Thesis Gold: Reimagining a Mine
Working to improve a proposed mine plan can be daunting, but the new Thesis Gold is tinkering with their Lawyers Project PEA to unlock further value for shareholders.
tl;dr:
Thesis Gold and Benchmark Metals have both fallen off quite a bit since the recent announcement of their proposed merger. Market sentiment seems uncertain about the direction of the new, amalgamated company. In addition, there are (valid) concerns specific to the up front costs Benchmark’s Lawyers project that have been voiced to me by some of my readers. However, Thesis has a plan in place to improve on these economics above and beyond efficiencies found through the merger and I believe this makes them a well-supported pick to see a strong increase in value over the next year or two.
I thought I would use this article to discuss some economics around Benchmark Metals (BNCH.V) /Thesis Gold’s (TAU.V) current PEA (remember their proposed merger - which I will assume here will pass). Some readers have communicated with me concern over Benchmark’s cost to build their mine plan specifically which I thought warranted a fuller response. So credit to those readers for giving me an article idea.
Today, then, I thought I would discuss some flies in the soup in Benchmark’s PEA for their Lawyers project. Because to be clear, their concerns aren’t unfounded: BNCH’s post-tax NPV: Capex ratio isn’t much beyond mediocre. Here are the numbers:
So based on the 2023 PEA as per above, it is going to cost Benchmark C$484M (inc. contingency) to unlock an after-tax NPV of C$589 (giving us a 1.22 ratio) while sporting a 24.1% IRR and 2.8 year payback period at US$1735 Gold.
As you can see from above, it is the strong NPV number (especially for a project of its size) carrying the day for Benchmark. Which is a good problem to have - a nice, juicy ore body to target. So in the end, it is true - Benchmark’s open-pit plan is fairly expensive for a project of its size. Therefore, if there were savings to be found in the mine plan, it could go a long way to unlocking the true power of that NPV, and thus shoring up the new Thesis Gold’s odds of becoming a mine and/or ending in a positive outcome for investors.
Building off this, one of the reasons I like this merger while the market seems unimpressed is that there are ample opportunities for cost savings to happen. One of these is the traditional cost savings of any merger. Increased efficiencies, economies of scale, doubling a resource without additional infrastructure, etc. just makes sense.
But before I go too far into discussing the positives, let me present 3 problems/sticky points with Benchmark/Thesis’ plan that is keeping capex elevated and reducing payback period:
1. That 66 kilometer long, $46 million dollar powerline.
2. The poor strip ratio (5.9!).
3. A strange LoM production plan, with ounces strongly backloaded to the end of the LoM.
Let’s discuss these in turn.
1. The Powerline.
The Toodoggone District is fairly far north in British Columbia, but not to the point of being completely desolate. It is road accessible all year from Prince George, but also importantly has a landing strip nearby. However, its existence on the “fringe” means there is some need for infrastructure improvements to properly service the company and the powerline being extended from Centerra’s nearby Kemess Mine is the core obstacle. And don’t forget that once connected, that powerline will be providing carbon-free hydropower.
That powerline alone is basically 10% of all mine capex, so any way to get it off the company books would be a win. Of course, the line has to be built, but the question of who builds and maintains it is up for discussion. Right now, the plan is for Benchmark to build the powerline and turn it over to BC Hydro upon completion.
However, it isn’t uncommon in these situations for a third party to build the needed infrastructure and then charge a toll to companies for use, and I can’t help but wonder if this might be an option here. If Thesis could pull that off, this would effectively download $46 million of initial capex into an expenditure spread out across the entire LoM. Which of course makes that $46 million a much easier pill to swallow and a positive material impact on up-front economics. A10% decrease in Capex results in roughly $57M increase in after-tax, NPV, taking it to $646M (as per sensitivity charts on page 1-22 of BNCH’s PEA), or a 1.33 NPV:capex ratio.
The Strip Ratio.
5.9 obviously isn’t great. The Cliffs Creek (CC) zones make it worth it to get there, but the high volume of waste rock produced dulls the economic potential of them under the current plan. However, this weakness is already actively being addressed by Benchmark and Thesis with an in-the-works new mine plan that flips things around a bit. Rather than starting with a large and inefficient open pit that is ultimately targeting those high grade CC zones, the idea is to begin with an underground mine targeting those zones first. This mine would operate in tandem with a scaled back, more efficient open pit above and around it.
First off, this would of course dramatically reduce the strip ratio – the new unofficial target is around 4.5, within a pit that is significantly smaller to begin with, effectively doubling the improved efficiency. Another 10% improvement in opex (like could be done with capex with the powerline) based on the chart below would push after-tax NPV up another $99M to $745M, which gets Thesis to a 1.54 ratio between NPV and Capex. Though I suspect this new plan could see more than just 10% improvement from this. You begin to see how economics can rapidly be improved with some reimagined work.
3. The LoM Annual Production
This is a domino effect of #2 and arguably the most important. Take a look below at the payable ounces of the proposed 12 year mine life. The last 3 years end up averaging more payable metals produced than any other 3 year period of the mine. This is obviously something of an oddity.
As mentioned, though, a corollary effect of reimagining how to target Cliffs Creek is that it would pull hundreds of thousands of ounces of high-grade gold forward in the mine plan from the last couple years to the first couple years. This would obviously have a significant impact on IRR and payback periods, making the project much more enticing to would-be investors. There is no certainty with this, but I would guess that these improvements could end up being significantly more impactful than the savings in parts #1 and #2 described above.
If you speak to the company, these topics are indeed the company’s targets to improve the economics of the Benchmark mine plan (a fact I felt a little smug about after pulling out those same 3 issues on my own from reading the PEA). Obviously I don’t have any hard, QP-worthy numbers to provide to you for this new, proposed, mine plan. But the new Thesis Gold under CEO Ewan Webster is optimistic these changes are achievable and will have an impact similar to what I discussed above. And they do seem practical and achievable. Ewan seems to be a smart and capable executive and I trust him to make this new, amalgamated company a success for its shareholders.
Ultimately, a huge secret to success in this sector is buying when you really don’t want to. Thesis and Benchmark have seen a lot of value destruction since the announcement of their proposed merger and investors are spooked. Which just doesn’t make sense to me. Whatever “confusion” there might be with the identity of the company (explorer vs. developer) is more than made up for by effectively doubling the resource while halving the capex requirements the two companies have together vs. apart. And not to mention the various potential efficiencies I detailed above. Mergers such as this are what keep the junior sector strong.
All this is why I believe that the new Thesis is a great contrarian pick over the next 1-2 years. It has 18+ months of strong news flow upcoming - lots of exploration, an updated, universal MRE due in H1 of 2024, followed by an updated PEA1 scheduled for H2 of 2024 which will settle the questions raised above finally. And I personally am excited to see the end result.
Here is a link to BNCH’s SEDAR for the Jan. 12, 2023 PEA: https://www.sedar.com/DisplayCompanyDocuments.do?lang=EN&issuerNo=00033260