Advanced Stage Gold Junior Receives Investment from Yamana · Page 3 ©2020 Fundamental Research...

Analysts' Ideas of the Week Advanced Stage Gold Junior Receives Investment from Yamana

June 15, 2020

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PLEASE READ THE IMPORTANT DISCLOSURES AT THE BACK OF THIS REPORT

Weekly Mining Commentary Last week, we had mentioned that we were getting concerned about equity valuations

as most global markets had already recouped a significant portion of the losses from

COVID-19, and that there is no indication that the current fundamentals are better than

pre-COVID levels. Our concerns were justified as stock markets across the globe

experienced a significant sell-off in the first half of last week. The S&P 500 was

down 7.1% in the first half of last week, but has since gained 2.1%. The TSXV (good

proxy for resource companies), which fared better, was down 3.7% in the first half, and

then up 2.9%.

The sell-off was a result of rising concerns of a second wave of the pandemic.

Beijing reported its highest number of new infections since February; almost all of them

were from a single wholesale food market. In the U.S., Florida and Texas reported an

increase in new cases, as shown below.

Source: https://www.worldometers.info/coronavirus/



https://www.worldometers.info/coronavirus/

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On a positive note, except for India, all other countries that we were closely

monitoring, have started reporting a steady or declining number of new cases. As

India has only tested 4k per one million population, we believe that India will continue to

report increasing new cases.

Source: https://www.worldometers.info/coronavirus/

Despite the sell-off in equity markets, copper and gold prices strengthened last

week.



https://www.worldometers.info/coronavirus/

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Barring the risk of a second wave, we believe that increasing activities, as indicated by

the following data, continue to support base metals’ demand.

1. Industrial production in China increased 4.4% YoY in May, up from 3.9% YoY in April.

Chinese Industrial Production

2. Retail sales in China were only down 2.8% YoY in May versus 7.5% in April.

Chinese Retail Sales

3. Consumer confidence is increasing, as indicated by rising property sales in China, and record high mortgage applications in the United States. Canadian home sales increased 57% MoM in May.



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4. The inventory levels of copper on the LME and SHFE (Shanghai Futures

Exchange) continue to decline WoW.



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We remain cautiously optimistic on the current recovery, and continue to be positive on base metal prices. We have not made any changes to our near-term or long-term price forecasts.

As for gold, four out of the fix factors in our model (presented below) were favorable for gold in the past week, which explains why gold prices strengthened. We believe that these four factors continue to support a short-term spike in prices, followed by a decline to our long-run average of $1,400/oz.



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Valuations – Despite the increase in gold and copper prices, due to the sell-off in equity markets, the valuation of gold producers stayed flat, and that of base metal producers declined last week. All seven base metal producers in our list reported weekly declines.



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The next few weeks will be very critical as we will know if a second wave is on the

horizon. That said, as most nations have been able to contain the first wave, we

believe that a second wave can also be contained if and when stricter lockdowns are

imposed. Beijing is reintroducing strict lockdown measures, and is implementing large

scale testing. Although we remain positive on metal prices, we expect equity

markets (across all the mainstream metals) to be very volatile in the coming

weeks.

In the following section, we review companies that announced key developments in the

past week.

Mining / Exploration

Company

Name:

Ticker

Symbol

Current Share

Price:

FRC Fair Value

Estimate:

Date of PR:

Monarch Gold

Inc.

TSX: MQR $0.27 $0.60 June-8-2020

PR Content Received a $5.42 million investment from Yamana Gold (TSX: YRI), Alamos Gold Inc. (TSX: AGI) and other investors. Yamana subscribed for $4.2 million and will be entitled to have a representative on MQR’ board of directors. The company had recently sold its Fayolle property to IAMGOLD Corporation (TSX: IMG) for $11.5 million.

FRC Opinion Positive – This strategic investment from Yamana is a major vote of confidence on MQR’s portfolio. Monarch is in an excellent cash position with $25 million in the treasury and short-term investments. Their properties hold measured and indicated resources totaling 3.16 million ounces (“Moz”), and inferred resources of 0.42 Moz. MQR had recently entered into a MOU with Glencore (LSE: GLEN) to potentially use Glencore’s concentrator in Timmins, Ontario, for the treatment of ore from MQR’s flagship Wasamac gold property. A toll milling option will allow MQR to advance this asset into production quicker and at a lower CAPEX.



