Why Vista Gold May Triple From Current Levels


In a prior article here at Wall St. Cheat Sheet, I outlined why Vista Gold (NYSEMKT:VGZ) is a takeover target in the gold mining sector and is a good buy for 2014. Since then, shares are only up 6 percent while gold and silver are up about 5 percent and 9 percent, respectively. However, shares are substantially undervalued. I cannot stress this enough. Given the reserves at the Mount Todd site, the actions the company has taken in cleaning up its debt load, sales of properties and interests in Midas gold, and ongoing efforts to push its Mount Todd site to development, I think once the company secures permits and production begins, revenue will skyrocket significantly higher and reward shareholders with subsequent share price appreciation in future quarters.

Remember, Mount Todd is located in the Northern Territory of Australia in a very mining-friendly jurisdiction with excellent existing infrastructure. Mount Todd is of significant size and Vista Gold has exploration permits for a very large section of the site. At the site, there are confirmed deposits of gold, silver, copper, and lead, among other metals and minerals. According to the company’s best-case estimates, Vista Gold estimates an average annual production of 369,850 ounces of gold per year, with a higher amount of production in the first five years. In that timeframe there would be an average annual production of 481,316 ounces of gold per year. Turning to cost, it would be estimated to cost $773 per ounce produced over the life of the mine, with only $662 average cost for the first five years. Vista estimates a 13-year operating life that would require $1.04 billion in capital.

Recent updates you need to know about

1. Extension of Los Cardones $6 million payment

At the end of January, Vista Gold announced that it agreed to extend the due date for the second and last $6 million payment for the Los Cardones gold project in Mexico by six months to July 31. In October, Vista announced the closing of sale of the Los Cardones $13 million. Recall that the sale included $7 million paid at closing to Vista and an optional second payment of $6 million due by January 30.

As a result of permitting delays, Vista and the buyers have agreed to extend the due date of the $6 million payment to July 31. As consideration for this extension, the purchasers have agreed to increase the second payment from $6 million to $6.25 million. The purchasers will continue to retain the option to elect, in their discretion, not to make this second payment of $6.25 million, in which case Vista will retain the $7 million already paid and the project.

Vista’s president and CEO, Fred Earnest, said in a statement: “We are satisfied that Invecture remains committed to advancing the Los Cardones gold project and continues to expend the human and financial resources needed to obtain the permits for the project. We believe that our current cash position will be sufficient to fund the Company into the third quarter of 2014.”

2. Sale of Midas shares

Two weeks ago Vista Gold announced that it had completed the previously announced sale of 16 million common shares of Midas Gold for $12.8 million. Further, as required under the terms of its loan facility granted by Sprott Resource Lending Partnership, Vista Gold used proceeds to pay down its loan by $5.5 million, resulting in an outstanding balance of approximately $1.7 million. The remainder of the proceeds will be used for general corporate purposes. Now, with gold rebounding, it may have been a bit premature.

However, this move raises much-needed cash. Further, it reduces the debt load significantly. If the Los Cardones payment of $6 million comes through, expect Vista to pay off its debt entirely to Sprott. Vista Gold still holds a substantial stake directly and indirectly through 15,802,615 common shares of Midas, representing approximately 12.4 percent of the outstanding common shares of Midas Gold. To help capture a rise in gold and silver prices and to potentially sell the stake at higher share prices, Vista has agreed not to sell any of these shares of Midas for a period of 12 months.

3. More good news out of Mount Todd

On February 19, the Northern Territory of Australia extended its agreement with Vista for the Mount Todd gold project. This agreement will now extend through the end of December 2018.

Company CEO Earnest said: ”The advanced stage of our technical studies together with this three-year extension give us sufficient time to make a development decision at the Mount Todd gold project, provided gold prices improve. The extension of the Agreement is indicative of Vista’s and the Northern Territory Government’s desire to see the Mt. Todd gold project successfully developed.”

