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Buy Victoria Gold

Buy Victoria Gold (VGCX.TO)

Victoria Gold is a past pick of mine, which I sold for fundamental reasons a couple of years ago.

The company is a single mine operator producing gold from its Eagle mine in the Yukon. The company never managed to ramp-up production in line with the original mine plan.

Eagle mine plan

Eagle should have produced 280,900 ounces of gold in 2023 as per the plan but instead produced a mere 166,730 ounces. The 2024 guidance isn't any better.

Meanwhile, costs keep ticking higher. 2024 All-in Sustaining Cost (AISC) is expected to range from US$1450-$1650/oz, as compared to US$1488/oz in 2023. Knowing the company, costs will be in the higher end of the range.

This is a marginal producer that only makes money when gold heads higher, as it is now.

Yesterday, the stock tanked 10% on reporting Q1 production data, which showed a sharp drop in grade (0.63 g/t vs 0.86 g/t in Q1 2023 and 0.65 g/t in Q4 2023). The company attributed the drop to mine sequencing, which isn't much of an excuse.

However, Q1 is always the weakest quarter for the company due to harsh winter conditions. Until 2023, the company would effectively shut down for the winter and used to report terrible production numbers. Q1 gold production actually went up from 24,358 ounces in 2022 to 29,580 ounces in 2024 - an improvement, but just not as good when looked at strictly on a YoY basis. 

You can guess how the algos parse these news releases.

And therein lies the opportunity for traders who understand fundamentals.

Gold is heading higher. Marginal producers which didn't make money at lower prices should gush cash at higher gold prices.

Victoria Gold has a C$465.7M market cap and reported $25.1M in net income and C$4.9M in FCF in 2023. The YoY comparisons are going to look amazing by the time this company reports 2024 results. In fact, given management's history of sandbagging bad quarters, I'd say Q2-Q4 2024 will be a marked improvement.

I don't expect it to get that far. M&A activity is typically lackluster at the beginning of the bull market, when investors are loath to see companies waste cash/ dilute shareholders. Or worse, take on debt to fund M&A. Once the gold bull market gets going, multiples expand, and investors get comfortable, M&A is seen as a way to "grow". Mines are depleting assets and one sure way to replace reserves is by buying them. And what better asset to buy than a single-mine operator which has a lower multiple due to the high risk nature of being a single mine operator.

Agnico Eagle Mines (AEM, MCap: $30.7B) is focused primarily on Canada with 7 operating mines in the country. The stock has a PE of 11. The stock is neck and neck with Barrick Gold (GOLD) for the no. 2 spot in the GDX ETF. What better way to decisively clinch that spot than by acquiring another Canadian asset in an all-stock deal, especially when doing so will be value accretive and not be frowned upon? In my opinion, Agnico should sell Fosterville in Australia to an Aussie-based miner, and deploy the cash into rolling up Wesdome Gold Mines (WDO.TO), Artemis Gold ($ARTG.V) and Victoria. AEM has experience operating the low-grade Detour Lake mine and building mines in the Arctic, so VGCX would be the perfect addition.

But if not Agnico, Eldorado Gold (EGO) is another potential suitor. Or any LATAM/ African producer looking to lower their geopolitical discount. Canada has become hostile to Chinese capital, which narrows the field a bit, but isn't a material issue for my bet on Victoria Gold.

I had a starter position established at C$5.9 in October 2023 when I started to go heavy on the gold stocks during tax-loss season. I added to my position along the way at prices ranging from C$5.3 to C$7.02. I raised my position by two-thirds on yesterday's sell-off. Victoria is now my fourth largest stock position, behind Consol Energy (CEIX), Fortuna Silver (FSM) and Endeavour Mining (EDV.L, EDV.TO) - in that order.

Good Trading!

Kashyap Sriram

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