IKN

With an old three chord rock track to belie your humble scribe’s age, here comes a monthly production chart for Novo Resources (NVO.to) that’s product of a little too much curiosity (killed the cat) in this company this evening. But with its NR today, NVO finally had some fundies numbers worth considering and so I scratched the itch. The data for the chart is going to be reasonably close but context is required, so please consider the notes underneath before jumping down my throat about 10oz there or 50oz here:

NVO’s disclosure hasn’t been 100% on its monthly production numbers (and doesn’t have to be) but, by using the occasions they’ve given monthly production numbers in NRs and backing them out from quarterly declarations in the RegFs, we’re going to be close enough to allow a month-by-month chart within leeway. For one example, we know July 2021 was 8,589oz (they were proud of that and put it in an NR) and we also know the 3q21 total production number, so I’ve split the 9,555oz restant the way you see between August and September (i.e. the aggregate of the two months will be right, the exact split is a guesstimate). For another, thanks to today’s NR we know the November number and the 4q21 guidance, which implies October sucked at around 3,700oz. We also know that for the the first six months of 2022 NVO is guiding between 4,500oz and 5,500 oz per month average, so I’m going to be generous and give the company the top end of guidance for each month. Therefore, what you see above is a best-fit for monthly production at NVO which a) won’t be far out on months gone and b) gives plenty of benefit of the doubt for FY22.

Thing is, this is an Australian FIFO operation and they tend to have fixed cost regimens. As we know from the 3q21 financials that it takes around U$10m per month to keep this company at breakeven, what with its CAD$ filed COGS numbers, then G&A and lease payments, then the forex etc. So if you do the math at U$1,800/oz average gold going forward (5.5k X 1.8 = 9.9), in effect what Novo Resources told us today is “We hope to break even for the next six months, then we’ll see” and if that’s your idea of a five year plan, I still haven’t closed on the bridge I have for sale so if you hurry, you may be able to gazump the offers on the table.

Which leaves me wondering what you get for your C$1.33 if you buy a share of this company at its current price as, at 245.94m shares out, this is a C$327m market capper. Yes it has cash of C$39.1m and equities worth C$119m as at today (the NVO NR told us), which is also mostly shares in New Found Gold (NFG) and that’s fine, but if you’re here in NVO for the NFG leverage you are in the wrong place (go buy NFG and get all the whack for your buck instead of 35c on the dollar). So, back out that Cash&Equity and you’re left with C$169m to justify and for that, you have the “promising and extensive land package” to your credit, but please remember its C$43m financial debt position on the balance sheet because I promise you, Eric Sprott does every single day. What’s more, these guys have declared commercial production now so if things don’t go as wonderfully well on the exploration side, that C$31.8m reclamation liability sitting in the long-terms suddenly moves out of the world of theory and kicks equity holders in the teeth.

The bottom line is that NVO isn’t worthless, but today’s NR doesn’t even promise jam tomorrow. Instead, P.T. Barnum PhD is offering you the chance to sponsor his next exploration project, which at least is centred on NVO’s “promising and extensive land package” but comes at an implied valuation of around 50c per share if you ignore the reclamation cost line and a whole lot less if the current ops go pear-shaped. And for that, the market wants you to pay an 83c premium and that, ladies and gents, is way too much for the track record NVO has shown us so far. The end.