A Junior Gold Miner with Big Potential
A double in 2Y still 40% discount to NPV
All $ figures are in USD unless otherwise noted. Information purpose only, not investment advice.
Why Gold Miner?
Q: “Aren’t most junior gold miners doomed to fail”?
A: True.
Q: Then why shall I take the time to read this?
A: Let me take a step back. My 20Y+ of investment in Gold Mining companies yields a rewarding return, from the mid-2000s’ Zijin (紫金矿业 2899.HK), 2018s Kirkland Lake Gold (TSX:KL), to early 2020’s Karora Resources (TSX:KKR).
Kirkland and Karora ended with mergers (Kirkland with Agnico Eagle in Y22, Karora with Westgold in Y24), both ~3x return in ~4 years, and Zijin became an outsized (~10x) winner. I still own a portion of the holdings bought 20 years ago.
In addition to luck, I found an edge over the years.
You often meet 2 types of analysts/investors in gold mining, geologists or accountants, ones either obsessed with technical study/drilling results, or financial reports/debt structure, etc, but few are immersed with both.
Combined is an edge to find mining winners, companies with quality assets, actionable plans, strong financial backing, led by an experienced team, and fairly valued.
That enters Aris Mining ARMN 0.00%↑ (and TSX:ARIS)
Elevator Pitch
A junior gold miner with cash-generating assets and a well-funded growth plan is mispriced. Even if it doubles in 2 years (my price target), it would trade at a 40% discount to its peers.
Aris Mining
A US/Canada duly listed junior* miner with 2 operating mines in Colombia (Segovia, Marmato) and 2 dev projects (51% interest in Soto Norte in Colombia, and Toroparu in Guyana). It produced ~200koz of gold in 2023, targeting 500koz by 2026.
* Gold Miner tiers by annual output: junior: sub-300koz, mid: 300koz-1moz, major: >1moz.
At $4.4/share, it is just under $1Bn MktCap today (208Mn diluted shares). $80Mn net debt ($120Mn cash, $150Mn warrants proceeds if exercised, and $350Mn debts). Thus ~$1.1Bn Enterprise Value ($1Bn + $80Mn).
Let us dive into 4 key elements of a successful junior mining co: team, assets, financials and valuations
An experienced team
Quality assets with an actionable plan
Strong financial backing
Fairly valued
The star-studded Team
Aris, in Celtic, means again. It comes from the founders’ intent to do it again, according to CEO Neil Woodyer.
Neil Woodyer was founder/CEO of Endeavour Mining and Leagold Mining, the former is one of the largest miners globally, and the latter was merged with Equinox ( EQX 0.00%↑ ) in a C$750Mn deal in 2020. BoD/advisors have many mining heavyweights, including:
Ian Telfer, Board Chair. Former Goldcorp chairman, and former World Gold Council chair.
David Garofalo, Board Member. Former CEO of Goldcorp, former CFO of Agnico Eagle (AEM)
Frank Giustra, strategic advisor to BoD. A well-known mining financier.
Frank Giustra is the largest individual shareholder (8%). He is the behind-the-scenes guy assembling the Aris team. He is known for his ultra-long bullish view of gold, extreme patience, and iron-cast stomach. This joint interview with Neil Woodyer in 2023 shed light on his traits.
The 2-Year Plan
Aris has 2 operating mines (Segovia, and Marmato) and produces 200-225 koz of gold annually. It is expanding both and target 500 koz by 2026.
Junior (and mid-tier) miners often have aggressive growth plans on paper but fail to deliver in reality as they encounter high geology/mining risks, lack of funding, and uncertainty in local support and infrastructure, e.g. road, water, and electricity.
Aris’ plan derisked almost all of them. Both expansions are existing operating mines, fully funded and permitted with strong local support.
Neil Woodyer in 2Q24 cc said:
Both projects remain on track and we continue to expect to achieve an annual gold production rate of approximately 500koz in the second half of 2026.
