The secret behind well performing stocks is simple – they outperform the expectations of shareholders. The outlook for Meadow Bay and its shareholders could not be better. Meadow Bay not only successfully confirmed a historic resource estimate after an initial drill program. There is much more gold and silver in and around the Atlanta Mine, that was closed in 1980s, as expected. However, this is by far not the end of the rope as Meadow Bay may have further positive surprises up its sleeve. What did not get much attention during the release of positive findings is the fact that the bulk of the 2011 drilling campaign is not yet included in the current preliminary resource estimate. A large number of high-grade intercepts will be included and released shortly. The preparation of the first NI43-101 resource estimate on the gold and silver quantities within the Atlanta deposits in eastern Nevada is ongoing and we are certain that Meadow Bay will again surprise its shareholders. If we dare to look a bit farther and believe the statement of Meadow Bay’s Project Manager, Dr. Douglas Oliver, the company just started to scratch the tip of a large goldberg.
Vancouver-based Meadow Bay Gold Corp. (“MAY“) is a junior mining company exploring and developing its main asset – the fully-owned Atlanta Gold Mine project in Nevada, USA. In early 2011, a new management and exploration team took control of the company, raising $11.3 million in March (11.3 million shares @ $1/share) and acquiring the privately-held Desert Hawk Resources Inc. The purchased portfolio included an option in the Atlanta Gold Mine (4 square km), the Colorback Gold project and the Spruce Mountain Molybdenum-Copper-Silver project. Later in 2011, MAY took full control of the Atlanta District by staking and acquiring additional claims significantly expanding the land position from an initial 404 to 4,856 ha. On January 16, 2012, the company began trading on the Toronto Stock Exchange (TSX) under the symbol “MAY.”
With a current market cap of $22 million, we value the stock of Meadow Bay Gold Corp. (TSX: MAY; Frankfurt: 20M) “undervalued“ and base our six-month price target on a market cap of $75 million, which represents $1.64/share with 46 million shares issued and outstanding. First and foremost, we are confident that the new management team will succeed in developing the Atlanta project quickly and efficiently towards a mining decision. Before becoming involved with MAY, senior geologist Bill Reed was instrumental in the discovery of the multi-million ounce San Miguel gold and silver deposit in Mexico, when he was vice president of exploration for Paramount Gold & Silver Corp. (NYSE/TSX: PZG; market cap: $363 million), a company which he co-founded. The other co-founder was Robert Dinning, who still serves as the chairman of the Paramount board and was CEO of Meadow Bay between early 2011 and late 2012 (and continuing to serve as MAY‘s Chairman). Adrian Robertson, a professional engineer whose previous experience includes roles with Inco/Vale, Teck, TVX Corp. and Golder Associates is not only a director at Meadow Bay Gold, but also serves as president & CEO of Urastar Gold Corp. (TSX.V: URS; market cap: $8 million). We initiated coverage last month on Urastar (“In the Heart of Two Giants – Why Two Major Gold Producers May Bid for This Gold Explorer“) and note that Bill Reed sits on the board there as well. Alex Khutorsky, formerly with Dahlman & Rose (a New York-based investment bank focused on the metals and mining sectors) has joined the MAY‘s Board of Directors and has been appointed interim CEO in October 2012.
In 1970 – when gold was priced at only US$35 – Rutherford Day bought the Atlanta property and formed Bobcat Properties Inc. purchasing a small 800 t/day mill from northern Nevada and reconstructing it on the Atlanta property. In 1975 – when gold was trading near US$200 – Bobcat formed a joint venture with Standard Slag operating the Atlanta Gold Mine until 1985 processing 1.5 million t ore with an average grade of 2.8 g/t gold and 39 g/t silver producing 121,000 oz gold and 800,000 oz silver – when gold was selling for US$850 in 1980 and US$315 in 1985. Since then, Bobcat optioned the property only to Gold Fields in 1990 (US$355 Au), Kinross in 1998 (US$290/oz Au) and Cordilleran in 2000 (US$255 Au). Thanks to heavily depressed (bottoming) gold market phases around each of those years of optioning out the Atlanta Mine, the property was later returned to Bobcat – conveniently by prominent seniors having used the most modern exploration methods available at that time to prepare resource estimates of the remaining gold and silver within the closed Atlanta Pit.