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Company

Name:

Ticker

Symbol

Current Share

Price:

FRC Fair Value

Estimate:

Date of PR:

Thor

Exploration

Limited

TSXV: THX $0.18 $0.50 June-12-2020

PR Content Raising up to US$15 million.

FRC Opinion Positive – The funds will be primarily used for exploration drilling on the flagship Segilola project in Nigeria, and the Douta gold Project in Senegal. THX is fully funded to advance the Segilola gold project into production in 2021. At a grade of 4.2 gpt, Segilola is estimated to host the highest grade known open pit gold deposit in West Africa. The average production is expected to be 80,000 oz per year, with an all in sustaining cost of US$662 per oz. We expect a number of catalysts for the share price over the next 12 months as the company advances to production.

Company

Name:

Ticker

Symbol

Current Share

Price:

FRC Fair Value

Estimate:

Date of PR:

Kootenay Silver

Inc.

TSXV: KTN $0.31 $0.57 June-11-2020

PR Content Recommenced drilling at its Columba high-grade silver project, and the never drilled Copalito silver-gold property in Mexico, following a temporary suspension due to COVID-19. Drilling at Columba is the continuation of a 7,000 m program.

FRC Opinion Positive – Columba has consistently returned high grade values since the company started drilling the property in 2019. In 2019, the company had completed a 41 hole / 6,853 m drill program, which was very successful with multiple holes returning high grade silver intercepts on multiple veins. We expect a maiden resource estimate by year-end. No immediate plans on the flagship La Cigarra project, also in Mexico.



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Company

Name:

Ticker

Symbol

Current Share

Price:

FRC Fair Value

Estimate:

Date of PR:

Rockcliff Metals

Corporation

CSE: RCLF $0.07 $0.32 June-10-2020

PR Content Commenced a 3,000 m expansion drill program on the Tower property.

FRC Opinion Neutral – We are awaiting a Preliminary Economic Analysis (PEA) on Tower, which is expected to be completed next month. Note that Tower is one of RCF’s key assets, which includes three advanced stage copper projects (two high-grade copper and one gold-rich copper project), and a leased processing and tailings facility – all in the Flin Flon-Snow Lake greenstone belt in Manitoba. All three projects and the mill are strategically placed, offering the company an option to use a ‘hub and spoke’ strategy, and truck ore from all three projects to a centralized mill. A production decision is expected by Q4.

Company

Name:

Ticker

Symbol

Current Share

Price:

FRC Fair Value

Estimate:

Date of PR:

Skyharbour

Resources Ltd.

Azincourt

Energy Corp.

TSXV: SYH

TSXV: AAZ

$0.15

$0.03

$1.01

N/A

June-8-2020

PR Content Announced results from a phase two drill program at the East Preston uranium project in the western Athabasca Basin. The program (nine holes totaling 2,431 m) tested the A-zone and B-zone conductor corridors, as well as the Swoosh zone, located approximately five km along strike southwest of the A-zone.

FRC Opinion Neutral - Although the program did not result in a discovery, we were pleased to see potential for REE (rare earth elements) mineralization. The project holds multiple untested conductive corridors for additional drilling. AAZ is planning a ground geophysical targeting program to identify drill targets.



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Company

Name:

Ticker

Symbol

Current Share

Price:

FRC Fair Value

Estimate:

Date of PR:

Golden Arrow

Resources

Corporation

TSXV: GRG $0.17 N/A June-8-2020

PR Content Mapping and vein sampling at the Flecha de Oro gold project in Rio Negro, Argentina delineated a new high - grade gold target. Highlights from sampling include: ➢ 24.4 g/t gold and 13.6 g/t silver ➢ 5.23 g/t gold and 32.3 g/t silver over

0.30 m, and ➢ 4.3 g/t gold and 2.3 g/t silver over 0.30

m

FRC Opinion Positive – These results were encouraging, and the company is likely to follow this up with a trenching program. GRG’s portfolio includes early stage precious-metal projects in Paraguay and Argentina. The company holds 945,580 shares of SSR Mining (TSX: SSRM), which are currently valued at $24 million. GRG’s market capitalization is only $19 million; implying that the market is assigning zero value to any of its assets.



