To make sure the most obvious point isn’t lost in a rambling post, let’s put it up here at the start: NVO would not have sold its shares of NFG if its own operations had worked. After burning hundreds of millions of dollars in exploration, capex and opex, its “commercial production” has been an utter failure and continues to fracture cash. That’s the only reason it sold its NFG shares to Uncle Eric and it doesn’t matter how much spin the permabull diehard true believer fanclub tries to put on it, this move was obligation and not choice. Period.
With that out the way, we can consider what this means to NVO. Today’s NR talks of a pro forma C$97m balance, once the deal is closed in August and all payments made, but that doesn’t take into account the $10m or so per quarter getting flushed down the toilet by an operation supposed to be running at
10,000oz/qtr EDIT, 10,000oz/month by now, but can’t even do half of that. Those losses will continue, as $1,900+/oz gold prices cannot fight against $2,000+/oz cash costs and for more evidence, check the details: There’s a reason Sprott placed its $25m covenant on the deal in the period between Tranche 1 and Tranche 2; those guys want their money back (failure to recoup principal is simply embarrassing) and want to make sure Tranche 1 isn’t thrown down the NVO moneypit before the final payment. After that Spredders can do what he wants, because there’s no way Sprott (company or person) is ever sponsoring this trainwreck again, be it debt, equity or a bridge loan.
Which brings us to the only thing that matters; What’s NVO worth these days? When the dust settles, NFG shares gone and treasury full this will be a simplified story; NVO will have perhaps C$90m cash left and no debt, plus a book of third party shares worth $20m (to da moon!), its money-losing operation that continues to fracture cash every day it remains open, then its concessions. With the debt paid off it can do the only logical thing and put operations into care&maintenance (close it? no way, over $30m in closure liabilities says it “re-thinks and optimizes” for a few years) which means its only real selling point is acreage. It has land, it has targets, it has cash to do drilling (and jackhammering); it might not have the permits for the exact places it wants to explore but hey…details…enough is under permit for an early drill target or two. So to put a figure on that, let’s be generous to a fault and give them 40c/share in cash+marketables, let’s also assume it stops throwing bad money after good and closes ops. That means today its exploration concessions and potential is being valued at over C$135m and if you think that’s a deal worth chasing, I have a bridge to sell you. Only one owner, easy terms, one small downpayment secures legal ownership, send me a mail for more details. Instead, the napkin math we ran on this stock in December seems to hold up reasonably well, even after five months and all the noise and corporate moves:
“…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…”
Yeah, 33c/share overvalue is still about right, so with tonight’s 95c close let’s stick a finger (or Fingers…geddit?) in the air and put a 60c target on this thing. And to wrap up, separately we note NFG’s price pop today, which is not surprising as that’s 15m shares which don’t get fed piecemeal to the open market. We also note that with this deal, P.T. Barnum PhD gets to stay in good graces and remain a NFG director. Eight-figure debt defaults can strain relationships, after all.
PS: You need to be a True Believer to buy that chart.
PPS: The CEO…
…has been resigned.