Troilus Gold: Mineral Resource Expanded, PEA Anticipated (OTCMKTS:CHXMF)

“[W]e are in the fifth inning of a gold bull market that likely goes into extra innings“, as Ross Beaty put it. This is the part of the cycle where high-cost projects that had failed during the previous bear markets usually come out of hibernation. A discerning investor who picks the right project at the right time may reap enormous gains as the bull market roars on.

In this article, I present a follow-up of a recent article on Troilus Gold Corp. (OTCQB:CHXMF, TLG.TSX-V) by Peter Arendas, in which he stated:

“Troilus Gold is like a well-kept secret… It is successfully expanding already sizeable resources at its brownfield project in mining-friendly and safe jurisdiction of Quebec… Also, a PEA is underway. Based on some comments of the CEO and the president of the company, and based on other currently known data, it is reasonable to expect an average annual production of at least 140,000 toz gold per year, at an AISC below $700/toz… What is important for the potential new investors, the company is valued only at $70 million right now ($85 million after the recently announced equity financing is completed), which is a very low price given the enormous upside potential of the Troilus gold project.”

Since Peter’s article, the share price has appreciated by some 38%, driven by the anticipation of a major expansion of the mineral resource (Fig. 1).

Fig. 1. Stock chart of Troilus Gold. Source: Barchart

The July 2020 mineral resource update

That updated mineral resource estimate was released on July 28 (Table 1; see here).

Table 1. The July 2020 mineral resource estimate. Source: Troilus Gold Corporate Presentation, July 28, 2020

As predicted by Peter, the global contained metals indeed surpassed 8 Moz AuEq, reflecting a 142% increase in mineral resources since the acquisition of the property (Fig. 2).

Fig. 2. History of mineral resource expansion. Source: Troilus Gold Corporate Presentation, July 28, 2020

Mineral resource additions were obtained in the so-called J zone and Z87-Z87 South, both having been previously open-pit mined, as well as in the Southwest zone (Fig. 3). The company also identified high-grade zones, which will be important in optimizing the mining plan and project economics as it conducts the PEA.

Fig. 3. The expansion of the mineral resource at Troilus. Source: Troilus Gold Corporate Presentation, July 28, 2020

Exploration upside

Troilus still holds substantial exploration upside. In the near term, drilling to greater depths of J zone, Z87 South, and the Southwest zone, drilling of the 2.5km space between the main orebody and the Southwest zone and of the Allonge target should result in an additional expansion in mineral resource (Fig. 4). I reckon that Troilus can expand the global mineral resource above 10 Moz AuEq by drilling the above targets.

Fig. 4. Near-term exploration targets. Source: Troilus Gold Corporate Presentation, July 28, 2020

Regionally, Troilus is the largest mineral claims holder in the under-explored Frôtet-Evans Greenstone belt. It has consolidated a total of 107,326 hectares in a series of acquisitions:

  • Troilus initially acquired 81 mineral claims and one surveyed mining lease from First Quantum (FM) that collectively covered approximately 4,700 hectares.
  • It acquired from Emgold Mining Corporation (OTCPK:EGMCF) 209 mineral claims that cover approximately 11,300 hectares to the northeast of the Troilus mine.
  • In April 2020, the company acquired 627 mining claims totaling 33,410 hectares to the south and southwest of the existing Troilus project from O3 Mining Inc. (OTCPK:OQMGF). In addition, it has staked 629 new claims covering 33,790 hectares (see here).
  • In July 2020, it acquired from Globex Mining Enterprises Inc. (OTCQX:GLBXF) 91 claims totaling 4,960 hectares to the south of the existing Troilus project; it acquired from Canadian Mining House 21 claims totaling 1,140 hectares to the south of the existing Troilus project; it also staked 310 new claims covering 16,905 hectares (see here).

These newly acquired and staked claims are still under-explored. Recently, private company Kenorland Minerals (which entered on July 29, 2020 into a letter of intent with Northway Resources Corp. (NTW.TSX-V) for a reverse takeover to go public), working with JV partner Sumitomo Metal Mining, hit 29.1m of 8.47 g/t gold and 12.23 g/t silver starting at 72m depth, including 11.1m of 18.43 g/t gold and 25.93 g/t silver in a hole drilled at the Regnault target in an area intertwined with the southern Troilus claims, pointing to great regional potential in the newly acquired land (Fig. 5). Troilus holds an equity interest in Kenorland since either late 2019 or early 2020.

