Cardinal Resources: Still Oblivious To Gold’s Rapid Ascent – Cardinal Resources Limited (OTCMKTS:CRDNF) No ratings yet.

It looks like the gold bull market has finally arrived. Most recently, the spot price of gold has been on a tear, and even managed to hit a high of ~$1,475/oz, before cooling off a bit to settle at around ~$1,462/oz. Now, gold is currently trending back up again, trading at ~$1,485/oz, and looking poised to challenge new highs not seen since 2013.

Source: Goldprice.org

As such, it may then come as no surprise to observers that many industry leading gold stocks have also seen their share prices soar in tandem with the rapid ascent made by the yellow metal since the start of summer, and in some cases, there are companies out there that are outperforming the latter quite significantly.

The following chart shows the share price performance for an array of gold companies focused on mining/developing assets located in West Africa, since June 1.

In a span of just over two months, the above examples showcase some very impressive returns, indeed.

Although gold and gold mining stocks have been mostly gaining steady ground in recent months, there are still laggards to be found across the sector.

In particular, gold developer Cardinal Resources (OTC:CRDNF), located in Ghana, has greatly lagged behind its West African peer group over the same time frame, beginning on June 1.

  • CRDNF is up “only” 2.94%.

As shown above, shares of CRDNF are up a measly 1.47% since June 1, current trading at A$0.37/share, which more or less implies that Cardinal Resources and its longer-term shareholders have essentially missed the boat during the early days of what is looking more and more likely to be the emergence of the next bull market in gold.

Let us now take a closer look and examine what the Cardinal Resources story is all about.

Namdini Gold Project

Cardinal Resources controls the Namdini Gold Project, which is their flagship project, and one that the company has been actively drilling + developing over the past several years.

The boundaries of the Namdini Mining License are shown below in the following map.

Source: Cardinal Resources Namdini Project

In September 2018, Cardinal Resources published a Pre-Feasibility Study (PFS) for the Namdini Gold Project, which showcased the potential to support a very large scale mining operations (capable of processing 9.5 Mtpa), which would lead to gold production of 294k oz/year over the life of mine (not to mention 361k oz/year over the first 2.5 years via an initial “starter pit”).

Source: Cardinal Resources August 2019 Corporate Presentation

Worth noting, large gold projects in the development stage are not exactly a rare thing to locate in the gold sector (many junior companies own very large deposits), but as shown in the slide above, what stands out in particular about Cardinal’s Namdini Gold Project is that not only does it have immense size/scale, the upfront CAPEX is a reasonable $414 million.

In other words, the Namdini Gold Project is not an optionality play (which again, are a dime-a-dozen out there), and based on the most recent PFS, it seems to have the potential to offer some rather compelling project economics.

Source: Cardinal Resources August 2019 Corporate Presentation

As shown in the chart above, assuming a gold price of $1,250/oz produces a robust after-tax NPV (5% discount rate) of $586 million and an after-tax IRR of 38%.

Factoring in for higher gold prices, such as $1,350/oz (which at the time the PFS was released represented a realistic “ceiling” for a rising gold price, since smashed by the recent move upward this summer), the numbers become even more impressive for the Namdini Gold Project, with an after-tax NPV (5% discount rate) of $758 million and an after-tax IRR of 46%.

Peer Comparisons

For comparison, Midas Gold (OTCQX:MDRPF) previously released the following numbers in a 2014 PFS for its Stibnite Gold Project, located in Idaho, which shows a slightly larger life of mine production profile of 337k oz/year (compared to 294k oz/year for Namdini), but would require a far more substantial initial CAPEX bill of $970 million (compared to $414 million for Namdini).

Source: Midas Gold December 2014 PFS

As a result of such exorbitant CAPEX requirements, Midas Gold’s Stibnite Gold Project can only muster up an after-tax NPV (5% discount rate) of $832 million and an after-tax IRR of 19.3%, while also assuming a gold price of $1,350/oz.

With all that said, it may then be surprising to observe that the share price of MDRPF has appreciated quite a bit higher than shares of CRDNF, since June 1.

Moreover, although it’s a relatively known fact that not all gold ounces are created equally (the market typically gravitates towards rewarding a significant premium to companies/projects that it feels offer more economical, “high quality” ounces), it’s nevertheless also worth pointing out that in the context of a bull market for gold, the number of ounces a company holds starts to matter a whole lot more.

As shown below, some companies that arguably represent more of an “optionality” (i.e., non-expiring call option) way to speculate on a rising gold price have seen their shares ripping a lot higher, since June 1.

  • Seabridge Gold (SA) is up 23.58%.
  • Chesapeake Gold (OTCQX:CHPGF) is up 69.92%.
  • Vista Gold (VGZ) is up 66.72%.
  • NovaGold (NG) is up 65.43%.