After 10 years of gold rising six-fold from US$255 to US$1,405, Bobcat transferred the property in late 2010 to (privately-held) Desert Hawk Inc. for a payment of $6 million and a 3% NSR (to be paid in gold; capped at 4,000 oz) before MAY acquired Desert Hawk in February 2011 paying $100,000 in cash and issuing 7.5 million shares worth around $11 million at that time. Apparently, the time seems ripe again to bring Atlanta back into production during times of high gold prices with the previous owner being the largest shareholder of MAY. We are also confident that MAY represents a prime opportunity for shareholders and it is now that the time seems ripe. The company is about to release the first NI43-101-compliant resource estimate not only on the remaining resources of the Atlanta Mine, but as well on other zones of mineralization that were discovered or tested during the 2011 drill program. Additionally, MAY will start another aggressive drill program shortly guaranteeing continuous news-flow and the prospect of new discoveries and significant extensions of known mineralization zones.
Between June and December 2011, MAY drilled 9,400 m in 39 holes. Seven of these confirmed historic drilling and expanded on Kinross’ historic resource estimate (1998) from 339,000 to 379,000 oz. gold. Mineralization exploited by the old Atlanta Mine clearly extends beyond the pit limits both along strike and down dip. With the bulk of the 2011 drilling not being included in the current (preliminary) 379,000 oz. gold resource estimate, we are certain that the soon to be released estimate will be substantially higher. Comparing metal prices and general mining cost data from the time of the 1998 resource estimated by Kinross (not NI43-101-compliant) with current data, it appears that there is an excellent probability that a larger resource may be present on the Atlanta property at current metal prices. Another 16 holes were drilled as infill and close 
step-out successfully demonstrating greater continuity of mineralization among the older holes and expanding the known mineralized area to the north and west. Additionally, the strongly mineralized east-west structure (poorly understood during mining in 1970/’80s) extends some distance into the footwall of the main structure (eastward) and some 100 m into the hanging wall. Most interestingly, 13 holes discovered the mineralized Atlanta Porphyry. Several intercepts well below the existing pit to the west and north had gold grades which, at first blush, appear to be economic (the mineralized portion of the porphyry is assumed to be 20 million t averaging 1.3 g/t gold). All of these extensions of the mineralization near the early pit offer exceptional potential for resource expansion.
Dahlman & Rose estimates a total gross gold resource of 1.2 million oz. with an average yearly production of 49,298 oz. gold from the Atlanta Porphyry and 33,115 oz. gold and 938,258 oz. silver from the Atlanta Fault Zone – total yearly output worth around US$160 million with gold at US$1,600/oz. and silver at US$30/oz., whereas estimated life of mine stands at 13 years. Total cash costs of US$465/oz. gold would be well below the worldwide average of around US$1,000/oz. making Atlanta one of the lowest-cost and most profitable gold mines in the world. It will take around two years to complete a feasibility study likely receiving mining permits in 2015, followed by an additional year to complete mine construction to initiate production in 2016. One of the most intriguing arguments for bringing Atlanta back into production is the relatively low up-front capital expenditures of only US$207 million.
Dahlman & Rose (initiating coverage March 21, 2012):
“Based on our modeling of the company‘s Atlanta asset, shares appear to be trading at a discount to the peer group and its fundamental/intrinsic value, from which our price target is derived. We value the Atlanta asset at $4.38/sh, yielding at 37% IRR – with an undiscounted payback under 2 years. Based on this valuation, Meadow Bay is trading at ~0.23x P/NAV. We believe that our valuation is conservative, both on our operating assumptions and on the exploration upside. We would not be surprised to see significant resource growth over the next 2 years, justifying a larger throughput and higher NAV... Metal prices are 2 major elements impacting our valuation. By our model at flat forward curves, the Atlanta project appears robust over $1,100/oz gold and $20/oz silver prices. This assumes that all other modeling assumptions, such as operating and capital costs, hold to those we have modeled. Our sensitivity analysis indicates that for every $100/oz move in gold price, our NAV calculation is affected by $0.60/share. Every $5/oz move in silver price moves our NAV by $0.34/share.“
The full analysis can be viewed as a PDF with the following link:
http://www.rockstone-research.de/research/Rockstone_MAY1_english.pdf
Disclaimer: The above editorial is not to be construed as an investment advice, consultation, or even recommendation to buy, sell or even hold any kind of securities or financial instruments of the above mentioned companies, any other company, market or physical commodity. Rockstone Research Ltd. or the author was not paid by the above mentioned companies to produce this content. The author holds shares of Meadow Bay Gold Corp. Please read the full disclaimer within the report or www.rockstone-research.com .