Musgrave Minerals: Takeover Target Thesis Remains Intact (OTCMKTS:MGVMF)


It’s been an exciting year for those in the junior gold mining space (GDXJ), but few market participants have enjoyed the year that investors in Musgrave Minerals (OTCPK:MGVMF) have. While there have been a few meaningful new discoveries in North America this year, none hold a candle to the results we’ve seen coming out of the Murchison Province of Western Australia where Musgrave is delineating its Starlight and White Light discoveries. Based on current drilling, these two deposits look like they could hold up to 600,000 ounces of high-grade gold that’s sitting near surface. However, the most recent news is that the company has stumbled upon new high-grade mineralization to the south and is in the process of testing multiple targets at its Cue Project. I continue to see Musgrave Minerals as a top takeover target in the junior mining sector, and this recent news has emboldened that thesis. All figures are in US dollars unless otherwise noted.

(Source: Company Presentation)

Musgrave Minerals has had a rough few weeks given the weakness in the overall gold sector with the stock sliding 30% from its highs, after an incredible 400% run since its Starlight discovery earlier this year. Some investors might be skeptical of buying the stock due to the unfilled gap in the chart below, but it’s important to note that breakaway gaps that occur on well above normal volume are not likely to get filled, and this surge in the share price was clearly funds picking up the stock. Since the August highs, the stock has pulled back to its weekly moving average where we need to see support to keep the technical picture intact. Fortunately, Musgrave has released some new drill results right on cue, and they should help to support the share price. Let’s take a closer look below:

(Source: TradingView.com)

Musgrave’s focus the past four months at its Break Of Day Prospect has been on infill drilling at Starlight and White Light to prepare for a resource estimate that’s expected before year end. However, given the significance of these discoveries and the fact that they’re the highest-grade intercepts reported in over a year globally, the company is now stepping out to test new regional targets on its tenements. We received the first holes from this regional drill program on Wednesday, and they are quite encouraging. As shown below, Regional Target #2 sits 400 meters south of Starlight, and the highlight intercept from this target came in at 14 meters of 5.0 grams per tonne gold. We can take a look at the other results below:

(Source: Company News Release)

20MUAC-006: 4 meters of 0.20 grams per tonne gold

20MUAC-007: 3 meters of 0.20 grams per tonne gold

20MUAC-008: 9 meters of 7.6 grams per tonne gold

20MUAC-009: 14 meters of 5.0 grams per tonne gold

20MUAC-012: 1 meter of 1.54 grams per tonne gold

As shown above, we only saw two meaningful intercepts (20MUAC-008 & 20-MUAC-009) of the five drilled into this target thus far, but this is an impressive success rate given that this is an entirely new target with no real drilling to date. The two most impressive intercepts were 9 meters of 7.6 grams per tonne gold and 14 meters of 5.0 grams per tonne, both running above 50-gram meters. Obviously, these results pale compared to some of the best holes at Starlight like 14 meters at 191.1 grams per tonne gold that start at less than 10 meters below the surface. Still, the recent results are economical, especially considering that they’re amenable to open-pit mining and less than 50 meters from the surface.

(Source: Company News Release)

If we look at the chart above, the recently completed gravity survey suggests that there’s the potential for more Starlight-type targets on the 6-kilometer strike length shown above, with regional targets #5 and #20 sitting to the south near Section 693-1000, and regional targets 14 and 16 sitting to the north near Section 693-7000. Currently, Musgrave is testing the targets in the closest proximity to their Starlight and White Light discoveries, and it’s a great sign that one of the first 3 targets to be drilled has shown above-average gold grades. The current resource at its Moyagee Project is made up of 613,000 ounces at 3.0 grams per tonne gold, and I believe the Starlight & White Lode discoveries alone could push this to 1.45 million ounces total within 15 months: a more than 100% increase. Therefore, if Musgrave can delineate another target, we could have two-million-ounce potential long term at the Southern Area.

(Source: Company Presentation)

Some investors might argue that Musgrave is quite expensive at its current market cap of $180 million with a sub-1-million ounce resource. While rudimentary analysis would suggest this is correct, I believe it couldn’t be further from the truth. Those valuing Musgrave Minerals on a sub-1-million-ounce resource are ignoring the most significant high-grade discovery in the past two years in the junior mining sector, with the only comparable for grades and size in Australia among gold juniors being Bellevue Gold (OTCPK:BELGF) (BGL.ASX). However, Musgrave benefits from being near-surface and amenable to open-pit mining, which means less upfront development costs as there’s minimal stripping needed when mineralization is starting 5 meters from surface.