Fig. 5. The large district-scale land package of Troilus, modified from Troilus Gold Corporate Presentation, July 28, 2020

Investor takeaways

Boxes ticked

Troilus appears to check a few boxes as an advanced-stage gold-copper explorer/developer in a top-ranked jurisdiction:

  • Quebec is a low-risk, pro-mining jurisdiction. The provincial government has “Plan Nord”, a 25-year government plan for natural resources sector development and job creation in northern Quebec.
  • The Troilus project is of district-scale in the Frotêt-Evans greenstone belt, which remains significantly underexplored (thanks to the till cover) compared to the geologically similar Abitibi greenstone belt, where numerous major gold mines were discovered (Fig. 5).
  • Troilus is a brownfield project; previously, Inmet Mining Corp. – formerly known as Metall Mining Corp., subsequently acquired by First Quantum – had profitably produced from the mine some 2 Moz of gold and 70,000 tons of copper in 15 years (1996-2010). Troilus inherited an active mining lease maintained from the production era of Inmet Mining Corporation, a permitted tailings facility that is currently reclaimed and revegetated, a water treatment facility, a 60-person mining camp, core storage and logging, more than 85km of power lines maintained by Hydro-Quebec, and over 40km of roads. The active mining lease and existing infrastructure should help enhance the economics of the project substantially and accelerate the advancing pace of the project toward production.
  • The mineral resource, despite the relatively low grades, occurs from the surface to the depths, the vast majority of which is amenable to open-pit mining at a low strip ratio, which should help with the project economics.

The upside

Troilus is still deeply undervalued in spite of the recent strong share price performance. With the mineral resource upgrade, the company is currently valued at US$16/oz AuEq. As compared with peer North American explorers (US$50/oz) or recent transactions (~US$80/oz), it trades at a significant discount. I believe Troilus will likely experience a re-rating either through better marketing communication or M&A.

Going forward, the company has a number of near-term catalysts scheduled for the 3Q2020 (Table 2). A successful PEA with attractive economics may drive the share price substantially higher. Troilus currently has a capital budget of C$7 million; although it reflects a scale-back due to the coronavirus pandemic, the planned drilling will nonetheless generate news flow.

Table 2. Near-term catalysts. Source: Troilus Gold Corporate Presentation, July 28, 2020

Risks

Troilus does carry high risks.

  • Firstly, the company burns C$5-6 million of cash per quarter, with approximately 75% going into exploration (see here). With C$36 million cash in hand, it is expected to do another round of equity raise either later in 2020 or 2021, to be followed by yet more, which will cause considerable equity dilution.
  • Secondly, the Troilus project is subject to a variable NSR held by First Quantum of 1.5% or 2.5% depending on whether the price of gold is above or below US$1,250/oz, as well as an additional 1% royalty held by QuestCap Inc., on 82 of its claims. The 209 claims acquired from Emgold are subject to underlying royalties of 1% to Emgold that the company has a right to purchase for $1 million, and 1.5% to three individuals that the company has a right to purchase for $2 million until 24 months from the start of commercial production and for $3 million thereafter. The three claims acquired from O3 are subject to a 2% NSR to O3, half of which can be purchased for $1 million, and 2% NSR to an individual, half of which can be purchased for $1 million. The 627 claims acquired from O3 are subject to a 2% NSR to O3, which can be purchased for $1 million, and some of these claims are subject to underlying royalties of 1% and 2%. These royalties will have a substantial impact on the economics of the relatively low-grade project.
  • Lastly, numerous executives at Troilus cut their teeth at Forbes & Manhattan or affiliated companies, an entity that appears to be viewed variously by retail investors in the junior mining patch. The management seems to be driven and marketing-savvy. The insiders hold approximately 10% of the shares issued – not an insubstantial skin in the game. On the other hand, they seem to grant restricted share unit rights quite generously; on August 4 alone, the directors and managers were granted a total of over 7 million RSUs.

In view of the upcoming PEA, interested investors who can look beyond the management to see an undervalued project may speculate on Troilus as an event-driven play.

Even more adventurous investors may consider investing in Kenorland Minerals, which is expected to go public in the near future through a reverse takeover of Northway Resources Corp.

Personally, I think there are better investment vehicles elsewhere for me to profit from this roaring gold bull market.

At this point, you may be wondering: So the author is not long Troilus, but then which stocks is he long? To find out, I invite you to sign up at The Natural Resources Hub. We are currently offering a 20% discount for a limited time.

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Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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