THH: Integra Resources: Transformational Merger Brings… Opportunity?

Finding cheap gold juniors right now is probably the easiest it has been in decades. Almost every decent story looks frustratingly attractive to me. The hard part is actually to find the cheapest of the cheapest. I really really like the teams and companies who are ambitious and aggressive when it comes to asset hoarding in a time when you hear several veteran billionaire investors claim they have never seen junior assets this cheap in their entire career compared to gold. Integra has been one of those since it first merged with MPM and now is close to merging with Florida Canyon.

I have had Integra on my watchlist for ages but never actually pulled the trigger as far as I can remember. However Integra 3.0 looks like such good Risk/Reward that I decided to buy shares for myself and for pretty much every long term focused “HODL-folio”. Note that since I own shares I am naturally biased. I would also happily have Integra on as a sponsor in the future just FYI.

Anyway, this article will as per usual be speculative, and full of forward looking statements. Never buy a stock simple because someone else likes it. Never buy a stock where you can’t see “the case” yourself. For simplicity’s sake this article will be written based on the assumption that the merger between Integra Resources and Florida Canyon will go through and form Integra 3.0. Right now I own mostly Florida Canyon shares that I hope will convert to Integra Resources shares in the not too distant future.

• Integra Resources Website

Integra Resources

1. “Florida Canyon”, Nevada: Producing Asset
2. “DeLamar”, Idaho: Advanced multi Moz asset
3. “Nevada North” (Wildcat + Mtn View), Nevada: Advanced exploration asset
4. Significant probable, and potential, growth opportunities at all above
5. Numerous stand alone exploration projects
   1. Including the Red Canyon (Carlin Gold) discovery

Mr Market is offering to sell ownership of all of the above for a combined price of ~C$200 M right now to anyone willing and able.

Catalysts & Potential Catalysts

1. Merger completion: NYSE listed Producer re-rating potential
2. DeLamar Feasibility Study: Will also incorporate 42 Mt of stockpiles which were costs in the PEA
3. Wildcat Exploration: Disturbance allowance recently hiked from 5 Acres to 400 Acres
4. Overall news flow expected to speed up post merger
5. Selling pressure from legacy shareholders subsiding

Personal expectations is that both Integra and Florida Canyon shares could both be subdued until the expected merger is complete (Hence the opportunity). And then a lot might change quickly. I have put Integra (Florida Canyon) in the HODL-folios, as well as my own portfolio, because I think it is remarkably cheap and I can see growth for the next 3-5+ years.  A potential revaluation post-merger is something I am almost expecting so I there could be a case for Integra/Florida Canyon even for much more short term focused speculators.

Validation & Backing

• Alamos Gold
  • One of the best performing mid-tiers
• Wheaton Precious Metals
  • As a royalty/streaming company Wheaton cares a lot about a project’s ability and merit to get into cash flowing production
  • Assets technically de-risked in light of Wheaton’s Due Diligence
• Beedie Capital
  • Helped finance Atlantic Gold and Ascot Resources

Visualizing the Base Case value from the three flagship projects + C$50 M in portfolio wide exploration potential

(I am using the Base Case NPVs from the economic studies)

Personally I think a “no brainer” case should be very cheap in light of conservative assumptions so I get significant margin of safety at face value. As per the slide above I can easily argue that there is 5X potential in Integra even when using lower, to much lower, gold prices than the current spot price of gold.

Visualizing a Higher Case

If I were to use spot price of gold for Florida Canyon, $2,000 gold for DeLamar & Nevada North, and include some implied value from the obvious exploration potential it could look something like this:

Of course at $2,600 gold all of the projects are worth significantly more than even this.

Honestly I think the exploration potential at especially the three flagship projects is worth much higher than the numbers I used above. Regardless, I think this exercise makes it abundantly clear why I think Integra is one of the cheapest juniors I can find right now. We know the company already has 10.2 Moz on the books. If we fast forward the tape 3-5 years from now to a theoretical scenario where Integra could be a 3 mine producer with maybe a couple of million ounces added to the total resource I don’t think it is a stretch to envision the company having close to a C$2 B Market Cap.

(Note that these valuations are is USD and not CAD)

There are of course even scenarios that are even more optimistic than this. Like for example gold trading closer to $4,000 at that time, additional discoveries having been made, Red Canyon perhaps being followed up with success, total resources are surpassing 12 Moz, additional acquisitions and a much better sentiment environment while the company is producing close to 300,000 ounces per year with $1.2 B in annual revenue. In such a scenario I don’t think a MCAP of $2 B would even come close to the actual number. With all this said, this is not a scenario I am basing my investment on. Especially since for example $4,000 gold in 3-5 years would boost all juniors and is not Integra specific. I am basing it on the company looking significantly undervalued even in quite conservative scenarios. If that turns out to be true then all the different types of blue sky scenarios become bonus upside that I never paid a dime for.

