This broker thinks the Never Never resource upgrade should let Gascoyne take flight

Gascoyne has no need for pixie dust to fly, rather it’s the impressive better-than-doubling upgrade to resources at its Never Never deposit that has improved its fortunes.

While shares in the company have risen around 28 per cent this week to 25.5c following the news that Never Never now has a resource of 721,000oz at a high-grade of 5.85 grams per tonne (g/t) gold, Sydney-based corporate advisory firm Bridge Street Capital believes that a net asset value (NAV) per share of between 40c and 60c is perhaps a more accurate assessment of its value.

So just why does Bridge Street believe this to be the case?

It wasn’t all that long ago – January this year to be precise – that Gascoyne Resources (ASX:GCY) first defined a resource of 303,000oz at 4.64 g/t for the underexplored Never Never prospect after drilling returned impressive hits such as 59m at 12.5 g/t gold from 138m and 54m at 6.55g/t gold from 116.0m.

However, systematic infill drilling has since allowed the company to tuck away a 138% increase in its resources at an average exploration cost per ounce of just A$13/oz, which is well below the global (or Australian) cost curve for discovering gold resources.

To top it off, a majority of the resource – 548,400oz – is contained within the higher confidence Indicated category while the broader Dalgaranga resource has been increased to 16.7Mt at 2.2g/t gold for 1.18Moz of gold within 10km of its relatively new 2.5Mtpa processing plant.

The company’s total resource endowment has also been increased to just under 2Moz.

What the broker says

Given this impressive growth, it is not surprising that Bridge Street considers the Never Never discovery to be one of the best it has seen in Western Australia’s Goldfields region in recent years.

It noted that a succession of high-grade drillholes has extended the ore body to vertical depths of around 600m, increasing both the resource tonnage and grade.

That the majority of the company’s new resource is accessible to its mothballed Dalgaranga mill has not been lost on the corporate advisory firm, either.

Bridge Street believes that with the upgrade, Gascoyne could be less than 12 months away from restarting its mill.

Further growth is also very much on the cards as Never Never is not only open at depth but may also deliver better grades at depth, meaning that defining a ‘magic’ 1Moz at the deposit isn’t out of the question at all.

It also places the company right in the sights of bigger companies with Bridge Street noting that Gascoyne’s resource are trading at a 66% discount to Musgrave Minerals’ (ASX:MGV) ounces – an intriguing finding given that MGV has a lower market capitalisation despite being the subject of rival bids from Westgold Resources (ASX:WGX) and Ramelius Resources (ASX:RMS).

Despite this, Musgrave and its resource of 327,000oz at 10.4g/t remains the model for Bridge Street to determine how much Gascoyne should be valued at.

Bridge Street’s valuation

It noted that Musgrave’s resource could provide high-grade, low cost feed to Ramelius’ Mt Magnet plant about 40km to the south, which would replace the need for a standalone 500,000tpa CIP gold plant requiring a pre-production capex of $121m that would still have delivered net present value of $215m over a five-year mine life.

Ramelius’ recommended takeover offer of one RMS share for every 4.21 MGV shares capitalises Musgrave at over $200 per resource ounce, which compares with Gascoyne’s capitalisation of $122/oz using its resources at Dalgaranga and Yalgoo while assigning no value to other exploration assets or the Dalgaranga mill.

Including all of the company’s resources will take this capitalisation down to $87/oz while including the mill and its ancillary infrastructure – even with a 50% discount – will further reduce this figure down to just $69/oz.

Using the last scenario as its basis, Bridge Street calculated a potential merger and acquisition target price of between 65c and 70c per share.

Of course, an acquisition bid will also be valued higher in order to attract shareholders so Bridge Street used an average feed grade of 2.2g/t, mill throughput of 2.5g/t producing about 159,000ozpa and cash cost of about US$1,200/oz to calculate its valuation.

To this, it also included a gold price of $2,500/oz, $50m start-up capital, and an 8% discount rate to arrive at the valuation, which goes from 40c for a five-year mine life up to 60c at eight years.

Bridge Street adds that further success with the drill bit might see its estimates increase further, noting that Never Never is barely 12 months old, and remains open at depth.

Never Never’s discovery has also generated a new exploration model for the project, which could in turn deliver even more growth.

“GCY to us is inexpensive on any measure. New management focussed on a new exploration model may continue to add value to Never Never and other targets,” Bridge Street concluded.

This article was developed in collaboration with Gascoyne Resources, a Stockhead advertiser at the time of publishing.

This article does not constitute financial product advice. You should consider obtaining independent advice before making any financial decisions.