Is this the ASX's cheapest gold developer?

Emanuel Datt

Datt Capital

Echo Resources (ASX:EAR) is a gold developer with its operations based in Western Australia. We believe that it provides the best exposure to ASX listed gold development plays, and is compelling value at the current market value of around $100 million. It is our opinion at the current gold price, the company is worth significantly more; especially considering its exceptional project economics, strategic assets and exploration potential.

Echo's key differential advantage against other gold developers, is that it already owns almost all the key infrastructure required to operate a stand-alone gold production operation. The Bronzewing Processing Hub is a 2 million tonne per annum processing plant, currently on care and maintenance, solely owned by Echo with a replacement value of approximately $120 million. Other key infrastructure available to Echo's operations are a 200 person mining camp, an operational airstrip, essential services (water, power, telecommunications) and an established network of haulage and access roads.

Having this infrastructure in place, heavily reduces the upfront capital expenditures ('capex') and time required to bring it's gold resources into production; making the project exceptionally attractive from a financial returns perspective. A Bankable Feasibility Study ('BFS') has been completed, demonstrating that the project requires pre-production capex of around $40 million to bring the project into production in a time frame of only 6 months. This is in contrast with similar projects, requiring between $130-160 million in pre-production capex depending on jurisdiction, and a time frame of 12-18 months to first gold production.

According to the BFS, at a gold price of AUD$1600, the project is projected to earn over it's lifetime of 8.5 years, a base pre-tax IRR of 155% and to payback it's initial capex within 12 months. Assuming a gold price of $1800, we modeled that the project would earn an IRR of around 300% and payback it's inital capex in around 7 months; almost unheard of economics for a commodity project. Taking a discounted equity multiple approach, we modelled that the project would return almost $8 for every $1 of capex spent over its lifetime. EAR's all in sustaining cost ('AISC') for the life of the mine is projected to be around $1270 an ounce however, we expect this figure to fall in the optimised BFS.

These figures account only for EAR's existing resource base; whilst ignoring it's significant exploration successes since the issuance of the BFS and future exploration potential. An optimised BFS is currently underway and due to be released in the March quarter. We anticipate this confirm the robust economics of the Yandal project, and lead very quickly to a Final Investment Decision. We expect there will no issues at all with debt funding the entire capex requirement given the exceptional economics of the project, and the company have iterated that discussions with multiple Tier 1 resource project funders have been undertaken.

We note that the company currently has a 1.7 million ounce mineral resource, with a JORC reserve of 856,000 ounces. We expect, given the recent excellent strikes at Mt Joel, that this figure has the potential to increase substantially. In addition, there is still vast exploration potential for the company at depth, with almost all exploration to date has been done near the surface (<200 metres below ground level). With the project expected to produce around 95,000 oz a year, any further discoveries or resources defined will have the potential to extend the life of the project materially.

EAR's fantastic potential has not gone unnoticed by larger competitors. Northern Star Gold (ASX:NST) have over time taken a stake of approximately 22% of the company; at an implied value over 50% higher than the current market value. NST have appointed an experienced development executive to act as a board nominee. We believe there is a strong possibility that NST may ultimately make a takeover bid for EAR for a number of reasons.

The Yandal project in its current incarnation, is projected to produce around 95,000 ounces per annum. This equates to over 10% of NST projected forward production from its various mines. With NST current capitalised at over $5 billion, this implies a value of around $500 million for EAR once the project is in production; and if the market attributes a multiple similar to NST which is unlikely for the company on a stand-alone basis. If NST were to acquire EAR, this becomes more likely as the acquisition would materially improve NST's company wide production metrics, as well as consolidating a large portion of the area around its flagship Jundee mine and securing the valuable infrastructure and existing gold resources held by EAR. The Bronzewing Processing Hub has a lot of strategic value and when functional will open up a lot of stranded deposits within the area. This asset will still have value at the end of the life of mine as it's likely to be able to generate ongoing income via 3rd party tolling agreements; as well as being able to scale up in size. 

EAR also possesses around $65 million of carry forward tax losses that can be recouped before paying tax. This fact makes EAR an attractive candidate for a corporate acquisition. We also note the commonalities between the CEO's of the two companies. Both have studied and worked at different times, at the same educational institutes and the same companies. Both have operational mining backgrounds and we regard the existing EAR team as a good cultural fit for NST so attractive as a bolt-on acquisition. 

We note that EAR fulfils almost all of NST's stated acquisition criteria and we note that other transactions in the gold sector in recent times have been for higher prices per ounce of gold equivalent than EAR is currently valued by the market. It is our opinion that EAR shareholders could achieve significant upside at the current price, in a relatively short period of time.



Disclaimer: This article does not take into account your investment objectives, particular needs or financial situation; and should not be construed as advice in any way

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Emanuel Datt
Datt Capital

Emanuel is the Principal of Datt Capital, a boutique Melbourne-based investment manager focused on identifying high growth and special situation opportunities.

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