Kalamazoo Resources: A Look At The Valuation After The Advance

Kalamazoo Resources: A Look At The Valuation After The Advance

It’s been a busy year for Kalamazoo Resources (OTCPK:KAMRF) as the company has added to its extensive holdings in Central Victoria and is preparing a drill program to test its Sisters Gold Project, which lies southwest of De Grey Mining’s new Hemi discovery. In addition to work on its early-stage projects, the company also made a surprising move, scooping up a 1.65 million ounce gold project from Northern Star Resources (OTCPK:NESRF) in Q2. The fact that Kalamazoo was able to complete the Ashburton Gold Project deal with Northern Star on favorable terms has led to a re-rating in the stock, with Kalamazoo Resources being one of the top-performing gold juniors year-to-date. However, while the stock is up more than 140% in 2020, the valuation is still very reasonable at A$0.68. Therefore, I believe investors trading on the Australian Market should keep a close eye on the stock.

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For those unfamiliar, Kalamazoo Resources is a junior gold company listed on the ASX, and until recently, it had no gold resources to its name. This left the company trading off of hopes that it might drill into some solid mineralization at its early-stage properties. However, the most recent acquisition of the Ashburton Gold Project from Northern Star has put a valuation floor under the stock, as the stock has transformed from a resource-less gold junior to a gold junior with a promising high-grade gold resource on the southern edge of the Pilbara Craton. This means that investors are now getting a 1.5 million-ounce gold junior with prospective land next to million-ounce gold projects, a much better proposition than where Kalamazoo started 2020. Let’s take a closer look at the company’s portfolio below:

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Beginning with Ashburton, Kalamazoo’s newest addition, the company managed to pick up the project off of Northern Star for staged payments contingent on success, with a $5 million payment on mining of the first 250,000 tonnes of ore, and a 2% net-smelter royalty [NSR] on the first 250,000 ounces of gold produced. Following the first 250,000 ounces of gold production, this will drop to a 0.75% NSR from all metals produced from the tenements. Given that million-ounce gold projects in Tier-1 jurisdictions are fetching a price tag of US$50/oz more, this was an exceptional deal for Kalamazoo as the company will only pay up if the project ends up becoming a mine.

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Kalamazoo’s newly acquired Ashburton Gold Project sits on a 217 square-kilometer roughly 200 kilometers west of Capricorn’s 2.1 million ounce Karlawinda Project, and just south of the mining town of Paraburdoo. The project has historical production of 350,000 ounces and is currently home to a relatively high-grade resource of 1.65~ million ounces at 2.50 grams per tonne gold. While there are no economic studies completed on the project to date, it’s quite encouraging to see that Paul Adams is heading up exploration on the project. This is because he was previously Managing Director of Spectrum Metals. As a reminder, Spectrum Metals just came off of being acquired by Ramelius Resources (OTCPK:RMLRF) for over $200/oz for its high-grade Penny West Project. With Adams at the helm and in charge of resource definition and expansion here, I am confident that they should be able to build on this resource in the next 12 months.

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If we move southeast in Kalamazoo’s portfolio to Central Victoria, the company has two projects next door to Kirkland Lake Gold’s (KL) flagship Fosterville Mine. These two projects are Castlemaine and South Muckleford, and the company recently added to 22 square kilometers to its Castlemaine Project holdings to bring the total tenements to 310 square kilometers. While these are early-stage projects, they couldn’t have a better address as the Bendigo Zone is responsible for over 60 million ounces of historical gold production at above 15 grams per tonne gold.

The Castlemaine Project is roughly 50 kilometers south of Fosterville, which is producing over 600,000 ounces per year, while South Muckleford is approximately the same distance, but southwest of Fosterville. Early drilling at the Mustang process didn’t turn up anything of significance, but we will see if the company can uncover some better results at these two prospects. The plan is currently for 3,000 meters of drilling at the Lightning Prospect on Castlemaine, and 7,000 kilometers of RC drilling at South Muckleford. Therefore, we should see a steady stream of news flow starting in December as drill results typically take a month to get back from the labs.

