Junior gold co with potential - Thinking more about Matsa (MAT AU)

The stock has pulled back recently.... Writing up my latest thinking on Matsa.

Background and financial

Matsa is clearly in the penalty box. The stock sold off following the quarterly statement.

Key concern was its operation in Devon and the weak operating cash flow in Q2. Operating cash flow was negative $13M due to gold sales of $7.9M and mining cost of $22M.

Certainly concerning but we need to read fine print. Remember the P&L cut off in Jun 26 (which recorded sales of $7.9M). In Jul/Aug, Matsa received another 1949oz from the mint. Working backward, we can see that Matsa produced around 3300oz of gold from its campaign 3/4 so far.

In addition, Matsa disclosed that 40751t of ore/materials were processed during Q2. There are another 35kt of ore/materials left to be proceeded in Q3. Assuming grade of the new materials stay the same, we are looking at another 2840oz of gold. All up, campaign 3/4 produce around 6140oz of gold. To be fair, it is below its target of 7K oz of gold planned.

Q3 should book sales of $28M. Say processing cost per ton is $75, we are looking at processing expense of $2.6M. Presumably, there will be other production expenses (such as moving the mined materials to FMR) in Q3. Nevertheless, gross margin should be solidly positive in Q3.

Turning to the balance sheet, it has drawn down $14M as of June 26. It had cash of $6M in Q2 26. We are looking at net debt of $8M. It is manageable (even with the high interest rate) in my view.

Now.. Let’s consider its operating expenses…. 3 main cost items: i) $2.2M for exploration, ii) staff + admin cost = $270K, iii) project review/evaluation = $180K. In Q2, it also added 3 directors to the board, should add $60K in opex/quarter going forward. Assuming it maintains this pace of spending, opex/quarter is around $2.7M.

In summary, Q3 should be profitable based on campaign 3/4 alone. Or consider in aggregate, campaign 3/4 gross margin remain positive after adjusting for negative gross margin of $14M in Q2.

So what is the story of Matsa ?

1.       Devon was a negative surprise… But with the stock price having adjusted, it is priced in. Importantly, operation at Devon should improve in coming quarters. This is the exact quote: “ Mine production has been impacted by voids associated with the historical underground mining which has adversely impacted mined grade due to higher than planned mining dilution. Unplanned mining dilution to date has been calculated at approximately 40%.” If I understand correctly, gold is there at Devon but with all the blasting/mining activities going on, inevitably more waste materials were produced and when it came to FMR, g/ton processed dropped sharply. In response, Matsa is re-working its mining plan.

2.       Devon has produced 8k oz so far.. Including the upcoming batch in Q3, we are looking at 11k oz. Remember Devon is expected to produce 42k oz….. BUT looks like with the recent production challenge, we may have to tone down the expectation….. Let’s be conservative… Say new production target is now 30-35k oz all up…… Devon should yield another 20k oz. Also all in cost was estimated to be A$2829 but given the challenges, assume cost per oz of A$3800…. Saving grace is gold price has picked up to US$4400. We are looking at gross profit of $2.5K/oz in upcoming campaigns. Also, there may be upside as campaign 5 and beyond should yield the best than earlier campaigns….. Bottom line… The base case is Matsa should earn gross profit of $50M in coming campaigns at Devon (20K oz * $2500).  Apparently, Matsa has locked in slots with FMR every 3 month… We can expect Matsa to steadily sell down its gold to fund its operation.

3.       Remember opex/quarter is around $2.7-3M vs. anticipated gross profit of $50M from Devon’s remaining gold….. Matsa has the fire power to fund its exploration program.