The chart below shows projected annualized gold production in the next 2Y.
The Financials (to Support the Growth Plan)
Few junior miners have the luxury of what Aris has: a profitable operating mine to support growth plans. That is Segovia, and it produces 200 koz of gold, generating ~$70Mn free cash flow annually.
Segovia’s expansion plan to increase processing capacity by 50% requires a mere $15Mn in facility upgrades (repositioning an existing ball mill), as we find in its 2023 Technical Study.
Marmato’s lower miner plan requires $280Mn CapEx. It spent $75Mn as of 2Q24 ($40Mn in Y23, $15Mn 1Q24, ~$20Mn 2Q24). For the remaining $205Mn, it secured $122Mn financing from WPM (Wheaton), thus only requiring $83Mn additional funding, a digestible amount given Segovia’s ~$70Mn FCF each year.
Unlike most juniors, Aris secured its growth financing needs from the get-go.
The Valuation
Quickly recap the basics, at $4.4/share, 208 total shares (including 38Mn warrants), $1Bn MktCap. 38Mn warrants(avg exercise price $4) will bring $150Mn proceeds (if exercised). Cash $120Mn, $350 debts (6.875% $300Mn notes, and 7.5% $50Mn Gold Linked Notes), net debts 80Mn. Enterprise Value $1.1Bn.
As discussed earlier, Marmato expansion needs an additional $85Mn, and Segovia needs $15Mn. Thus Aris’ adjusted Enterprise Value is $1.2Bn (covers both expansion projects)
1. Sum-of-the-Parts Valuation: 4 Mining Assets
I use NPV to value 2 operating mines - Segovia and Mamarto, and use acqusition cost to value Soto Norte and Toroparu. It adds up to a value of $2.1Bn, currently trading at 0.6x of that (EV = $1.2Bn)
This considers expansion plans for Segovia and Marmato (thus fairly valued) but leaves out Soto Norte and Toroparu’s development potential.
Let us examine.
The latest investor slide had Marmato’s NPV at $341Mn, based on a $1600/oz gold price, despite gold at $2600/oz+ today.
I built a model (left) based on Marmato’s projected output to fit its $341Mn NPV calculation and used the same parameters to calculate its NPV(right) at a gold price of $2500/oz. The result is ~$1Bn. Marmato’s NPV ($2500/oz gold price) alone matches Aris Mining’s market cap today.
The left table shows the NPV calculation assuming Gold at $1600/oz, AISC1 at $1003/oz, 5% discount rate, and 55.5% AISC profit margin conversion to FCF (free cash flow). I use Discount Cash Flow (DCF) for NPV calculation.
The right table assumes the gold price at $2500/oz, AISC increases from 1k/oz to 1.3k/oz (add $100/oz royalty (9.6% of sales) and $200/oz buffer for cash cost inflation, its NPV is ~1Bn (1.25Bn if excluding initial CapEx).
I model Segovia’s NPV at $630Mn. Using its revised gold output at 300koz/year (starting from 2025), $105 FCF/year, 5% discount rate, and 7Y mine life. 7 year, 300koz/year gets to 2.1moz total output. Given its 1.3moz reserve, 3.6moz M&I resources, and its past track record of successfully converting M&I resources to reserve, I feel comfortable (and conservative) with the 7Y mine life projection. Mgt indicated updating the Segovia reserve/resource estimates in 4Q24, I expect an estimate raise.
Soto Norte: 200Mn. I use acqusition cost ($100Mn for initial 20% interest. $100Mn for 31% interest, with Mubadala becoming ~9.3% Aris Mining shareholder). Noted its 1st 10% was acquired in Mar 2022 (Gold ~1.9k/oz), and 31% was acquired in May 2024 (Gold: 2.4k/oz). Today’s gold price is 40% and 10% higher.
Toroparu: $250Mn. I use acqusition cost (GCM acquired Gold X in an all-share deal valued at $250Mn, and GCM merged into Aris in 2022).