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Special Situations

Company

Name:

Ticker

Symbol

Current Share

Price:

FRC Fair Value

Estimate:

Date of PR:

CIBT Education

Group Inc.

TSX: MBA $0.45 $1.22 June-9-2020

PR Content Signed a binding agreement to purchase two apartment buildings in Metro Vancouver. If and when completed, this will be CIBT’s eleventh project in Metro Vancouver. The purchase price was undisclosed, but the company did disclose that the two buildings have a capacity to accommodate up to 245 students and other tenants.

FRC Opinion Neutral – Since the purchase price and other pertinent details (such as the cap rate) remain undisclosed, we are not in a position to comment on the deal’s attractiveness. That said, CIBT’s expanding portfolio size makes them increasingly attractive for institutional buyers of real estate. CIBT is now the largest privately funded student housing provider in Western Canada with a total projected cost of projects completed and under development of over $1 billion, and a capacity of over 1,500 students and other tenants. Our near-term outlook for student housing projects is weak due to a lack of international students. However, we maintain a long-term positive outlook on the sector considering that we believe B.C. will continue to attract foreign students once all the travel restrictions are removed. We will comment on CIBT’s latest transaction once additional details are disclosed.



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Company

Name:

Ticker

Symbol

Current Share

Price:

FRC Fair Value

Estimate:

Date of PR:

Siyata Mobile

Inc.

TSXV: SIM $0.11 $1.14 June 12, 2020

June 11, 2020

PR Content

Released year-end results, with 2019

revenue coming in at $13.02 million – a

year-over-year decrease of 8.4%. The

deterioration in revenue, according to the

company, was primarily due to lower 3G

device sales. The net loss in 2019 was

$10.16 million (EPS: -$0.09) versus a net

loss of $11.53 million (EPS: -$0.12) in

2018. The net loss in 2019 improved

year-over-year due to an impairment

charge of $1.95 million on intangible

assets in 2018.

Announced a related-party non-brokered

private placement of approximately US$1

million in unsecured convertible

debentures (12-month maturity, interest

rate of 10%, with a conversion price of

$0.30).

FRC Opinion

Negative – For 2019, we expected the

company to report revenue and a net loss of

$15.04 million and $6.72 million (EPS: -

$0.05), respectively. In the company’s

earnings call, management alluded to weak

3G device sales headed into 2020 as users

switch to 4G products. The company has

been delivering on its government tender

(valued between $3 million to $5 million) in

Q1-2020, in addition to other purchase

orders (“PO”), leading us to believe that

revenue in Q1-2020 will strengthen

compared to Q4-2019 (revenue of $2.93

million).

Positive – We are pleased to see a related-

party financing, as it indicates insider’s

conviction on the company.



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Cannabis

Company

Name:

Ticker

Symbol

Current Share

Price:

FRC Fair Value

Estimate:

Date of PR:

Inner Spirit

Holdings Inc.

CSE: ISH $0.15 $0.42 June 8, 2020

PR Content

Announced that five franchise partners

have secured Retail Store Authorizations

(“RSA”) for Spiritleaf cannabis stores in

the province of Ontario. Furthermore,

seven additional Spiritleaf stores in

varying provinces have completed

construction and are in the final stages of

licensing.

FRC Opinion

Positive – We are pleased to see the

company continually expand its footprint

across Canada. We expect Inner Spirit to

operate 73 retail cannabis stores

(franchised and corporate) in 2020.

Company

Name:

Ticker

Symbol

Current Share

Price:

FRC Fair Value

Estimate:

Date of PR:

AgraFlora

Organics

International

Inc.

CSE: AGRA $0.06 $0.38 June 15, 2020

PR Content

Announced the commencement of

cannabis cultivation at the Delta

Greenhouse Complex (“DGC”).

