scoring of company’s fundamental analysis):
|Market Opportunity Analysis||20%|
For each attribute, the analysts score the company from a low of zero to a high of ten based upon the analysis described below. The final rating and resulting check marks is a result of dividing the overall score (out of 100%) by ten.
|Superior||9.1 to 10||Five Checks|
|Superior||8.1 to 9||Four & A Half Checks|
|Above Average||7.1 to 8||Four Checks|
|Above Average||6.1 to 7||Three & A Half Checks|
|Average||5.1 to 6||Three Checks|
|Average||4 to 5||Two & A Half Checks|
|Below Average||3 to 3.9||Two Checks|
|Below Average||2 to 2.9||One & A Half Checks|
|Low Quality||0 to 1.9||One Check|
While these are the attributes currently used for the analyst’s fundamental analysis, the attributes and weighting may be reviewed, updated with additional attributes, and/or changed in the future based on discussions with the analysts and recommendations from the Director of Research.
Following is the description of each attribute in the fundamental analysis.
We believe that a review of corporate governance and assessment of the senior management are important tools to determine investment merit. Good corporate governance aligns management with the interests of stakeholders. As such, analysts are to rank the company on the basis of good corporate governance principles that may include rules and procedures, board composition and staggered term limits, rights and responsibilities, corporate objectives, monitoring of actions and policies, and accountability. In addition, analysts will assess issues with controlling shareholders and whether decisions have been made in the past that were in the interests of all shareholders. In addition, management will be assessed based on industry experience, expertise, and/or track record.
High ranking example: Board and management that is aligned with the interests of shareholders with incentives based on stock price appreciation and with an experienced management team known for exceptional shareholder returns.
Low ranking example: Concentrated ownership without independent directors that do not necessarily align with all shareholders’ interests.
The Market Opportunity Analysis
In this review, the analyst assesses the company’s macro environment as a measure of understanding the industry. Factors considered include the size and growth potential of the industry under various economic conditions, the emerging demands in the market, technological benefits/disruptions, competition, geographical opportunities, and customer demands/needs, and an assessment of supply and distribution channels. In addition, the analyst will review legal and regulatory trends, as well as potential shifts in consumer or social behavior and natural environment changes.
High rank example: A company in an industry that is growing revenues well above GDP rates (which are on average 2% plus) and/or may have unmet or under-served needs in a rapidly growing market opportunity.
Low rank example: A mature industry that is in secular decline and likely to grow below GDP rates.
The evaluation of the company’s competitive position is another macro environment attribute designed to measure the relevance, market share, position and value proposition, and sustainable differentiations of the company and its products/services within its industry. Ease of entry into the industry and the ability of other well-funded players to potentially enter the market would be determined. As such, the assessment would consider the company’s strengths and advantages of its products/services against weaknesses and limitations. This may include the company’s current brand awareness, pricing and cost structure, current market strategies and geographic penetration that may affect demand for its products/services. In addition, the company’s competitors would be evaluated.
High rank example: An analyst would consider the company’s product to be superior to its competitors and that should allow the company to gain market share.
Low rank example: A company with a “me-too” product that does not have any significant technology advantages in an industry that has low barriers to entry.
Simplistically, operating leverage is determined by the operating income relative to changes in revenue. The analyst will calculate the impact on sensitivity on gross margins and variable costs to determine operating leverage. The analyst will take into account the ability of the company to cut fixed and variable costs in a challenged revenue environment and technological changes that may impact operating expenses. In addition, the analyst is to assess corporate strategies that include capital investment, which may be required for sustainable revenue growth, marketing expenses, and the company’s ability to attract and retain talent and/or employees. The analyst should focus on the revenue opportunity and determine the price elasticity of demand for the company’s products or services. In other words, the analyst is to rank the company based on improved operating margins going forward on an absolute and relative basis.
High rank example: A company that has improving margins for the foreseeable future, with significant price elasticity.
Low rank example: A company that is in a challenged revenue environment with a fixed cost structure and limited ability to cut costs, indicating an outlook for declining margins.
A strict definition of financial leverage is total debt divided by total shareholder’s equity. Financial leverage analysis is to determine the company’s ability to improve shareholder value by means of utilizing its balance sheet to grow organically or to acquire assets. Analysts may look at the company’s debt to cash flow leverage ratio, interest coverage ratios, or debt to equity ratios. In addition, the interest rate environment and the outlook for interest rates are a factor in determining the company’s ability to manage financial leverage. Finally, the analyst is expected to determine the ability to service the debt given the industry and/or company profile, such as cyclicality, barriers to entry, history of bankruptcy, consistency in revenue and profit growth, or predictability in sales and profits and large cash reserves. The analyst is expected to take into account capital intensity of the company and the anticipated of capital allocation decisions.
High rank example: A company with predictable and growing revenue and cash flow with modest debt levels. This may indicate that the company could improve shareholder value through growth investments, including acquisitions, using debt financing.
Low rank example: A company in a cyclical industry in a late stage economic cycle that has above average debt leverage and is in an industry that has a history of financial challenges, including bankruptcies.
ANALYST CREDENTIALS, PROFESSIONAL DESIGNATIONS, AND EXPERIENCE
Senior Equity Analyst focusing on Basic Materials & Mining. 20 years of experience in equity research. BA in Business Administration from Westminster College. MBA with a Finance concentration from the University of Missouri. MA in International Affairs from Washington University in St. Louis.
Named WSJ ‘Best on the Street’ Analyst and Forbes/StarMine’s “Best Brokerage Analyst.”
FINRA licenses 7, 24, 63, 87.
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RESEARCH ANALYST CERTIFICATION
Independence Of View
All views expressed in this report accurately reflect my personal views about the subject securities or issuers.
Receipt of Compensation
No part of my compensation was, is, or will be directly or indirectly related to any specific recommendations or views expressed in the public appearance and/or research report.
Ownership and Material Conflicts of Interest
Neither I nor anybody in my household has a financial interest in the securities of the subject company or any other company mentioned in this report.
|NOBLE RATINGS DEFINITIONS||% OF SECURITIES COVERED||% IB CLIENTS|
|Outperform: potential return is >15% above the current price||91%||25%|
|Market Perform: potential return is -15% to 15% of the current price||8%||2%|
|Underperform: potential return is >15% below the current price||0%||0%|
NOTE: On August 20, 2018, Noble Capital Markets, Inc. changed the terminology of its ratings (as shown above) from “Buy” to “Outperform”, from “Hold” to “Market Perform” and from “Sell” to “Underperform.” The percentage relationships, as compared to current price (definitions), have remained the same.
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