i-80 Gold: Down But Not Out, After 2023-24's Dilution Disaster
I suggested i-80 Gold Corp. (NYSE:IAUX) at $2.70 per share as a buy idea back in December 2022 here. My bullish forecast was based on a string of positive exploration drill results at its Nevada gold properties and some very powerful momentum characteristics in share trading. Well, despite a decent rise in gold/silver bullion during 2023-24, the stock sits at $1.23 today, representing a -55% investment loss.
Management has not been able to bring enough ounces into production to offset excessive rates of capital spending, while drilling for new resources costs money. In the end, extra ownership shares have been issued to find the capital to offset operating losses (vs. a worse choice of borrowing funds at high interest rates).
The good news is overall underlying valuations for its gold/silver resources have been rising with precious metals prices. Management is shopping for a joint-venture partner to help fund the buildout of mines, and enough capital now exists for continued drilling and asset development in 2024.
In fact, I am liking the chart trading pattern more and more of late. It appears a better balance of share supply vs. demand is coming into focus, with the strong possibility future gold/silver price gains will begin to pull IAUX higher also. Based on my long-term bullish outlook for precious metals, and the improvement in i-80’s technical trading action, I repurchased shares for the first time in many months. Let me explain why.
Negative Dilution Effects
What went wrong? The main answer is new shares have been issued to keep exploration and development activities going in the right direction. The second issuance effort in 2024, the company just completed an offering of another 69 million common shares to fund ongoing operations (with another 34 million in warrants capping some upside for existing shareholders). Versus 240 million shares “outstanding” in December 2022, 384+ million now exist, dropping the prorated ownership of gold in the ground per unit by 60% over 15 months flat (and this doesn’t include the effect of warrants that can be exercised for extra shares at higher quotes, if such appears). Up to another 110 million shares could be issued in total from options, warrants, and convertible debt exercises for a fully-diluted number, with the potential for positive additions of $300+ million in net cash on the balance sheet.
Yes, gold and silver resources in the ground are still there, while the total enterprise value (equity + debt – cash) of the company has changed little, but we are now dividing ownership between a larger pool of investors. This is how smaller miners stay in business… it’s essentially a dilute or die situation, when significant revenue are not part of the equation. In IAUX’s case, enterprise value has actually risen slightly over the last three years, as the market does believe the company’s gold reserves and resources are worth more in a rising precious metals environment.
As highlighted by the IAUX experience, share dilution is the #1 enemy for investors in junior miners (i-80 does produce a small volume of gold ounces) and exploration gambles. To retain the current share price level or create a gain in the quote, either new metal resources have to be discovered to offset rising share counts, or the pricing of gold/silver needs to climb enough to drive new investor buying into the increasing underlying worth story of its reserves/resources (if and when they are mined).
Gold/Silver Assets Haven’t Gone Anywhere
Despite the stock price dump, our core bullish investment argument to own safer Nevada gold/silver resource assets in the ground hasn’t changed. I have targets for gold above US$3000 oz. in a few years, with silver potentially trading in the US$50 to $100 oz. area. Foreign central bank buying of gold, especially from China, is only going to grow from early 2024, in my view, which I discussed in an article last September here. In addition, silver is primed to rise even faster than gold on supply shortages since 2020, projected to mushroom on solar panel manufacturing demand going forward.
The quality and size of IAUX’s assets are also worthy of serious consideration. The only real issues are how to get production ramped up quickly, and at what cost to the business and shareholders.
Below I have taken slides from the company’s May 2024 Investor Presentation to illustrate the investment proposition of its mining assets and resource base. Without doubt, tremendous potential exists for investors, especially if a dramatic rise in gold/silver is approaching. High-grade ore, a number of locations/types for resources in close proximity, alongside relatively low mining costs after the initial capital expenditure to construct each mine are the highlights.
Improving Technical Momentum
Why buy shares now? I believe the best trading setup for IAUX is now in place since November 2022’s bottom and rapid price increase. I have drawn below a daily trading chart of price and volume changes back to September 2022.
The combination of rising 20-day Chaikin Money Flow since late April, climbing Negative Volume Index readings since February, and ultra-low 21-day Average Directional Index scores under 10 in May, has not existed since early November 2022 (circled in green). My analysis of the technical trading setup is buying interest has started to overwhelm selling volumes, following the price drop in early April on the latest share offering news.