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Finally, Kalamazoo also has an interesting prospect in Western Australia: the Sisters Project, which lies less than 70 kilometers from De Grey’s Mallina Gold Project. Currently, Mallina is home to over 2 million ounces of gold at 1.80 grams per tonne gold. However, the recent Hemi Discovery, which lies east of Mallina, suggests that this project could grow to over 4 million ounces. The market has been quite impressed with the results, judging by the 500% move in De Grey’s share price year-to-date. While this is also a very early-stage project, it’s certainly in the right neighborhood for gold discoveries. Like the Central Victoria exploration program, we should see initial drill results from the Sisters Project by January, with an RC drill program planned for Q4.

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While we are currently in the speculation stage for most of Kalamazoo’s projects and I generally don’t like to get involved in early-stage stories, the recent acquisition of Ashburton has likely put a floor under Kalamazoo near A$0.60. This is because gold ounces in Tier-1 jurisdictions (Canada, US, Australia) have been acquired for US$90.74/oz on a 4-period moving average basis, and over US$54.20/oz on a long-term moving average. Given that Ashburton holds 1.65 million ounces of gold, and even if we use a conservative price of US$54.20/oz, which is the 18-period moving average of the price paid per ounce by suitors for gold juniors, this suggests that Ashburton is worth a minimum of US$89 million. Given that the stock’s current enterprise value is US$57 million, investors are getting the Central Victoria projects and Sisters Project for free.

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As we can see in the below calculations, Kalamazoo currently has 130 million shares outstanding and a share price of A$0.68, which gives it a market cap of A$88 million [US$63 million]. On an enterprise value basis, the valuation is A$79 million [US$57 million] as we subtract out A$9 million in cash. This leaves Kalamazoo trading at a valuation of just US$34.55/oz, nearly 40% below the long-term moving average for the price paid per ounce, and this assumes zero ounces are uncovered at South Muckleford, Castlemaine, or Sisters. Given that these projects have exceptional real estate as they surround million-ounce gold projects, I would argue that there’s a decent chance we could see a discovery here. Therefore, investors buying Kalamazoo today are actually paying a very reasonable valuation, despite the more than 100% run we’ve seen this year in the share price.

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The bonus to the Kalamazoo story is that we have a tightly held share structure, with Eric Sprott owning just over 7% of the company, Novo Resources (NSPRF) owning 7% of the company, and major shareholder Doux Argenty holding 30%. This leaves barely 50% of the share structure open to retail shareholders, so the stock could move quite quickly if the company does release some decent intercepts in the Q4 drill season.

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If we move over to the technical picture, there’s a lot to like here as well. As we can see below, the stock broke out of a multi-year base earlier this year, and now looks to be building a cup base near its recent highs. This is a bullish setup, and I would expect the monthly moving average (grey line) to provide strong support on any pullbacks. Therefore, if we were to see a pullback below A$0.60 while we wait for drill results, I would expect the stock to bounce here as valuation would become a further tailwind at this level. Obviously, there’s no guarantee that buyers come in, but it’s encouraging to see a solid technical setup with a relative undervaluation.

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As noted earlier, I generally shy away from covering early-stage juniors, but Kalamazoo is an exciting story now that it’s picked up over 1.5 million ounces of gold at Ashburton. At the current share price, investors are getting the exploration upside for free, and we could see a run-up in the share price in anticipation of the busy drill season in Q4. While I am not long the stock, I believe it’s an interesting story given the valuation, and it’s one worth keeping an eye on for investors trading on the ASX. As long as the stock remains below A$0.68, I would view valuation as a tailwind as the stock would be trading below US$35.00/oz.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: Disclaimer: 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.

Credit: SeekingAlpha

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