Price as of Publication: $0.44 | Price Target: $1.00
Castle Zone Plan-of-Operations. Within the Eastside project area, Allegiant Gold commenced a Plan-of-Operations for the Castle Area to expand the permitted area from 5 acres to 1,648 acres. Castle is comprised of 130 claims encompassing an area of approximately 2,600 acres and includes the Berg, Blackrock, Boss, and Castle deposits.
Upgrading resources. The Castle Area hosts a pit-constrained inferred resource of 314,000 gold ounces averaging 0.49 grams of gold per tonne using a cut-off grade of 0.15 grams of gold per tonne. Allegiant’s goal is to expand the existing resource, upgrade resources from inferred to measured and indicated, along with conducting advanced metallurgical work leading up to an eventual preliminary economic assessment. Upgrading resources to measured and indicated may require only a modest amount of drilling which we think could occur as early as later this year.
Resource expansion potential. In late 2020 and early 2021, Allegiant drilled 49 reverse circulation holes in the Castle area representing 5,850 meters of drilling. All but two holes encountered mineralization within 45 meters of surface. Initiating a Plan-of-Operations is an important step since it will allow the company to expand drilling activities at Eastside.
Rating is Outperform. While the current focus is on drilling in the northern portion of the project area, we think the Castle Area represents a significant value creation opportunity that is largely unrecognized by investors. Allegiant has made significant progress in advancing its Eastside project and has a clear plan to add resources through drilling and to define the project’s high-grade areas. Results from the company’s reverse circulation and core drilling program could provide near-term catalysts for the stock. Our rating remains Outperform based on our view that Eastside could develop into a multi-million-ounce resource.
Eastside’s Expanding Resource Potential
Within the Eastside project area, Allegiant Gold commenced a Plan-of-Operations for the Castle Area, which is in the southern portion of the Eastside project area, to expand the permitted area from 5 acres to 1,648 acres. Castle is comprised of 130 claims encompassing an area of approximately 2,600 acres and includes the Berg, Blackrock, Boss, and Castle deposits. The Castle Area hosts a pit-constrained inferred resource of 314,000 gold ounces averaging 0.49 grams of gold per tonne using a cut-off grade of 0.15 grams of gold per tonne. Allegiant’s goal is to expand the existing resource, upgrade resources from inferred to measured and indicated, along with conducting advanced metallurgical work leading up to an eventual preliminary economic assessment. Upgrading resources to measured and indicated may require only a modest amount of drilling which we think could occur as early as later this year.
Eastside Project Map and Castle Plan-of-Operations Boundary
Source: Allegiant Gold Ltd.
In late 2020 and early 2021, Allegiant drilled 49 reverse circulation holes in the Castle area representing 5,850 meters of drilling. All but two holes encountered mineralization within 45 meters of surface. These included Hole ES-196 which returned 1.85 grams of gold per tonne over 5 meters, Hole ES-202 which intercepted 1.08 grams of gold per tonne over 14 meters, Hole ES-211 which returned 2.32 grams of gold per tonne over 4.5 meters, Hole ES-216 which returned 2.00 grams of gold per tonne over 3.6 meters, and Hole ES-222 which intercepted 3.86 grams of gold per tonne over 1.5 meters. Initiating a Plan-of-Operations is an important step since it will allow the company to expand drilling activities at Eastside.
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 8.7 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 ~14.0% 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.
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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