FRC Opinion

Neutral – We expected the commencement

of cannabis cultivation at the DGC in early

Q1-2020.

Coverage Update:

• We are terminating coverage on Agrios Global Holdings Inc. (CSE: AGRO) due to a lack of communication from management. Our rating and fair value estimate are no longer valid.



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Weekly Cannabis Commentary

Cannabis Industry Performance

Note: MCAN and XCAN was launched on November 18, 2019 and January 20, 2020, respectively.

Source: TMX Money, FRC

Over the past week, the Horizons Marijuana Life Sciences ETF (TSX: HMMJ / “HMMJ”), the Standard & Poor’s/MX International Cannabis Index (“MCAN”), and the Standard & Poor’s/TSX Cannabis Index (“XCAN”) generated a return of -10%, -10%, and -13%, respectively. Weakness in the broader market, due to fears of a second wave of COVID-19 and rising cases in some states in the United States, resulted in the poor weekly performance of the cannabis industry. Canadian retail sales data for the month of April 2020 are due on June 19, 2020. An update to retail cannabis sales will be provided next week.



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Valuation of Select Canadian LPs

The following shows the average Enterprise Value to Revenue (“EV/R”) of the cannabis

companies that we track.

Average EV/R (October 2019 – June 2020)

Source: S&P Capital IQ, FRC

Source: S&P Capital IQ, FRC

The average EV/R, as of June 15, 2020, is 10.9x – a slight deterioration from an

average EV/R of 11.1x as of June 8, 2020. The average EV/R, from October 7, 2019 to

date, is 12.4x. As a number of companies are not EBITDA positive, we have refrained

from tracking the average Enterprise Value to EBITDA (“EV/EBITDA”).

Below, we discuss the illicit market for cannabis in Canada.



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Canada’s Illicit Market for Cannabis

Legal recreational cannabis sales in Canada were $1.2 billion in 2019 (Source:

Statistics Canada), a figure dwarfed by an illicit cannabis market that is estimated at $5

billion to $7 billion (Source: The Associated Press). We believe there are two key

factors contributing to the success of Canada’s illicit market for cannabis: (1) the high

pricing for legal cannabis and (2) the lack of retail cannabis stores across Canada.

These two factors result in legal cannabis that is overpriced and not easily

accessible.

Key Issues with Canada’s Legal Cannabis Market

Source: FRC

• From our data, the price per gram of recreational cannabis has only dropped

5% from October 2018 to date (average price per gram currently sitting at

$11.49).

• Since we began tracking the number of retail cannabis stores in Canada

(February 2020), the store count has increased by 20%. Although this represents

a strong increase, the population per store currently sits at 40k. There is

tremendous potential for more store openings across Canada, especially in

the province of Ontario, who has a population per store of 166k. According

to a report by Verilife, the state of Oregon (a mature cannabis market) has a

population per store count of 6k.

If Canada expects to compete effectively against the illicit market for cannabis, stronger

effort must be made in decreasing the retail price of cannabis and opening more retail

cannabis stores.



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According to the 2019 National Cannabis Survey (“NCS”) by Statistics Canada, 29% to

51% of cannabis consumers in Canada acquire their products from an illegal

source.

Sources of Cannabis

Note: Respondents could select more than one category, so results may not add up to 100%.

Taken From: Vancouver Sun; Source: Statistics Canada, National Cannabis Survey

Canadian Retail Cannabis Pricing

Source: Online Provincial Cannabis Stores, FRC



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The average retail price per gram remained steady at $11.49 per gram.

In the long-term, we continue to reiterate our view that the retail price per gram of

cannabis will decrease to combat the black market for cannabis. According to

Statistics Canada, the average price of illegal cannabis in Q4-2019 was $5.73. The

following shows the trend in pricing for illegal cannabis:

Illegal Cannabis Pricing

Source: Statistics Canada, FRC

Retail Cannabis Stores

As of June 15, 2020, there are 943 retail cannabis stores across Canada. This is a

nominal increase from a week ago.

