This is a quick stock analysis of CKG – Chesapeake Gold Corp. – which is a company focused on the exploration and development of precious metals projects in the Americas. Chesapeake owns the Metates project located in Durango state, Mexico. Metates is one of the largest undeveloped gold, silver and zinc deposits in the world.
Chesapeake Gold Stock Overview
- Developing a large gold/silver project in Mexico.
- Highly undervalued, with 10-bagger potential at $2,500 gold.
- Currently testing a new sulphide heap-leach process to lower their capex and increase the recovery rate.
- It’s a long-term investment, with production not until 2026.
Chesapeake Gold Stock Price
Chesapeake Gold Corp Company Basics
|Stock Name||Symbol (CAD)||Type||Category||Share Price (US)||FD Shares||FD Mkt Cap (7/23/2022)|
|Chesapeake Gold||CVE||Gold||Late Stage Development||$1.15||72M||$109 Million|
Cash: $27 million
Current Gold Resources: 15 million oz. (.5 gpt).
Current Silver Resources: 500 million oz. (15 gpt).
Estimated Future Gold Resources: 15 million oz.
Estimated Future Gold Production: 300,000 oz. (AUEQ including silver).
Estimated Future All-in Costs (breakeven): $1400 per oz.
Chesapeake Gold Corp. Projects
Chesapeake Gold Corp. owns two projects:
- Metates: undeveloped gold/silver/zinc project in Mexico.
- Talaposa: 1.5 million oz open pit project with exploration potential to increase in size in Nevada, USA.
Metates has 18 million oz. of gold (.6 gpt), 500 million oz. of silver (15 gpt), and 4 billion lbs. of zinc. With AUEQ production potentially reaching 500,000 oz. per year.
This project is rumored to have the potential to become one of the most profitable gold mines in the world (using silver and zinc for offsets).
They currently have a $109 million market cap, which is only about $7 per oz, counting only their gold. If you include their silver, it is much lower.
Metates will be built in phases because of the large size of the project. Phase 1 has a capex of approximately $360 million to produce 150,000 oz of AUEQ with cash costs of around $700 per oz. It is economic at $1400 gold, and when they try to finance the capex in 2024, gold prices should be higher.
2021: Heap leach and metallurgy testing. Infill drilling.
2022: Complete heap leach testing and metallurgy. PFS.
2024: Permitting and financing.
They also have 8 drill targets near Metates that are potential discoveries. They could easily have already found a second or third mine near Metates. Plus, they have another project (Tatatila) in Vera Cruz, Mexico, that appears to be a discovery.
Talaposa is their Nevada project.
This is a 1.5 million oz open pit project with exploration potential to increase in size. However, the company is now looking for offers as they want to sell it.
They have about $25 million in cash and no debt. So, they don’t necessarily need the cash right now.
Management and directors own approximately 20%, and long-term core shareholders own about 24%. Those 24% should be able to prevent a hostile takeover for a low premium. They are well-positioned to take Metates to production in 2026.
Why sell today when free cash flow from the project could be more than $300 million per year for 20+ years at higher gold prices?
The red flag is their heap leach testing, which is a new technology that needs to prove itself during testing in 2022. If successful, the stock should begin trending. Management believes initial testing points to the success of the project.
Is Chesapeake Gold Corp. a Good Stock to Buy?
Below, I will provide my scorecard for Chesapeake Gold Corp. The closer the overall grade is to 10, the better investment CKG is.
- Properties/Projects: 7
- Costs/Grade/Economics: 7
- People/Management: 7
- Cash/Debt: 6.5
- Location Risk: 6
- Risk-Reward: 7
- Upside Potential: 7.5
- Production Growth Potential/Exploration: 7
- Overall Rating: 7/10
Is Chesapeake Gold Corp. a good company?
Below, I have provided a few positive things about CKG.
- Production growth forecasted
- Significant upside potential
- Positive economics
Is Chesapeake Gold Corp. a bad company?
Below, I have provided a few risks of investing in CKG.
- Sulphide heap-leach testing is not yet completed.
- Capex financing and permitting not completed Metates.
- Metates is in Mexico, which adds jurisdiction risk.
- Production at Metates is not until around 2026-27.
- They could sell their silver at a low fixed price to finance the capex.
