Integra Resources Stock: Capex Up Sharply, But Still A Very Robust Project (NYSE:ITRG)

2021 was a year to forget for investors in the precious metals space, and 2022 hasn’t started out much better, with some nasty moves to the downside in the sector in names like Integra Resources (ITRG), Novo Resources (OTCQX:NSRPF), and Perpetua Resources (PPTA). In Integra’s case, the stock is now down 70% from its highs and sports a market cap of ~$120 million, despite a recent study highlighting an After-Tax NPV (5%) of ~$412 million. While I was clearly incorrect in my assessment last year that the stock was a Buy, I believe it’s time to be open-minded about a bottom at US$1.70, and I continue to see Integra as a top-12 takeover target.

Just over six months ago, in one of my worst calls last year, I noted that the correction to US$2.90 in Integra appeared to present a buying opportunity. While I was not long the stock at the time of the article, given that I exited my position at break-even, this turned out to be a poor Buy rating, given that the stock has found itself 40% lower just seven months later. Many investors are likely scratching their heads at the decline, and there’s some discussion that the project economics are inferior to peers.

I am always quick to acknowledge when I’m wrong, and more than glad to point out my poorly-performing ideas because it’s deceitful only to show ideas that worked. Every investor has losers, and it’s part of the cost of doing business. However, getting back to Integra and the study, it is worth pointing out some misconceptions about the current study. These misconceptions could be stemming from some investors who have suggested that DeLamar is a high-cost project from an operating standpoint and a costly project to build.

First of all, as I will point out in a couple of charts below, these points are entirely incorrect. It’s also worth pointing out that while the internal rate of return [IRR] is a little lower than I expected, the current mine plan in the Pre-Feasibility Study [PFS] is merely a snapshot in time. In fact, it excludes a massive amount of sulphide material (some of which are very high-grade) that could boost project economics, subject to further test work. Let’s take a closer look at the study below:

Based on the 2019 PEA, the plan was to produce ~140,000 gold-equivalent ounces [GEOs] per annum at costs below $800/oz, with an upfront capex estimate of ~$161 million. These economics made Integra’s DeLamar Project in Idaho one of a kind, with the project having an After-Tax NPV (5%) of $358 million at $1,350/oz gold / $17.00/oz silver, and an After-Tax NPV (5%) to Initial Capex ratio of more than 2.0 to 1.0, and an IRR of 43%.

The updated PFS released last week envisions a project with a 35,000 tonne per day heap-leach processing facility and a 6,000 tonne per day mill. The plan is to build the project in two stages to reduce upfront capex, with Stage 1 focused on heap-leach only (136,000 ounces at $813/oz). There will be the option to go ahead with Stage 2, which would entail constructing a 6,000 tonne per day mill to process non-oxide ore. To help with permitting and cost savings, the company is looking at sustainable initiatives: solar power, an LNG plant, and a light rail system (Rail-Veyor) for ore transportation.

Unfortunately, the project economics were weaker than the PEA on a constant metals price basis, with the After-Tax NPV (5%) coming in 15% higher, but only due to much higher metals prices. At first glance, this is disappointing, and the upfront costs did come in slightly above my estimates ($282 million vs. $240 million). However, this lift in upfront capex should not be surprising at all, given that we’ve seen significant cost increases industry-wide. In fact, there have been several capex blowouts, with a few being IAMGOLD’s (IAG) Cote Lake and Argonaut’s (OTCPK:ARNGF) Magino. Below are the main attributes of the updated study:

• Average annual production (Year 1-8) of ~163,000 gold-equivalent ounces
• All-in sustaining costs (Phase 1/Phase 2): $813/oz / $955/oz
• 16-year mine life (~110,000 GEOs over 16 years)
• Upfront capex estimate: $282 million
• After-Tax NPV (5%) – $412 million at $1,700/oz gold and $21.50/oz silver, with a 27% IRR

As shown in the chart above, the project has a significant silver component, and an attractive mine life, with a 16-year mine life averaging ~110,000 GEOs per annum. In Year 1-8, which investors and most suitors will focus on, the average production profile is much more impressive, with expectations that the project will produce ~163,000 GEOs per annum at all-in sustaining costs of $955/oz. This cost figure may seem high, and many detractors will note that many economic studies out there have much lower projected costs.