4.       Now we are into the key part of the investment case of Matsa. If I am not mistaken, Fortitude North exploration program is aiming for somewhere between 640k to 1.85M oz. Note… I am no expert in mining stocks… BUT reading the press releases on Fortitude North, feels like Matsa is feeling optimistic about Fortitude North after the early drilling results. Quoting from the latest release: “ So far, the geological setting is proving to be structurally complex, which we believe is a good sign in our quest to identify multiple gold lodes. We know at Sunrise Dam, as an example, there are in the order of 30 separate lodes and with more drilling here at Fortitude North, we are confident of continuing to discover new lodes….”And the press release even calls out Fortitude North as a major gold deposit: “The combination of multiple, thick and high grade mineralised intersections demonstrates the presence of a large hydrothermal gold system and supports Matsa’s belief that, with further drilling, Fortitude North will be defined as a major gold deposit.”

5.       My take is 600k oz is hardly a major gold deposit…. So a reasonable base case is push up the bottom of the range from 640k to say 1M….. So all up, Matsa has a resource of 1.9M oz in time… If we are really lucky, Matsa will have well over 2M oz of gold at some point….. One more point is the company’s view is these gold ores are not “refractory”.

6.       How about time line ? Exploration and further drilling to better delineate Fortitude will take 12 months. Then permitting needs to be sought for Fortitude North + new plant another 12-18 months. Upon approval, a new plant can take as long as 18 months to construct. An important point is Matsa can pull in the time line by stacking different activities. Specifically, Fortitude (not Fortitude North) is already “permitted” so it can start mining sooner at Fortitude (say first 3-4 years) then bring on Fortitude North. Also Matsa can place order for long lead time items for the plant while it applies for different permits/approval…… At the earliest, Matsa could be in production in very late 2028/2029. Base case is probably production sometime in 2029.

7.       How much is it going to cost ? The reference point is Brightstar. The plant at Brightstar costs $120M or so…. Matsa is aiming somewhere in the ball park, especially consider it has some of the infrastructure (such as the air strip, the camp) in place already.

8.       How is it going to fund the build ? Guess this is the BIG question for all the junior miners…. For instance, operating expense of $3M a quarter….  So looking at $18M through to end of 2027…. Vs. gross profit of $50M from Devon…. Matsa may have $30M left to fund the mill by end of 2027. If that is the case, it needs to raise $90-110M. Chances are it needs to raise additional capital and dilution for existing shareholders…. Keep in mind MV is only $50M or so at the moment… Nevertheless, if a fully funded Matsa @ $150M MV with a resource of over 2M oz, existing shareholder will still be rewarded handsomely.

9.       Anglo ? Guess my base case is Anglo will not exercise the option. If one is optimistic, maybe Anglo will look to re-negotiate the current agreement to a lower price… Again, if Matsa can bring in some money from Anglo this way, it is a plus…. If not, Matsa needs $90-110M itself…..

Conclusion

1.       Short term, two potential catalysts – good or bad. First, Matsa will deliver a revised plan for Devon. Likely negative. Could be a clearing event once folks are comfortable there are still gold to be mined at Devon. Second, let’s see how much upside in Fortitude North. Should be positive.

2.       My gut feeling is Fortitude North will drive the stock price in the coming months… If all goes well, the stock will react.. And Matsa will have an easier path to figure out how to raise the sum for the mill.

3.       Long term upside is certainly there…. With a resource of over 2M oz, Matsa can support production of 100K oz over 10 years. Plug in the numbers… 100k oz @ A$6000 = $600M… All in cost of say $3-4K…. Minus tax… Still looking at net profit of $100-200M. Put it on 8-10X PE, upside will be substantial.

4.       People can say what they want about management…. But my read is the CEO (Paul Poli) is moving mountains to build Matsa into something darn interesting… Devon is in production and about to start the more profitable campaigns. It managed to strike an interesting option deal with Anglo. Despite the challenges over the years, it has kept Fortitude North and is now on the verge of finding out its true potential… Retail investors may not like the management team. But looking in from outside, the CEO and his team have built the foundation for a pretty darn interesting gold company.

PS... Not financial advice.. Do you own research. I may own the stock.