Integra: Pre-Feasibility Study disappointed, some benefits remain
Integra Resources (ITRG) has finally released the results of the long awaited PFS (Pre-Feasibility Study) for its DeLamar project. DeLamar had very good PEA results and it was believed that the PFS will outline an even more attractive mining project. Expectations were further raised in October when Integra announced that the PFS will present an expanded scope of the project. The company explained:
The expanded scope and increased throughput at DeLamar is expected to result in an increase in the gold and silver production profile of 50% or more over an extended period, subject to ongoing studies, compared to the 2019 Preliminary Economic Assessment (“PEA”). ), which has returned 124,000 gold equivalent (“AuEq”) ounces per year for 10 years.
It should be noted that the company anticipates an increase in capital expenditures for the upcoming PFS; However, the increase in capital expenditure is expected to be consistent with the presented larger production profile.
Unfortunately, the promises were not fulfilled. The share has lost around 14% of its value since the press release. And there is no reason to expect the long-term downtrend to end any time soon.
According to PFS, DeLamar will be developed in two stages. The first stage should consist of a heap leach operation with a throughput rate of 35,000 tpd and Stage 2 will involve the construction of a 6,000 tpd mill. The mine should be able to produce 121,000 tons of gold and 3.3 million tons of silver (163,000 tons gold equivalent) per year in the first 8 years and 71,000 tons of gold and 3.1 million tons of silver (110,000 tons gold equivalent) in the 16 years of my life. The AISC should be $955/t gold equivalent (silver is a by-product) or $547/t gold (silver is a by-product). CAPEX is estimated at US$282 million. Assuming a base case gold price of $1,700/toz and a silver price of $21.5/toz, the after-tax NPV (5%) is $412.3 million and the after-tax IRR is 27%.
At first glance, the numbers don’t look bad. The problem is that the expectations were significantly higher. There are several points where the PFS has disappointed:
- Production is lower than expected. Integra promised at least 50% higher production volumes compared to the PEA. This would mean more than 186,000 tons of gold equivalent per year. However, average annual production over the life of the mine should only be 110,000 tonnes gold equivalent, even lower than the 124,000 tonnes gold equivalent projected by the PEA. Even the first 8 years, when production should be 163,000 toz gold equivalent per year, does not come close to the 186,000 toz mark. Yes, mine life increased from 10 to 16 years, but as can be seen from the chart above, DeLamar should only become a marginal gold mining operation in the second half of mine life.
- CAPEX grew from $161 million to $282 million, or 63%. DeLamar was originally intended to be a relatively cheap, easy-to-finance project. But a CAPEX of $282 million is relatively high for a mine with an annual production of 110,000 tons gold equivalent. This negatively impacts the economics of the project and Integra’s ability to fund mine construction. Yes, it’ll likely get the funding, but shareholders will have to brace for much greater stock dilution.
- The profitability of the project has deteriorated significantly. The PEA reported an after-tax NPV (5%) of $604.9 million based on a gold price of $1,700/toz and a silver price of $21.28/toz. At the same gold price and even slightly higher silver prices ($21.5/toz), the PFS forecasts an after-tax NPV (5%) of just $412.3 million. The after-tax IRR went from a really great 67% to a good but far less impressive 27%.
But there are also some positive aspects. The maiden reserves have been outlined (table above). The combined reserves of the Florida Mountain and DeLamar deposits contain 1.787 million tonnes of gold and 92.403 million tonnes of silver. And the AISC refused. The PEA forecast it at $619/toz gold. But due to the higher silver by-product credits, the AISC in the PFS dropped to $547/toz gold.
As can be seen in the chart below, Integra has been in a declining trend for more than 1.5 years. The current sell-off has pushed the share price to the bottom of the trading channel. The stock price is safely below the 10-day and 50-day moving averages and the RSI has yet to reach the oversold level. There are no signs of an imminent trend reversal.
The question is whether Integra stock still has upside potential. The answer is yes. Unfortunately, it’s lower than it was before the PFS was released.Integra’s market cap is $105 million. It is well below the after-tax NPV (5%) of $570 million applicable to current gold and silver prices. However, given the significantly higher CAPEX, the share dilution must be much larger than originally expected. Moreover, after the disappointment, many investors could lose confidence in the company and abandon ship, meaning the price decline could continue. As such, I don’t think it’s a good time to buy Integra Resources stock. Much better buying opportunities could lie ahead.