While this is a fair point, costs industry-wide have changed completely on a two-year basis, and I estimate industry-wide all-in sustaining costs will come in above $1,100/oz next year vs. ~$1,000/oz pre-COVID-19. So, this project would be margin accretive for most other producers. Secondly, while there are dozens of studies out there showcasing lower operating/upfront costs, those studies benefit from stale pricing, with many of these studies completed in 2018 through 2021.

So, with Integra being the most recent company to report an economic study, it will by default have the ‘ugliest’ economics, given that it has to factor in significant cost inflation in labor, fuel, materials, and many other inputs. Hence, if a project showed all-in sustaining costs of $800/oz in 2019 for argument’s sake, one should assume that those costs are likely now at least 15% higher, depending on where the project is located. Regarding upfront capex, 15% is likely far too conservative, with Argonaut and Iamgold missing by over 30% on their initial estimates. Let’s take a look at how Integra’s DeLamar Project stacks up relative to other undeveloped projects globally.

The clear takeaway from the above chart (average annual production vs. projected all-in sustaining costs) is that DeLamar is less robust than its 2019 PEA and most other projects. However, as noted, this chart is not all that useful, given that many of these studies use stale pricing. As an example, I have highlighted Argonaut, which assumed that all-in sustaining costs could come in below $750/oz. I would argue a more realistic assumption in a new study completed today would be $900/oz or higher. The same can be said for all of these studies, so if we were to pull up the average, Integra is nowhere near the “high-cost” outlier it appears to be in the above chart. Finally, some of these studies above (green dots) are PEA-level, which are much less conservative on costs (Integra’s is more conservative, being a PFS).

The above chart should not be relied upon, given that these are only estimates. Still, it bakes in some assumptions for where other projects might sit after adjusting for inflationary pressures. As we can see, Integra‘s DeLamar is not overly expensive relative to peers and is actually very manageable with a respectable production profile. This is evidenced by the project sitting below the trend line from a cost and production standpoint. Looking at economics, we can see the estimated After-Tax NPV (5%) comes in at $412.3 million at $1,700/oz gold / $21.50/oz silver. Notably, the study bakes in a meaningful 20% contingency in some areas, so the current capex bill looks quite reasonable hence this NPV (5%) figure can be relied upon.

Sustainability & Upside Case

Beginning with sustainability and keeping the environment in mind, Integra has proposed using Rail-Veyor for ore transportation. This is not a new concept and has been used by Vale (VALE) and Agnico Eagle (AEM) in Val d’Or, moving 600 tonnes per hour and reducing dependency on truck haulage. It also made up for productivity losses during COVID-19 related shutdowns. An image of Agnico Eagle’s Rail-Veyor at Goldex is shown below.

Not only is this expected to potentially reduce the need for up to 5 haul trucks at DeLamar, providing upfront cost savings, but it will allow for reduced GHG emissions with a normal operation with diesel trucks. Meanwhile, it will help to reduce noise reduction, and it will allow the mine to utilize less water, with water being used to suppress dust. In addition to Rail-Veyor, Integra is looking at an LNG Plant and solar power, which will reduce emissions vs. grid power and the levelized cost of energy [LOCE] vs. the local electric utility. These initiatives help to make the project more sustainable, help to reduce operating costs, and could make it easier to permit.

Meanwhile, if we look at the project as a whole, it’s important to note that the mine plan does not include any resources from Black Sheep or War Eagle, with both targets showing promising drill results. At War Eagle (southeast of Florida Mountain), Integra intercepted 34.1 meters of 12.4 grams per tonne gold-equivalent and 7.6 meters of 32.6 grams per tonne gold-equivalent. At Black Sheep (north of DeLamar), previous intersections included 3.05 meters of 5.99 grams per tonne gold-equivalent and 78.9 meters of 1.43 grams per tonne gold-equivalent. These grades are well above the average reserve grade of ~0.70 grams per tonne gold-equivalent.