Let me highlight that Soto Norte, for which I used a $200Mn acqusition cost in NPV, has as much potential as Segovia and Marmato combined. I will discuss that later.
2. Peer Valuation
The table below lists 3 mid-tier gold miners with annual gold output between 460koz to 530koz, enterprise value at 3.7Bn to 5.2Bn vs 1.2Bn for Aris Mining.
If Aris gets to 500 koz by 2026, a stock price 2x will value Aris at $2.2Bn EV, a 40% discount to $3.7Bn, the lower bound of its peers’ current valuation, a fair discount given Aris’ mining assets concentration in Colombia.
Both Sum-of-the-parts and peer valuation point to a sizable upside. Let us examine one of its principal risks:
Colombia
Colombia isn’t a top mining jurisdiction. Fraser Institute’s Survey of Mining Companies 2023 2 ranked Colombia low in investment attractiveness and policy perception and its score/rank has declined since 2022.
The decline coincided with Gustavo Petro’s 2022 presidential election win. One of Petro’s campaign messages was clean energy over mining and fracking. That narrative contributed to Colombia's mining score/rank decline and Aris (and Colombian Mining co)’ stock price weakness throughout 2022 and early 2023.
2 years into his term, as we study Petro’s record3, it shows a sizeable gap between his campaign message and executive actions, as the analysis concluded while Petro has won praise for green leadership and big speeches on the global stage, a low approval rate and lack of congressional majority support stalls progress.
Thus far, few bills have been proposed/passed that hurt gold mining. One to introduce a 10% duty on gold exports was withdrawn citing concerns of increased illegal export.
Historically 69% of gold mining was done illegally in Colombia. To be legal, one must formalize operation that meets gov requirements, often unaffordable to locals.
Aris responded by pioneering the Contract Mining Partners (CMPs) program in Segovia. It invites local/small-scale/individual miners, buys gold ores from them at a competitive price, and processes in its plant.
It is a win-win-win strategy for all parties as it legalizes individual mining activities, increases gov tax income, supports the local community, and reduces the environmental impact.
Most importantly, it aligns Aris with the Petro administration’s key mandate: reduce inequality. Aris intends to expand this program to Marmato and Soto Norto mines and help Aris navigate a commonly perceived challenging jurisdiction. It is also worth noting that 3 of Aris’ board members were former ministers in the Colombian government, including Mining and Energy, Finance, and Justice.
Thesis Recap
Aris Mining is a junior miner producing profitably 200-225koz gold annually with a fully-funded growth plan to become a 500 koz producer. Its imminent path to 500 koz shall take off in March 2025, and roll out gradually by 2H26.
Gold miners at ~500koz output are valued in $3.7Bn to $5Bn+ range, a big premium to Aris’ $1Bn Mkt Cap ($1.2Bn EV) today.
At $2500/oz gold price, both operating mines yield $1000+/oz profit (AISC margin). At 500 koz output, it could generate ~$200Mn FCF annually, a 20% FCF yield at today’s Market Cap. Below is Kinross (a mid-tier miner) touting its peer-leading 7.6% FCF yield in 2Q24.
At $4.4/share, I target a 2x return in 2-3 years, which considers a 40% jurisdiction (Colombia) discount to its peers. Its management team has broad experience managing mines in challenging jurisdictions (e.g. Endeavour Mining in West Africa) and does the same in Colombia.
Lastly, while I’m content with a targeted 2x return in 2-3 years, it still leaves out huge upside potential in Soto Norte. I take that as a bonus and discuss it below.
Soto Norte - A Virgin Land Poised to be Harvested
I used the $200Mn acqusition cost in my valuation. If I used NPV, it would be ~$2Bn (model gold at $1925/oz) according to its 2021 feasibility study. Aris’ 51% interest would be worth ~$1Bn, based on a modeled gold price ~30% lower than today’s Gold spot price.
