An Attractive Valuation Case for Middle Island Resources Driven by its Flagship Project

West Perth, Australia-based Middle Island Resources Limited (ASX: MDI), established in 2010, is a gold explorer and an emerging developer, with a key interest in prospective properties located in Western Australia (WA) as well as West Africa.  Presently, Middle Island Resources has a key project within its purview of advancement – The Sandstone Gold Project, supported by a promising infrastructure in place.

Sandstone Gold ProjectAn Overview

Middle Island Resources is specifically progressing with activities and initiatives to advance the 100%-owned Sandstone Project and Processing Facility, located in the East Murchison Mineral Field of WA.

Some of the salient features and strengths of the Sandstone Project are briefed as below.

Strategic Location – The project is situated in the heart of the WA goldfields, 11Km south of Sandstone and 400km NW of Kalgoorlie, on a sealed highway between mining towns of Mt Magnet & Leinster. It encompasses two fully permitted Mining Leases that pre-date Native Title, along with several peripheral tenements, which span a total of 191 km2. There are at least 15 gold deposits within 100 km of the project.

Processing Plant – MDI’s key assets at Sandstone include the fully compatible CIP processing plant, the only processing plant for 160 km, which is presently on care & maintenance with a capacity of 600,000 tpa. It is fully permitted, with an operating licence, conventional grinding, milling & leach circuits, all allied infrastructure, permitted tailings storage facility and bore field. It also boasts a substantial inventory of equipment and spares.

The plant also has three fully equipped camps (under freehold title) with an accommodation capacity of 100 and a proximal, well-maintained airport to service FIFO operations. The refurbishment cost estimate for the processing plant and associated infrastructure is ~$ 10.3 million with an estimated recommissioning time of 4-6 months.

Mineral Resources – The Mineral Resource Estimate for the project stands at 537,000 oz gold with six existing open pits and a further four open pit and underground deposits (see figure below). Of these, Two Mile Hill, Shillington, Shillington North and Wirraminna are the four defined open pit deposits (aggregating 127,000 oz) on which it is initially planned to recommission the project.

In addition, the project area hosts seven other priority exploration prospects along with 19 untested weights of evidence (WoE) targets.

Source: Investor Presentation

Two Mile Hill: Primary Exploration Target – Located 4 km north of the processing plant, the tonalite deeps deposit at Two-Mile Hill has considerably enhanced the project potential with an Exploration Target of 24-34Mt at 1.1-1.4g/t for 900,000 oz to 1.5M oz gold.

Fundamentals and Market Valuation Given the Key Project at Hand: Mining assets are associated with a high degree of technical uncertainty, around reserves and resources, which poses quite a challenge in valuing them. The ratio “Enterprise Value/Resource ounce” (EV/oz) is a widely used relative valuation metric that comes into play in such a scenario.

Middle Island Resources has a market capitalisation of circa AUD 7.33 million (as at 02 August 2019) while its Mineral Resources stand at an estimated 537,000 oz. As per key statistics understood through an industry specific study for the month of June 2019, the MDI June EV/oz stood at $ 6/oz, while the peer group average EV/oz was at $ 38/oz. 

With this in mind and in consideration of MDI’s key strengths in view of the Sandstone Project (i.e., strategic location, ownership of a processing plant with good infrastructure, which can be recommissioned at a very modest cost, and a substantial exploration potential), it is clear that there exists a fundamental valuation gap between its market capitalisation and asset valuation, best demonstrated by the substantial gap between the company’s current EV/oz and the peer average EV/oz. 

  • MDI Mineral Resources – 537,000oz
  • MDI June EV/oz – $ 6/oz
  • June peer average EV/oz – $ 38/oz

Peer comparison for Middle Island Resources with some of the fellow Australia-based gold explorers and near-term developers is tabulated as below.

Road Ahead: Middle Island Resources continues to make new gold discoveries within its permitted tenure, which has a considerable exploration upside. The decision to recommission the Sandstone Gold Processing Plant, while developing and expanding the existing production profile, is being actively evaluated by the company.

A second drilling grant of $ 150,000 from the Government of Western Australia bears testimony to the high prospectivity of the identified targets.

In addition to charting the inherent strengths for a better growth profile within the overall landscape, MDI’s strategy is also to undertake further consolidation of third-party deposits in the vicinity (referring to the below provided figure). A key step under this move is reflected through the ongoing takeover proposal (pending outcome) for Alto Metals Limited (ASX: AME), while, longer-term, MDI is seeking corporate investment as it consistently demonstrates the production, resource and exploration potential of the Sandstone Project and works towards consolidating the district around a central processing hub.

Source: RIU Explorers Conference Presentation

The company’s Reo Gold Project (100%-owned), located in Burkina Faso, West Africa, is in the process of being divested via an option agreement, which is due to be exercised in August 2019.

With the backdrop of a more buoyant Australian gold market, along with a fusion of a stable register, strong broker support, and a highly experienced exploration & project development team, Middle Island Resources is well poised to benefit from its Sandstone Project. The prevailing valuation gap that is understood through the analysis indicated above and the outlook for gold, MDI is working diligently to take advantage of the strengths at hand. Gold prices have been up-trending in the international market for a few months on the back of central banks buying up gold reserves, a strong buying in gold-backed ETFs, geopolitical issues, along with an interest rate cuts by the US Federal Reserve and others, and these events portray a potential sustained price increase for gold.

Stock Performance: At market close on 2 August 2019, MDI shares were trading at AUD 0.008, zooming up 14.1%. In addition, the stock has generated positive returns of 100% in the last six months.


Disclaimer

This website is a service of Kalkine Media Pty. Ltd. A.C.N. 629 651 672. The website has been prepared for informational purposes only and is not intended to be used as a complete source of information on any particular company. The above article is sponsored but NOT a solicitation or recommendation to buy, sell or hold the stock of the company (or companies) under discussion. We are neither licensed nor qualified to provide investment advice through this platform.

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