As it stands, these two targets are too early-stage to show resources, but they certainly point to the possibility of resource growth to potentially extend the mine life. It’s also important to note that this study does not contemplate mining/processing the high-grade material below Florida Mountain. Given that there are ~100 intercepts with a grade 4.0+ grams per tonne gold-equivalent over a width of ~1.5 meters, this is a major opportunity. Some highlight holes below the Florida Mountain pit include 96.2 meters of 3.36 grams per tonne gold-equivalent and 9.9 meters of 14.52 grams per tonne gold-equivalent. In the below image, red is oxide material, and blue is upside from sulphide material.

Comparing this to the average processed grade of ~0.70 grams per tonne gold-equivalent would boost project economics, assuming it’s included in a future mine plan. It would also significantly increase the average annual production profile and allow the project to maintain a higher production profile for longer than the 110,000 GEOs contemplated over the mine life.

The key here will be completing further test work to ensure that Integra can make this material worth accessing. Currently, work is being completed on an Albion treatment method that could boost gold recoveries north of 80% on non-oxide material, which would easily justify bringing sulphide material at Florida Mountain into the mine plan.

Valuation

Currently, Integra Resources has ~68 million fully diluted shares, giving it a market cap of ~$116 million at a share price of US$1.70. I have estimated ~74 million shares on a fully diluted to account for share dilution in the next 15 months. To come up with a fair value for the stock, I have used what I believe to be a conservative multiple of 0.55x NPV (5%) given Integra’s position in the Lassonde Curve and based this on metals prices more than 10% below spot prices ($1,700/oz / $21.50/oz). This translates to a fair value of ~$227 million.

I have also added $27 million to this fair value figure based on upside outside of the mine plan, based on ~600,000 GEOs at a fair value of $45/oz. After adding these two figures together, Integra’s conservative fair value comes in at $254 million. It’s important to note that I have excluded more than $10 million in cash from this valuation, given that I don’t like to give any credit for cash when it comes to explorers/developers, given that cash on the balance sheet is typically burned in a 12-18 month period on exploration and development.

If we divide this figure by 74 million shares (Q1 2023 estimated share count), I see a conservative fair value for Integra Resources of US$3.43. This points to 100% upside from current levels. At spot prices, Integra trades at barely ~0.20x NPV (5%), one of the cheapest figures sector-wide. I would argue that this certainly makes the stock an attractive takeover target after its recent correction. This is especially true for silver producers that might be looking for a cheap way to gain gold/silver exposure in a highly-ranked jurisdiction without paying a premium to net asset value.

For those unfamiliar, most silver producers/developers trade at a meaningful premium to gold producers/developers, so it is difficult to acquire on an accretive basis within the silver space. However, with multiple producers trading at well above 1.0x P/NAV like Endeavour Silver (EXK), First Majestic (AG), Coeur Mining (CDE), and Hecla (HL), and some hungry to reduce their exposure to Mexico, Integra would certainly be accretive at current levels for a company looking for growth later this decade. This is because it trades at a fraction of their P/NAV multiples at less than 0.30x, even at conservative metals price assumptions ($1,700/oz gold, $21.50/oz silver).

It’s important to note that I am not predicting that a suitor will swoop in next week or next month and acquire Integra. My points above are simply to point out that it would certainly sense at these prices. While First Majestic has its hands full with Jerritt Canyon optimization, this would provide one way to back-fill its net asset value, which sits at barely $1.0 billion, a very low figure for a company of its size. Meanwhile, Hecla has improved its balance sheet and does not have immediate growth on the horizon. This would allow the company to stay in Tier-1 jurisdictions and not sacrifice its silver focus, given the 90+ million ounces of silver at DeLamar.

It’s easy to be negative on DeLamar with the stock down ~70% from its highs, but I would argue that after a 70% correction from the highs, it’s time to be open-minded about a bottom in the stock. This is especially true when lots of low-hanging fruit lies outside of the current mine plan (subject to initial test work), which could make a large difference in project economics and boost the project’s net asset value. For now, I remain on the sidelines, given that I prefer to wait for clear signs of a bottom before buying. However, if I were anxious to put work in a speculative name in the developer space, Integra looks very attractive below US$1.70.