The Mount Todd environmental impact study (EIS) is expected to be approved in the third quarter of 2014. Through regular communication with the Environmental Protection Agency (EPA) of the Northern Territory of Australia, Vista has been advised that it has adequately responded to all but two topics: (1) the long-term stability of the waste rock dump and its ability to shed water in its reclaimed state and (2) the potential effect that the expanded Batman pit may have on the Gouldian Finch habitat and nesting areas.

This was good news, to which Earnest responded: ”We expect to be able to respond to the questions raised about the waste rock dump by the end of this month, and we have reached consensus with the EPA regarding a field study to be completed in April and May with respect to the Gouldian Finch questions. We expect the results of this study to be submitted to the EPA in June of this year. We are optimistic that this will clear the path for final approval of the EIS for the Mt. Todd gold project in the third quarter of 2014.”

In addition to the extensively studied Batman deposit, Vista’s mining licenses at the Mount Todd project are host to the Quigleys deposit, a satellite deposit that has the potential to be an additional source of ore for the Mount Todd gold project. Vista really has not undertaken the metallurgical testing and mine planning to be able to include the Quigleys deposit in its economic evaluations of the Mount Todd gold project. What this means is that all of the estimates of resources at Mount Todd are too low.

The property alone has more value than the shares of Vista Gold and its market capitalization. By my calculations, a fair value share price for the holdings at Mount Todd using the median estimates of resources (and not counting the Quigleys deposit) put a fair value price tag of $1.48-$1.66 on Vista Shares. Note that this does not include any of their other holdings. What’s more, recent geologic work has provided new information on the Quigleys deposit.

During the fourth quarter of 2013, Vista undertook a re-evaluation of the Quigleys deposit’s geology, mineralizing controls, and estimated resources utilizing the knowledge gained over the past seven years from analysis of the Batman deposit. The new information for the Quigleys deposit leads to increase in estimated resource grade.

Key highlights that you need to be aware of include three additional diamond core holes that extended the resource down-dip and have intercepts considerably higher than the expected cutoff grade. The mineral domains have been modeled as thinner and more discrete than previously thought. These domains have been modeled as sharp boundaries. The previous resource estimate was modeled as one domain through the main body of the anticline, where this new information has modeled the anticline as two separate geologic domains and removed the internal waste.

The previous model to gauge resources used all composites in a single domain model to vote for blocks within the single domain given they were within the search ellipsoid, while this model has several domains that are only permitted to use composites to inform grade within their corresponding domain. Finally, the current update utilizes a smaller block size and sub-blocks to best mimic the complex shape of the domain model.

All of this jargon is standard in the mining business. What it translates to is that Vista has improved upon its model and approach for gauging resources. Now estimating quantity of resources to be materially different than previously reported quantities, Vista now has a much better understanding of the geology and mineralizing hosts and has led to a higher cutoff grade than previously expected.

According to Earnest: ”The Quigleys deposit represents an opportunity to optimize the economics of the Mount Todd gold project by providing a source of higher grade ore in the early years of the life of the project. While we have yet to complete the appropriate metallurgical testing to confirm compatibility with the flowsheet selected for the Batman deposit, we are encouraged by the work recently completed to better define the geologic resource.”


This work builds substantially on my prior investigations into the company. Vista is finally taking necessary measures to clean up its debt and balance sheet. The company has improved upon its understanding of the Quigleys deposit at its premier mining site in Mount Todd. It has raised cash by selling shares in Midas and paying down debt. Vista is also expecting $6.25 million in payment for Los Cardones.

If it doesn’t receive it, Vista Gold keeps the original $7 million and the rights to the property. Expect that payment to lead to Vista paying off its debt to Sprott. Finally, the company is finally making real progress toward being able to do work at Mount Todd, as the EIS is nearly complete and is expected this year. Shares at 67 cents is laughable. The stock based on prior Mount Todd estimates would be fairly valued at $1.48-$1.66. Factor in a rising gold price and the other holdings of the company and my price target for the stock is $1.95-$2.10, which represents a potential triple from current levels.

Disclosure: Christopher F. Davis has traded Vista Gold in the past and has acquired a position as the price has come down. The author is adding to his stake in anticipation of eventual permitting of production at Mount Todd, the efforts to preserve shareholder equity, and the likelihood of a potential buyout.

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