As it pertains to Cardinal Resources, not only does the company possess economical, “high quality” ounces, but like its optionality peers shown above (which should not be lumped inside the same category as), it also has in its inventory a lot of ounces (although not to quite the same size/scale as some; for example, Seabridge Gold has ~40 million ounces in reserve).

At the time the PFS was unveiled to market, the Namdini Gold Project featured 4.76 million ounces in the Probable category.

Source: Cardinal Resources September 2018 PFS

Furthermore, since the release of the PFS, the Namdini Gold Project has continued to grow in size, as the company has undertaken more drilling and moved into the next phase of development, which is to produce a Definitive Feasibility Study (DFS).

Currently, the most recent mineral reserve update published by Cardinal Resources shows that there are 5.1 million ounces in the Proven and Probable category (which, if this does lead to a material impact, will be reflected in the soon to be released DFS).

Source: Cardinal Resources April 2019 Press Release

And as the PFS already demonstrated nearly a year ago, the Namdini Gold Project is just on the cusp of being able to average a life of mine production profile of ~300k oz/year. When factoring in the latest mineral reserve update, as well as any additional exploration upside (which very likely still exists within the boundaries of the Namdini Mining License), it seems reasonable to assume at this time that Cardinal Resources should one day be able to climb past the 300k oz/year mark.

Nevertheless, at the moment, Cardinal Resources is getting very little credit from the market for both the quality of ounces it controls, along with the sheer number of them, as evident by the lackluster share price performance of CRDNF ever since gold broke through $1,400/oz.

In fact, the share price of CRDNF has actually fallen -10.26% over the past year, despite the fact that gold is now trading at ~$1,485/oz (compared to a year ago when the gold price was stuck in the ~$1,250/oz range much of the time, and even on occasion touching below $1,200/oz).

Upcoming Catalyst and Key Risks

For Cardinal Resources, some of the recent stagnation in share price likely has to do with the company attempting at the last minute (on the cusp of releasing the DFS) to attempt further metallurgical testwork in hopes of improving recoveries even further, which has led to delays.

From Cardinal Resources.

Cardinal has recently completed its current testwork to consider the introduction of an AachenTM system into the Namdini process flow sheet which is being established by Lycopodium. The testwork has been completed at the Maelgwyn Mineral Services Africa (MMSA) metallurgical laboratory in South Africa.

The base premise of the process is to scour the mineral surfaces and maximise oxygen transfer to the ore slurry prior to leaching, which enhances leach kinetics, resulting in improved recovery of gold. It is a relatively simple, proven process already being used at 9 gold producing mines.

In addition to a potential increase in gold recovery (and therefore a potential uplift to annual gold production rates), there are typically power and reagent savings (Opex savings) and installed power requirements (Capex savings) that can be realised.

Testwork on integrating the AachenTM process into the Namdini flowsheet demonstrated potential to increase recoveries for the Life of Mine study and also suggested an increase in the grind size from sub 10 microns (µm) into the coarser range of 20 to 45 microns (µm) for certain lithologies. Further testwork is ongoing to consider the optimal grind size and target recovery, with detailed cost/benefit analysis underway as part of the programme.

The AachenTM process has also been successfully used for cyanide destruction, post leach circuit, which will also be analysed for further Opex and Capex savings.

Unfortunately, as a consequence of trying to incorporate the above-mentioned changes to the Namdini flow sheet so late in the game, the company has been forced to alter its schedule and push back the release of the upcoming DFS (back in April, the company altered guidance and actually was trying to move up the DFS for release in Q2).

From Cardinal Resources:

As a result of the positive leach results which are expected to enhance Namdini Project economics, further testwork samples have been submitted. All aspects of the Feasibility Study are on track for delivery this quarter, however, Cardinal is reverting to the original Q3 ‐ 2019 Feasibility Study publication timeline in respect of the Company’s flagship Namdini Gold Project in Ghana so that final testwork results from the AachenTM process can be incorporated.

The following shows the positioning of where AachenTM would lie in the Namdini flow sheet.

Source: Cardinal Resources June 2019 Press Release

Now, with the DFS likely being postponed until the latter part of Q3 (although it’s also possible that the eventual release date could slip even beyond that and into Q4), there arguably becomes less of an incentive for speculators to feel the need to have to pile on into shares of CRDNF right this moment, since there are no immediate catalysts to look forward to.

Further, while it can be rationalized that the results of some of the positive leach results via the introduction of integrating AachenTM process to the Namdini flow sheet are an encouraging progression towards possibly enhancing project economics in the DFS, they nevertheless introduce a new variable to the equation, which inherently carry with it risk, and this uncertainty may be giving the market reason to proceed with more caution, until after the DFS is published (and the final results are known).