At face value, at spot gold price, one is paying for around 2/3rds of Florida Canyon while getting 1/3rd and all other projects for free:

There is no shortage of cheap ounces out there. But it is rare to basically be paying nothing for the extra >6 Moz which would take at least tens of millions and many years to prove up.

Opportunity Enablers

• Deal has not yet closed (Market discounts/hate uncertainty)
• Expected ebb in news until the deal has closed (Market hates boredom)
• Shareholders from both Florida Canyon and Integra Resources might sell as both companies are changing
  • To quote Rick Rule talking about Reunion shareholder potentially selling their G Mining shares post merger:
  • “A lot of Reunion shareholders owned the stock because it would be taken over. Now that it has been taken over they have no continuing reason to own the stock”

… These are some of the reasons that I think are currently contributing to the opportunity today which might not be around too long.

Merger Benefits

• Becomes a US focused producer/developer/explorer with a NYSE listing
  • Producer premium with two two Lassonde Curve kickers
• In house heap leach mining team (expertise) from Florida Canyon
  • A big value add to DeLamar and Nevada North
• Florida Canyon (Incl. Alamos) wanted to do a deal with Integra because they could see significant re-rate potential post merger
  • Could be seen as Alamos being motivated to get a starter position in Integra (I believe Alamos will be a 8% shareholder of ITR post meter)

The big Price/Value discrepancy in the sector is between developers (and explorers) and producers. The producer are getting credit for the fact that gold being at $2,500 is indeed a current reality. The future gold mines in the hands of junior developers are however not reflecting the fact that the gold business is better than it has been in a very long time. I think the simple main reason for this is because retail investors are setting the prices for the juniors in the open market, and they are nowhere to be found, despite the fact that we see larger gold mining companies acquiring other miners left and right. In other words we have the valuations of the gold producers acknowledging the good state of the gold business and the producers are acknowledging this reality since we are seeing acquisitions left and right between the big boys. At the same time we have almost no retail buying to keep even the better juniors in line with the underlying value of their gold projects.

With Integra acquiring a producing gold mine it allows the entire company, and its many projects, to benefit from the reality of a high gold price despite the fact that retail is ignoring said reality. The almost non existent retail buying has led to many juniors being stuck in a loop of increasing dilution, even whilst doing good work creating value, because the juniors do not get the benefit of the added value showing up in a higher share price. With the cash flow from Florida Canyon the company could now advance the entire portfolio without being at the mercy of an apathic Mr (Retail) Market.

A simplified thought experiment

If a non cash flowing junior is creating value, in an extremely depressed market, there is a chance that the (sentiment driven) increased dilution can pretty much cause a very poor net gain of value per share. However a self funded, cash flowing junior that finds itself in an extremely depressed sentiment environment, will be adding undisputed/undiluted value thanks to have a mine capturing 100% of reality (a high gold price). Cash is cash, regardless of what the sentiment discount (or premium) is on the assets overall.

For the full year of 2027 the AISC for Florida Canyon is expected to drop down to around $1,550/oz on 74.2 Koz of production…

If gold prices, in real terms, just held steady at todays levels it would mean that the mine could theoretically throw off operating profits of: ($2,550 – $1,550) * 74,200 = US$74.2 M in just that year which equates to C$100.8 M at today’s exchange rate. That is around half the current pro-forma Market Cap of the combined entity.

Producer + Developer + Explorer

One gets a bit of everything in Integra 3.0. If one likes production stories and the fact that gold is trading at around $2,500 per ounce then one might like Florida Canyon. If one wants to see a producing growth story then one gets plenty of that in DeLamar and Nevada North. If one likes growth via exploration then one gets plenty of that via not only the three flagship assets but also several other earlier stage projects.

1. Production:

2. Development & 3.Exploration:

Combined:

Value of Oxide Ounces

Oxide, heap leach gold is very sought after in the Great Basin as evidenced by the frequent M&A:

The average acquisition costs for these transactions were >Us$100/oz Au. Integra Resources will have the Florida Canyon mine, which is an operating heap leach operation, plus over 3.5 Moz of oxide gold from the development assets. Global ounces, post merger, would be >10 Moz which includes oxides and sulphides.