Number of Retail Cannabis Stores in Canada

Source: Provincial Websites, FRC

The following shows the number of retail cannabis stores by province/territory:



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Source: Provincial Websites, FRC

Shown above, Ontario and Quebec are the two largest underserved provinces for

cannabis, with a population / store of 165k and 202k, respectively. To our surprise, the

number of cannabis retail stores in Ontario decreased by three week-over-week. We

are not privy to the reason for this decrease. Growth in Canada’s cannabis market

hinges on more retail cannabis store openings in the two aforementioned

provinces.

The below chart shows Canadian retail dried cannabis flower pricing since we began

price coverage.

Canadian Retail Dried Cannabis Flower Pricing

Source: Online Provincial Cannabis Stores, FRC



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Disclaimers and Disclosure The opinions expressed in this report are the true opinions of the analyst(s) about any companies and industries mentioned. Any “forward looking statements” are our best estimates and opinions based upon information that is publicly available and that we believe to be correct, but we have not independently verified with respect to truth or correctness. There is no guarantee that our forecasts will materialize. Actual results will likely vary. Companies mentioned in this report may be covered by FRC under an issuer paid model or be candidates for coverage. FRC or companies with related management, may hold shares in some companies mentioned in this report. Distribution procedure: our reports are distributed first to our web-based subscribers on the date shown on this report then made available to delayed access users through various other channels for a limited time. To subscribe for real-time access to research, visit https://www.researchfrc.com/website/subscribe for subscription options. This report contains "forward looking" statements. Forward-looking statements regarding the Company, industry, and/or stock’s performance inherently involve risks and uncertainties that could cause actual results to differ from such forward-looking statements. Factors that would cause or contribute to such differences include, but are not limited to, continued acceptance of the Company's products/services in the marketplace; acceptance in the marketplace of the Company's new product lines/services; competitive factors; new product/service introductions by others; technological changes; dependence on suppliers; systematic market risks and other risks discussed in the Company's periodic report filings, including interim reports, annual reports, and annual information forms filed with the various securities regulators. By making these forward-looking statements, Fundamental Research Corp. and the analyst/author of this report undertakes no obligation to update these statements for revisions or changes after the date of this report. Fundamental Research Corp DOES NOT MAKE ANY WARRANTIES, EXPRESSED OR IMPLIED, AS TO RESULTS TO BE OBTAINED FROM USING THIS INFORMATION AND MAKES NO EXPRESS OR IMPLIED WARRANTIES OR FITNESS FOR A PARTICULAR USE. ANYONE USING THIS REPORT ASSUMES FULL RESPONSIBILITY FOR WHATEVER RESULTS THEY OBTAIN FROM WHATEVER USE THE INFORMATION WAS PUT TO. ALWAYS TALK TO YOUR FINANCIAL ADVISOR BEFORE YOU INVEST. WHETHER A STOCK SHOULD BE INCLUDED IN A PORTFOLIO DEPENDS ON ONE’S RISK TOLERANCE, OBJECTIVES, SITUATION, RETURN ON OTHER ASSETS, ETC. ONLY YOUR INVESTMENT ADVISOR WHO KNOWS YOUR UNIQUE CIRCUMSTANCES CAN MAKE A PROPER RECOMMENDATION AS TO THE MERIT OF ANY PARTICULAR SECURITY FOR INCLUSION IN YOUR PORTFOLIO. This REPORT is solely for informative purposes and is not a solicitation or an offer to buy or sell any security. It is not intended as being a complete description of the company, industry, securities or developments referred to in the material. Any forecasts contained in this report were independently prepared unless otherwise stated, and HAVE NOT BEEN endorsed by the Management of the company which is the subject of this report. Additional information is available upon request. THIS REPORT IS COPYRIGHT. YOU MAY NOT REDISTRIBUTE THIS REPORT WITHOUT OUR PERMISSION. Please give proper credit, including citing Fundamental Research Corp and/or the analyst, when quoting information from this report. The information contained in this report is intended to be viewed only in jurisdictions where it may be legally viewed and is not intended for use by any person or entity in any jurisdiction where such use would be contrary to local regulations or which would require any registration requirement within such jurisdiction.



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