Params: 450koz/year, 10Y mine life, AISC= <$500/oz, initial capital $1.2Bn, 5% discount rate
To reconcile the gap between $200Mn acqusition cost and $1Bn+ NPV, let me tell the story of Soto Norte.
Ventana was the first owner and acquired Soto Norte (known as La Bodega) in 2005. Gold mining legend Richard Warke4 was the CEO and it quickly got exceptional drilling results and grew from a tiny microcap to a billion-dollar co. in a few years.
In Feb 2011, then-famous Brazilian billionaire Eike Batista (owner of EBX Group) bought Ventana at C$1.5Bn (1C$ = 1$) in a hostile takeover. He and his group have no mining expertise but are in an empire-building mode.
In Mar 2012, Mubadala, an Abu Dhabi-based sovereign investor (AUM: 300Bn), made $2Bn investment for 5.63% preferred equity interest in Mr. Batista’s various holding companies. It marked Mr. Batista’s wealth peak ($35Bn, the 4th richest person in the world), but he lost it all by Jan 2014, in less than 2 years.
Mubadala converted its $2Bn preferred equity to $1.5Bn debt and became the owner of Soto Norte. The asset had been in maintenance mode till Aris Mining bought a 20% stake in 2022.
Below is the gold price chart since 2005 to add context to the Soto Norte story.
Except for the initial remarkable exploration by a competent miner, Soto Norte’s potential has been hindered by a clueless empire builder, and then by a debt-to-own accidental owner.
According to its technical FS, about 50kt to 75kt total tonnage was mined in its entire mining history. Put into perspective, that’s ~1 month volume under modern mining facilities. In other words, this is a virgin land poised to be harvested.
That is an experienced miner’s dream asset.
I’m telling this story not to prove Soto Norte is worth $1Bn (or more), but to highlight the potential is real, and Aris became the right owner at the right time. It will take time to unlock the potential (likely after Aris reaches 500 koz output), and I’m content with that.
Also note the UAE (where Mubadala, the 49% owner, resides) is Colombia’s No.1 business partner in the Middle East.
AISC - All-in sustainable cost is a metric used to calculate the cost of its mining operation. It measures the cash cost of extracting gold from the ground, exploration expense, operating overhead, and sustaining CapEx
Fraser Institue Annual Survey of Mining Companies 2023
Petro’s record on energy and environment analyzed
Richard Walke is a series mining entrepreneur, and built multiple successful mining co. such as Augusta Resource (sold C$0.7Bn to HudBay), NewCastle Gold (merged with EQX), and Arizona Mining (C$2.1Bn).
Reader (TL2C24) comments from Reddit
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There's a lot to like about Aris, increasing scale and operational diversification as well as some longer term growth projects. I haven’t done the full work on their valuation so I’ll defer to you on that, but I have a couple of concerns with your note. Having said that, as you note even under more conservative assumptions this could still be a solid investments:
-The use a 5% discount rate seems very low, I’ve more frequently seen analysts use NPV6 or NPV8. To me. I think a higher discount rate is warranted given that this is company operating exclusively in Colombia.
-While the contract mining partners program is great for government/community support, it limits the company’s upside to an extent. They pay the contract miners (I believe the program has been around forever, they just used to call them "artisinal" miners) a % of the spot gold price, so as the gold price rises so do costs. This 40-50% of production at Segovia, and I believe they will be doing the same program for the Marmato upper mine once the lower mine is operational.
-The peer valuation is a bit misleading as at least two of the miners are undertaking expansion projects of their own. Eldorado is developing the Skouries gold/copper mine in Greece, and they’re projecting ~650koz of gold production and 50 mlb of copper production in ’26. IAMGold just opened their Cote mine in Canada which is expected to be producing >350koz of gold by 2026. Can’t comment on Lundin as I haven’t looked at them.
-Another additional risk is the refinancing of their $300M bond. I’m sure they can get it done in this gold price environment, but something to monitor.