Proactive Investors - Analysts sometimes discuss value inflexion points, which are milestones that support an investment thesis, typically backed by third-party data. In mining, this might be provided by a feasibility study; in drug development, by the completion of a clinical trial.
In an ideal scenario, this de-risking would align with an increase in a company's value. While this often happens, it is not always the case.
Consider this latter point in the context of Condor Gold PLC (AIM:CNR, TSX:COG, OTC:CNDGF), the owner of the 2.3 million-ounce La India Project in Nicaragua. Condor has passed significant milestones to get La India 'shovel ready' and is now seeking a buyer to bring the mine into production within 12-18 months.
Value crystallisation
It is now just months away from a crucial and final inflexion point - value crystallisation.
Under the plan developed by Condor, the mine would begin life as an open-pit operation producing 82,000 ounces annually, increasing to 150,000 ounces in three years. The initial capital expenditure required is relatively modest at $106 million, with a semi-autogenous grinding (SAG) mill already in place. Permitting is complete, and the land for the operation has been acquired. It has taken a decade and around $90 million in shareholder funding to bring the project to this point.
However, there is a challenge: The United States has imposed sanctions on Nicaragua due to concerns over human rights abuses, corruption, and the erosion of democratic institutions under President Daniel Ortega's government. This has been a discount factor for some investors and might impact potential buyers' interest.
Mellon leading the sale
That said, Condor's chairman, Jim Mellon, who owns 26% of the company and is leading sale negotiations with potential buyers, reported in mid-May that discussions are "advanced".
Eight companies are under NDA, there have been five non-binding offers, and three site visits. While no firm offer has been received, detailed talks are ongoing with one gold producer, and two other parties are actively reviewing the company's assets. "The board is optimistic that a sale will be concluded in the near future," Mellon told investors in commentary alongside the recent prelims.
This level of interest in an asset located in a supposedly challenging mining jurisdiction is notable. And despite the sanctions, Nicaragua has an active natural resources industry with a well-defined legal and fiscal framework. Operators receive 25-year exploration and exploitation concessions, are taxed at 30%, and pay a 3% net smelter royalty. The gold sector includes three major operations: Bonanza, El Limón, and La Libertad.
Mining-friendly
Local authorities are described as mining-friendly, with operations considered no more difficult than in Mexico. Investors retain 100% of their developed assets without a free carry to the government, enhancing the investment case.
La India is likely to attract buyers familiar with the country or comfortable with South and Central American politics. Chinese investors, known for taking on more risk, might also be interested. The project's scale, producing 80,000 ounces of gold initially and rising to 150,000 ounces by year three, would likely appeal to a mid-cap company looking to expand.
The 2022 definitive feasibility study of La India's phase-one, open-pit development, representing about 40% of the resource, delivers a “base case” net present value of $87 million, which represents a premium to Condor's current market value of $70 million. This assumes a gold price of $1,600 an ounce. That NPV rises to $320 million at current gold prices, assuming a 5% discount rate and an all-in-sustaining cost of $1,039 per ounce. The payback period would be 20 months.
Significant inflexion point
None of the foregoing factors in the potential to increase production to 150,000 ounces within three years by going underground or the estimated exploration potential to turn La India into a 5 million-ounce gold district.
Condor is on the brink of a significant inflexion point. Yet, the current share price, stagnant over the past 12 months, does not reflect even the base case valuation of La India. This undervaluation persists despite bullish gold futures predicting prices above $2,700 per ounce by the decade's end.
Investors should note that while the potential for substantial returns exists, so too does the risk that no buyer emerges for La India. This is a classic risk-reward scenario, not a risk-free investment.