(Source: Author’s Chart)

As the chart above shows which compares resource size and grade for Australian gold juniors, Musgrave is clearly in a league of its own for grades, with its only competition being Bellevue Gold (far right of chart). Bellevue Gold is currently valued at over $200.00/oz and has consistently commanded a valuation of above $200.00/oz for its high-grade Bellevue Gold Project in Western Australia. Meanwhile, Spectrum Metals was just acquired for over $200.00/oz by Ramelius Resources (OTCPK:RMLRF) in Q1 in a $153 million deal. Therefore, it’s clear that the highest-grade gold juniors are seeing a massive premium for their ounces.

(Source: Company Presentation)

Starlight and White Light is looking like it has the potential to push the Break of Day/Lena Resource up from 524,000 ounces to 1.0 million ounces. In addition, given the grades at White Light & Starlight, we should see the average resource grade increase to above 5.70 grams per tonne gold, from closer to 4.16 grams per tonne gold currently (Lena: 325,000 ounces at 2.30, Break of Day: 199,000 ounces at 7.20). On a property wide basis for the Southern Area and including the smaller ‘Numbers’ and ‘Leviticus’ deposits, Musgrave has 554,000 ounces currently, but this includes none of the recent discoveries. My estimate is that Musgrave should add a minimum of 450,000 ounces with the Starlight & White Light discoveries, so I would expect the Southern Area resource to grow to 1.03 to 1.05 million ounces conservatively by Christmas in a JORC resource estimate. However, with further drilling, I think 1.45 million ounces are achievable by December of next year.

(Source: Author’s Notes)

Based on Musgrave’s share count of 474 million and a share price of $0.38 at a $0.71 exchange rate for Australian dollars to US dollars, the company has a market cap of $180 million. If we subtract out $7 million in cash, this leaves us with an enterprise value of $173 million. Obviously, $173 million is a lot to pay for a company with a 613,000-ounce JORC resource. However, if we recognize that this resource is likely to grow to 1.45 million ounces by December of next year, the valuation becomes a lot more reasonable. Based on 1.45 million ounces, the enterprise value per ounce drops to $119.31, well below the price Ramelius paid for Spectrum and 40% below where Bellevue Gold is currently valued. Therefore, I would argue that Musgrave Minerals is still very reasonably valued at A$0.525. This is contingent on the company proving up a total resource of 1.45 million ounces by December of next year.

(Source: Company Presentation)

It’s worth noting that this valuation provides zero value for Lake Austin North, an A$18 million joint-venture where Evolution Mining (OTCPK:CAHPF) has the potential to earn up to 75%. Lake Austin North has the potential to be a significant discovery as well with thick medium-grade intercepts like 84 meters at 1.70 grams per tonne gold and 242 meters at 1.0 grams per tonne gold. This prospect sits less than 10 kilometers north of the Lena deposit on the Break of Day/Lena Gold Corridor. It’s hard to assign value to this prospect given that there’s no resource yet, but it’s undoubtedly an attractive prospect if Evolution is willing to spend this much on it to earn 75%. Finally, with three operating mills within a 130-kilometer radius of Musgrave’s Cue Project, several possible suitors are likely keeping an eye on Musgrave’s exploration program. This is because it’s a logical acquisition for Ramelius or Westgold (OTC:WTGRF) given that Break of Day ore is high-grade and near-surface and can be fed to their mills to beef up feed grade.

(Source: Company Presentation)

The Musgrave Minerals is arguably the most exciting in the junior mining sector currently, but news of high-grade mineralization at the second regional target tested has made it sweeter. Musgrave Minerals is a top takeover target given that it’s in the #1 mining jurisdiction worldwide. It has some of the most impressive intercepts of high-grade gold I’ve seen since Mariana Resources (OTC:MRLDF), which was acquired a few months after I started covering them in 2017. For now, I continue to see Musgrave Minerals as a Hold, but I would consider raising my price target if the resource estimate comes in above my expectations. If we do see a deeper correction in Q4, I would view any pullbacks below A$0.45 as an opportunity to add exposure.

Disclosure: I am/we are long GLD. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: Disclaimer: Taylor Dart is not a Registered Investment Advisor or Financial Planner. This writing is for informational purposes only. It does not constitute an offer to sell, a solicitation to buy, or a recommendation regarding any securities transaction. The information contained in this writing should not be construed as financial or investment advice on any subject matter. Taylor Dart expressly disclaims all liability in respect to actions taken based on any or all of the information on this writing.

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