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Matador Mining Ltd – No Bull! [ASX: MZZ]

matador mining limited gold mining company review commentary

Matador Mining Limited (‘Matador’, or the ‘Company’, ASX: MZZ) is an Australian gold exploration Company with 120km of continuous strike acreage in the Cape Ray Shear in Newfoundland, Canada. This acreage is lightly explored, but highly prospective and Matador is the largest holder of ground along the Cape Ray Shear. Cape Ray’s current resource stands at 840koz at 2g/t, with 96% of the resource less than 200m from surface.

A successful A$8.7M share placement of 21,428, 571 shares at 40.5 cents per share was completed in July, to fund a 12000 metre drill program through to 2021. Drilling is scheduled to commence in September. An additional $2.1M from the exercise of ‘in the money’ options is expected later this month.

Interestingly, Matador issued the new shares at a 28% premium to the last closing price of Matador shares on 1 July 2020 of $0.315 per share; and at a 44% premium to the 15-day volume weighted average price of Matador shares to 1 July 2020 of $0.28 per share. This is a highly usual situation as new shares are generally issued at a discount, to attract new investors. However, these shares were issued under Canadian law, which provides tax incentives to investors for expenditures that qualify as ‘flow-through mining expenditure’.

‘Flow-through mining expenditure’ refers to expenditure that gives rise to tax losses to the investor who is associated with that expenditure.  Since the Company agreed to renounce all tax losses arising from that expenditure, the investors became entitled to deduct the amount renounced in computing the investor’s income for Canadian income tax purposes. As a result of these tax benefits, the flow-through shares are issued at a higher price than would otherwise be the case, without these tax concessions. The cerebral rigour behind this initiative, that resulted in a higher share price being attained for the new shares, and therefore a lower cost of capital, has been rewarded by the market in that the shares currently trade at 44 cents and have traded as high as 51 cents since the date of the raising.

The Cape Ray Gold Project (the ‘Project’) is supported by excellent existing infrastructure, including a skilled local workforce at Port Aux Basque with a population of 5,000. The Project is 15km from the main roads and has easy access to grid power.

Matador released a Scoping Study in May 2020 proposing a 1.2 Mtpa standalone mining and processing operation, with initial production commencing in 2023. Mining is predominantly open pit, with a small underground component (6% of production) to access high grade ore below the pit.

The preliminary economics indicate the Project has positive financial metrics over an initial mine life of 7 years with total gold mined of 504,000oz, averaging 88,000 oz production per year over the first four years, with capital payback during the first 1.75 years of the Project’s life. Matador’s corporate strategy is to increase its resource base to a size that will support a 10 year operation. This will come from a combination of expanding the resource at existing discoveries and drilling at greenfield targets.

 Matador is following the path of a growing number of Australian gold miners looking to Canada for their growth, brought about by limited opportunities to buy or develop new assets and new discoveries in Australia, compared to the vast areas of unexplored acreage in Canada. This move has seen over $3 billion spent by Australian gold miners in North America, over the past two years.

But there are other valid strategic reasons for this trend of Australian miners prospecting in Canada, while raising their capital and being listed in Australia.

The Toronto Stock exchange (‘TSX’) has a focus on new growth industries (Crypto Currency and Marijuana), diverting investor funding from mining to these ‘trendy’ sectors. This has diverted funding away from resource-based stocks and has reduced the amount of expenditure on exploration in the past decade in Canada, despite it being a world-class jurisdiction for resource projects. Canada has low geopolitical risk, a skilled workforce and a well understood mining regulatory environment. Against this background and given the strong valuation metrics for ASX listed gold miners, savvy Australian based gold miners are basing their capital and financing solutions out of Australia and conducting their gold mining operations in Canada. The best of both worlds!

The Matador board has recently been strengthened with the appointment Executive Chairman Ian Murray, who was instrumental in building Gold Road from an explorer into a +$1B producer. Justin Osborne (Gold Road) and Mick Wilkes (Oceania Gold) have also joined as Non-Executive Directors.

The upside for Matador shareholders is the exploration potential along the Cape Ray Shear. If successful, the Cape Ray Gold Project is likely to be materially larger than the numbers presented in the Scoping Study.

Exploration activity of 12,000 metres of drilling into 2021 may support resource upgrades following any exploration success. Drilling success, together with a sustained high gold price in this negative real interest rate environment, may see the Matador share price charging higher materially under such circumstances. And that’s no bull!  

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