Share Structure and Balance Sheet

In regards to share structure, Cardinal Resources currently has 385 million shares on issue, with C$19 million of cash in the bank (as of June 30).

Source: Cardinal Resources August 2019 Corporate Presentation

Most noteworthy are the 110,371,935 listed options, shown below, which feature an exercise price of A$0.15/share, set to expire on September 30.

Source: Cardinal Resources June 2019 Quarterly Activities

Arguably, in addition to the DFS being pushed back, it’s most notably the “overhang” being created by the near-term options expiry that is creating the most selling pressure on shares of CRDNF, which is no doubt keeping a lid on the share price for the time being (despite rapidly improving sentiment towards the gold sector and a sharply ascending gold price). Moving forward and beyond September, it will be interesting to observe if clearing this “options wall” will allow shares of CRDNF to trade less encumbered; time will tell.

In addition to currently having ~A$19 million of cash on hand, it’s also worth mentioning that Cardinal Resources also has on its books ~$37 million in debt via a loan facility with Sprott Private Resource Lending.

Cash Balance

Source: Cardinal Resources June 2019 Quarterly Activities

Source: Cardinal Resources June 2019 Quarterly Activities

Likely, once the DFS is released, Cardinal Resources will take a closer look for ways to try and extinguish the debt burden of the current loan facility (30-month repayment term; interest rate of LIBOR + 7.75%), concurrently, with the company seeking funds to secure the initial CAPEX required to put the Namdini Gold Project into construction.

Potential Takeover Candidate

In a backdrop of a fast-improving gold market where many leading producers are now seeing their share prices soar to new heights (which make for especially valuable currency for acquiring companies to utilize to go shopping with), it will likely only be a matter of time before the industry looks to further consolidate itself, via Mergers and Acquisitions (M&A).

Although it’s still conceivably very early days in the next bull market for gold, activity has started to pick up, and most recently, Resolute Mining (OTCPK:RMGGF) announced that it was purchasing privately-owned Toro Gold for $274 million (A$400.2 million) to acquire their Mako Gold Mine, located in Senegal.

Source: Australian Mining

Right around the same time as the Resolute Mining/Toro Gold deal was being announced to market, Kinross Gold (KGC) was also busy finalizing an acquisition of their own, agreeing to acquire Chulbatkan, located in Russia, from N-Mining Limited for $283 million.

Source: Kinross Gold July 2019 Press Release

Now, at this juncture, there’s no way to know for certain if Cardinal Resources and its Namdini Gold Project are on the radar of any particular gold company, but it’s worth highlighting that Gold Fields (GFI) is currently a significant shareholder of the company (owning 11.2%).

Source: Cardinal Resources August 2019 Corporate Presentation

Furthermore, Gold Fields is a gold producer that is well entrenched in Ghana (where the Namdini Gold Project is located), having operated in the country for over 25 years (not to mention active just last year, acquiring a 50% interest stake in Asanko Gold Ghana). So it’s worth pondering if there might be further potential synergies to unlock locally that might entice the company enough to make a move to acquire a larger stake in Cardinal Resources/Namdini Gold Project.

Source: Gold Fields

Again, it’s worth emphasizing that it’s merely speculation as to whether or not Cardinal Resources and its Namdini Gold Project would be considered a highly prospective target to acquire for a larger gold producer (Gold Fields, or anyone else) out there. Though, as mentioned earlier, because the PFS already showcased such compelling project economics (while requiring a much lower gold price), it’s not far-fetched to assume that it’s within the realm of possibilities that the Namdini Gold Project could be a highly sought-after asset, particularly in the context of an emerging bull market.

Conclusion

Controlling a flagship development project that can boast of having an inventory of 5.1 million ounces of gold reserve is no small feat for any junior company to achieve, not to mention having these same ounces in one’s possession that can work at a gold price much lower than the current one, which Cardinal Resources’ Namdini Gold Project certainly looks like it can offer (based on the previously released PFS, which outlined a base-case scenario using a gold price of $1,250/oz).

Currently, there are some interim headwinds (e.g., delayed DFS, options expiry “overhang,” etc.) that are doing their part to keep the share price of CRDNF depressed, but due to the sheer size + scale + quality of the gold ounces contained in the Namdini Gold Project, this certainly continues to be a gold stock that has the potential to offer speculators immense leverage in a rising gold price environment.

Yes, although it’s most true that over the last few months shares of CRDNF have acted like they are totally oblivious to the ascent in the gold price (underperforming even “optionality” peers, when it isn’t one itself), over a longer time period, a profound re-rating could still very well take place once these short-term hurdles are overcome.

Cardinal Resources has clearly been a laggard out of the gates of this emerging new bull market in gold, but perhaps in this particular case, the expression that it’s not about how you start but how you finish will ring most true.

Time will tell.

Disclosure: I am/we are long CRDNF, ORZCF. 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.

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