Is Chesapeake Gold Stock Overvalued?
Briefly said, no, Chesapeake Gold stock is not an overvalued stock. As per my calculations, it has over 7X potential in the medium to long term. I do think most real gold companies are currently undervalued as I think the gold price should be much higher.
Below, I have provided my value estimate for CKG stock, at $2,500/oz Au. Yes, it’s a high gold price but I am only looking at gold stocks because I think the price of the metal will go up to at least $2,500/oz over the medium to long term.
- Production estimate for the long term: 300,000 oz.
- All-In Costs (breakeven): $1400 per oz.
300,000 oz. x ($2500 – $1400) = $330 million annual FCF (free cash flow).
- $330 million x 5 (multiplier) = $1.65 billion
- Current FD market cap: $109 million
Upside potential: 1,400%
Is Chesapeake Gold Corp a Risky Investment?
Yes. Every mining stock is a risky investment and should only be approached by people who are not afraid to lose all of their money. Nonetheless, I have provided a risk-reward estimation below to give you a better idea of the specific risks with this stock.
The main risk is the gold price. Unless it rises, it is never easy making money with gold miners. In fact, a volatile gold price will likely put you underwater at some point, and perhaps significantly down.
Another risk factor is Mexico, which may not remain mining-friendly all the way to 2026.
The second major risk is the long wait until production in 2026. The stock is likely to languish until 2025, when construction begins. Plus, unless the heap-leach sulphide testing is a success, the project is not likely to move forward.
Taxes and royalties can increase and zap the share price. Inflation or other factors can push up costs. A myriad of things can go wrong.
How they finance the capex for Metates will impact their upside potential. Often these financings require hedging or gold/silver streams, which can decrease potential FCF. Plus, the capex can increase due to inflation. Also, companies often have costs higher than expected or grades lower than forecast. There are always potential unknowns that can impact returns.
To take on this high risk, the reward has to be high. A 200% return, in my opinion, is simply not enough for accepting this project’s high risk. We want outsized returns. For Chesapeake, the upside potential is very high and enticing, although it is a speculative bet for the long term. We are expecting the gold price to rise and for them to build the mine in 2025.
Will I Buy CKG Stock?
Here is my thesis on Chesapeake Gold Corp, in a nutshell.
I’m not a big fan of development projects that are more than three years away from production. However, if Chesapeake can begin construction in 2025, the wait might be worth it. I wish this project was more advanced, but sometimes you have to take on higher risk than you want for a big potential return.
The key to making money is a good entry price. For this reason, I prefer to buy miners when they have an FD market cap between $100 million and $150 million. Below $100 million, and the risk increases. Above $150 million, and the upside decreases. I consider this the sweet spot. Lower valued companies tend to have higher risk, and higher valued companies tend to have less upside potential.
Once Metates begins production, Chesapeake will become a significant mid-tier producer, with production of around 150,000 oz. They will then steadily increase production to at least 300,000 oz. It makes sense to build it in phases to reduce the initial capex.
Another thing I like is that they are unlikely to get acquired, not with 24% insiders recognizing their huge upside potential. Once gold gets above $2000, Chesapeake is going to look pretty enticing at its current low valuation. My expectation is that it will jump to at least a $500M valuation prior to construction. The key will be the price of gold and investor’s expectations on how well the sulphide heap-leach process will work.
More Analyses From Don Durret
Find my previous Resource Talks articles here.
Thank you for reading, and don’t hesitate to correct me in the comments if you think I’m wrong.
– Don Durrett.
Don Durrett is not an investment advisor. Don Durrett has a high risk appetite. Don Durrett might own, buy, and/or sell shares of companies discussed herein without prior notice. Resource Talks is not responsible for the quality nor accuracy of information provided herein. Resource Talks is not receiving financial compensation from any company for the publication of this article. Don Durret is receiving financial compensation from Resource Talks for the production of this article. The information provided in this publication – and all other publications by Resource Talks – is impersonal in nature and meant for general information purposes only. Before taking any action on any investment, it is imperative that you consult with multiple licensed, experienced, and qualified investment advisors. Get numerous opinions before taking your own decision in the end. The minimum risk on any investment mentioned in this publication is 100% loss of capital.
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