A Look at “DeLamar”

I won’t go into detail on any asset since the article is already getting quite long in the tooth and there is plenty of information on the company’s website as well as interview. Anyway, here are some things to consider when DeLamar goes from a PFS to a new FS shortly:

• Feasibility Study will include 42 Mt of stockpile material that will be converted from a COST (-) in the PFS to ORE (+) in the FS.
• PFS study was done when the COVID inflation had brought up costs a lot. – Source
• Wheaton royalty to be added (-)

“Old” PFS:

DeLamar: Beyond the bird in the hand

There are several target areas that will need exploring once the current version of DeLamar is hopefully up and running in the future. Many are backed up by both Geophysics as well as Soil Geochemistry and are not far from the known resources:

IP Geophysics:

(The known DeLamar deposit is circled in white by hand)

Soil Geochemistry:

(The area in the white rectangle is called “Black sheep”)

George Salamis:

“This is a really really big system we have here at Black Sheep” – Source

Integra has done very limited drilling at Black Sheep but they have already hit both wider low grade mineralization, as well as narrower high grade mineralization, so the company has already confirmed that the low sulphidation system does indeed extend kilometers from the DeLamar deposit.

In essence there could be lots more gold and silver in this DeLamar district than what is reflected in the current resource is my take away. It reminds me of Agnico Eagle’s mantra of “Build a production base first and then grow from there”. Who knows, maybe DeLamar will get up and running in a couple of years and maybe, just maybe, there will be gold mining here for decades to come. On that note there is also already good evidence of potentially several high-grade feeders at DeLamar at depth (Which is typical for LSE systems and is what the old timers mined):

If you want to learn more about some of these growth targets then just google/youtube “Black Sheep”, “War Eagle” and “DeLamar” etc. Many videos that talk about the exploration potential at DeLamar can be found at the company’s Youtube Channel. To sum up I think that the current resource and coming Feasibility Study could seriously underestimate what the real value of this project/district could be.

Obviously the big thing about all of these targets is that it is basically “risk free potential” since one is not paying a cent for them right now at face value.

What one is getting in addition to the currently PFS stage DeLamar project with an intrinsic value of C$638 M at $2,000 gold is:

• All the potential within the “really really big” Black Sheep system
• All the potential within War Eagle
• DeLamar sulphides and extensions to DeLamar and Florida Canyon
• All the high grade feeder potential at DeLamar (Confirmed with drilling) and War Eagle (Confirmed with drilling) etc

Nevada North

• Extremely low strip ratio with loose gravels on top
• Expanded Plan of Operations: For the first time the company can really step out with the drill rig
• Significant growth of oxide gold expected
• Potential for covered, high-grade Feeders

Even if there was no multi million ounce, PFS stage deposit here, the exploration potential alone would be enough to build an exploration company around in my opinion.

The Green in the slide below is the outline of the current oxide pit at Wildcat. The White areas are where there is good evidence for resource expansion. The big red area is the greater potential footprint (Source):

The low hanging fruit areas circled in white have a combined footprint that is larger than the current pit outline. To me it looks very probable that the final value of Wildcat will be worth more than what is reflected in the already impressive PEA today.  Furthermore there is potential for classic, high grade, feeder mineralization at depth which has not been touched yet (The root of the lower grade, disseminated cap found at surface). These feeder zones can be a really big deal and are often the main exploration targets for many juniors when it comes to Low Sulphidation Epithermal systems. To have such exploration potential on top of the already impressive open pit potential is a significant value add.

Gold is rare. Projects like this in a jurisdiction like the US is much rarer still:

Beyond the three flagship projects

The three flagship projects could keep Integra busy and growing for years to come. But in case even more internal growth is needed/wanted, there are several early stage exploration projects, within the company’s portfolio. I won’t go through them all but I will post a few comments about them from Jason below. Lets start with the most high profile project which is the Carlin Gold discovery names “Red Canyon”:

Jason:

“You know like Red Canyon would be… For a junior company… That would justify $30-$40 million Market Cap alone.”

– Source

Despite there only being a few holes into this one it delivered one of the top 1% drill intercepts in 2021 as you can see in the slide above. Given that Carlin Gold systems can be giant and have been responsible for creating Major Miners (Like Barrick after discovering the Goldstrike Carling Gold deposit) it should be no surprise that Red Canyon is a very nice thing to have in the back pocket:

Jason:

“This is the asset that attracts the Barricks… The Anglos… All the big guys… To our company… You know we’ve had several conversations with the bigger companies…”

– Source

If Integra will explore Red Canyon themselves or let for example a Major Miner earn into it I do not know. Note that this is the very same project that got Crescat Capital, spearheaded by elephant hunter Quinton Hennigh, to invest in Millennial Precious Metals a few years back. Crescat later sold out after Millennial decided to go for the cheaper, lower risk, low hanging fruit exploration at the Nevada North project.

Jason on some of the other projects:

“Same with Ocelote… Maybe like a $10-$15 M… Cerro Colorado $10-$15 M”

Suffice it to say that Integra has an exploration portfolio large enough that several juniors could be built around it.

Some simple TA courtesy of “ty”:

Note: This is not a buy or sell recommendation. I cannot guarantee the accuracy of the information in this article. Always do your own due diligence. Assume I may buy or sell shares of either company at any time without notice.