Generation Mining (OTCQB:GENMF) (TSX:GENM:CA) owns 100% of the Marathon Pd/Cu project in Ontario, Canada. I believe the Company offers an attractive investment in a potential palladium mine in a Tier 1 jurisdiction with excellent management. The feasibility 2021 Studies and ‘cheap’ streaming deal from Wheaton Precious Metals (WPM)(WPM: APPROX) resulted in robust economics with a short payback of 1.7 and C$M 1.07 NPV (6%). From my point of view Gen looks undervalued as it is currently trading at just 0.09x cash value. Let’s check.
The Marathon project is a Pd/Cu/Pt project located in northwestern Ontario, Canada. The Marathon mine is one of the few large palladium development projects outside of Russia and South Africa. The project was bought by Sibanye Stillwater because they sold all of their development projects after acquiring Stillwater. They didn’t think the project was viable at the time when palladium was around $1350 an ounce. However, the 2021 feasibility study shows an expandable mine plan and economics.
The 2021 FS study projected a 13-year mine life, producing 2.03 million ounces of Pd, 500 million pounds of Cu and 634,000 ounces of Pt. The project’s mine plan is unique in that it features a high-grade palladium core and a high-grade copper core. The proposed mine plan will initially focus on recovering 70% of the palladium within the first five years. After this mine the focus shifts to the high grade copper core. The thesis of this mine plan is to reduce the risk of falling palladium demand in the future (I describe this concern in another paragraph). The sales breakdown is 58% palladium, 26% copper, 9.6% platinum, and some gold and silver. The 2021 feasibility study demonstrated excellent economics using a base case price of $1,725 for Pd and a Cu price of $3.20. The NPV (6%) is estimated at C$1,068 and has an IRR of 30%. I consider the amortization period to be short at “only” 2.3 years. It is important to remember that the NPV can change significantly due to the leverage on palladium in the first five years and the leverage on the price of copper thereafter.
The Marathon Project’s location offers excellent infrastructure that reduces much of the upfront capital expenditure, which is estimated at $665 million. The feasibility costs are included in the planned CAPEX. Unfortunately, I think real CAPEX is higher due to inflation. Another benefit of the excellent infrastructure nearby is that it could provide zero-carbon electricity, resulting in unique “green” palladium and copper. Gen even argues that the Marathon mine may be one of the lowest carbon intensity mines in the world per tonne of copper equivalent.
Wheaton Precious Metals streaming deal
The current market is very competitive for the royalty and streaming industry. Gen took advantage of this situation with the Wheaton deal announced in March 2022. Wheaton Precious Metals will pay Gen an aggregate cash payment of $240 million in consideration for a stream of all gold production and 22% of platinum production from the Marathon Project. Net electricity costs are 4.8% of mine revenue at FS base metal prices. The “cheap capital” of the Wheaton deal led to improved economics. Payback took 1.7 years and IRR improved from 30% to 38%.
Gen has already received $40 million to fund the detailed engineering and raise the necessary working capital for the next year. Management didn’t want to issue shares and dilute shareholders. The fact that Gen has received upfront capital through a streaming deal is very unique and demonstrates both Wheaton’s confidence and excellent execution by Gen’s management team.
I think streaming deals are a good sign for investors. Royalty and streaming companies like Wheaton do extensive research before offering capital. These teams of experts often have more knowledge of geology and mining projects than most investors. The fact that Gen got such attractive terms shows that Wheaton’s team liked what they saw.
Management is of high quality for a development company with a market capitalization of only $97 million. The team has built and operated many mines. The management has already impressed me with their fast progress of the marathon project because they completed a PEA and FS study within three years with an excellent streaming deal. In addition, they advance the environmental assessment process at a rapid pace. Insider ownership is 7%, so management and board are aligned with shareholders to create shareholder value.
demand for palladium
A key element of Gen’s investment thesis is future demand for palladium. 87% of the supply is used in automotive catalytic converters to reduce emissions. Governments are requiring lawmakers that car companies use palladium, and some governments are even increasing palladium loads per vehicle to reduce emissions in major polluted cities. This reliance on catalytic demand has some investors worried about investing in Gen because they believe palladium demand will fall as all cars go electric. I certainly think demand for electric driving will increase, but it won’t drastically reduce demand for palladium. Certainly not before 2029, when 70% of palladium has already been mined. If palladium demand dropped because people drove electricity, copper demand would rise sharply to conduct the required electricity. In this case, the increase in copper revenue would mostly offset the decrease in palladium revenue.
The main risk for Gen is to take risks. The company does not have the approval of environmental impact assessment and building permits. Stillwater did extensive work on the approval so Gen just needs to update it. This shortened the approval process by around two years. The Ontario movement has been positive about the permitting effort, even allowing Gen to apply for the permits before the environmental process was approved. The results of the environmental impact assessment are to be published in November/December 2022. Management expects to receive building permits in early 2023. The Marathon project is surrounded by other mines, so the local communities have a lot of mining experience. However, there is always a significant risk that Gen will not receive the environmental permits by the end of 2022. A possible delay in the permitting process would also result in more dilution for shares as they have to put in more cash before they can start production.
Gen doesn’t make any money, so they have to go to the market to collect money. As a result, shareholders run the risk of equity dilution. Cash on hand at the end of the second quarter was nearly $19 million. Average spend since 2021 has been C$8.5M and C$8.2M in Q2 2022. As such, Gen needs to raise cash before Q2 2023.
Another risk is the financing risk of CAPEX. Gen has not secured the necessary debt to build the Marathon Mine. The debt package is estimated at CAD 400-500 million. Financiers often need to raise some equity to protect their loans, so shareholders could expect some stock dilution. I think there is a significant risk that CAPEX will be higher than expected due to inflation. In that case, Gen may need to raise more capital through more debt or more equity. The ongoing detailed engineering should answer this question by the end of 2022.
Gen shares can be described as cheap on a price to NAV basis. The P/NAV is only 0.09x, which is based on a market cap of C$97 million and an NPV of C$1.07 billion (6%). The following charts show how the NPV is affected by different prices of Pd and Cu. The current price for an ounce of Pd and a pound of Cu is $2,075 and $3.35, respectively. So the real NPV is even larger than the projected NPV of $1.07 billion. The current The valuation is very low for a company that owns an advanced stage palladium development project in a Tier 1 jurisdiction with such an excellent management team.
Many investors in the mining industry are familiar with the Lassonde curve. Gen is negotiating debt financing to develop the mine and expects to receive all permits by the end of 2022. This should lead to a start of production in 2024. The transition from a cash-burning development company to a cash-generating company should be a significant reassessment.
The outstanding management team has made remarkable achievements in the short time they have owned the Marathon project. 2021 Feasibility Study shows very robust economics with short payback and 38% IRR. However, the rating is only 0.09x on a P/NAV valuation. The main risk for Gen shareholders is not getting the environmental permits. I think the current cheap valuation is an excellent first entry price for long-term investors. I would buy a small position at the current stock price. Gen could receive the environmental permit and complete the construction decision by the end of the year. This would remove permitting risk and provide clarity on the possible increase in cost of building the mine due to inflation. As such, I would consider adding more stocks to my position after 2022.