A breakout from the tight 4-week basing pattern could prove a positive turn in price is underway. For confirmation of the bullish story, all we may need is price moving back above the 50-day moving average, sitting at approximately $1.33 today. At that point, short-term traders and trend followers may step in with buy orders, pushing price into an uptrend. My first upside target area will be the 200-day moving average around $1.57 currently.
Considering gold and silver have advanced nicely in price over my pictured 20-month span, the i-80 price slide has been a complete bummer. On the flip side of the argument, the fact further gold/silver gains are likely (in my view) doesn’t hurt the investment outlook for this security. And, with buying momentum improving for IAUX, the foundation for sizable share gains over the rest of 2024 appears to be well supported.
Final Thoughts
I have traded in and out of i-80 shares multiple times since December 2022. Thankfully, personal trading/investment losses have been limited. Keeping position sizing low in my portfolio is one reason. Another risk reducer has been the willingness to take losses and reevaluate the ownership logic. Without doubt, regular dilution through new share offerings has been an incredible headwind.
The long-term rationale to look at shares has not changed over the last 17 months. The nominal inground value of IAUX’s measured, indicated and inferred resources of $33 billion in gold and $5 billion in silver at current spot quotes (US$2300 gold, US$27 silver) are nothing to sneeze at. The company operates in Nevada, the #1 ranked jurisdiction worldwide for investor safety. Plus, new upside is possible on future resource discoveries.
What this means is an equity market capitalization around $480 million and enterprise value closer to $600 million still offer tremendous upside “leverage” to rising gold/silver prices.
Risks of further dilution remain part of the i-80 story, as management is shopping for a joint-venture partner (or more than one for its different assets). For example, if management sells part of future production volumes to a streamer or major gold miner [like Newmont (NEM) or Barrick Gold (GOLD) operating next door to its properties], even greater upside potential for shareholders may be surrendered. However, depending on the structure of any deal and future funding requirements from IAUX to achieve overall production of 200,000+ gold ounces annually from its properties, a JV deal could be a significant net positive for the share quote. For sure, a pathway to operating profitability and elimination of future dilution needs would be a huge plus at this stage in the organization’s development.
Realistically on share dilution effects, I am lowering my original December 2022 upside stock-price goals from $10-12 to a watered down $5-6 range over the next few years. For this forecast to play out, I am using 4x sales for a safe-jurisdiction, 15 to 20-year mine life valuation on 180,000 equivalent gold ounces produced annually for IAUX’s account, which is sold for $3000 oz. at low cash costs by 2026-27. I am assuming further 25% dilution on a joint venture agreement, giving 60,000 oz. in annual mine production to the new partner in return for construction capital. 240,000 oz. in yearly gold production is a more conservative projection than the ambitious 500,000 oz. goal outlined in the company’s 2022 hub-and-spoke concept.
Under a bullish gold/silver price outcome, if you purchased a position after my first story, the upside to $5-6 could still represent roughly a double on your investment over 3-5 years. Yet, even better performance and compounding could come from buying a stake under $1.30 today and riding IAUX to $5 or $6.
Another possible conclusion to the i-80 investment story may appear with a takeover bid by a larger mining concern. I am not ruling out another major miner adding IAUX’s favorable location of high-grade resources to their portfolio. Such a bid may be in the $2 to $3 range during 2024, to secure enough votes from disgruntled shareholders purchasing around $3 during 2022-23.
Unfortunately for miners not able to generate profits and cash flow with operating mines, the dilution clock is ticking against you as an investor. That’s why you only invest a small portion of your assets in any one name (which I also suggested in my December 2022 effort), no matter how bullish you may be on future business fortunes.
I know previous and existing shareholders are quite disappointed with IAUX’s share performance. Investing in the gold/silver mining sector can be quite difficult. To be good at it, you have to shake off the mistakes (like an NFL quarterback after throwing an interception). Past performance is not always the best indicator of approaching gains/losses either. One year’s big drop can often reverse course into an oversized jump in price over the next year, depending on business dealings, surprise discoveries, climbing gold/silver quotes.
Given the huge decline in investor sentiment regarding i-80’s share price outlook during April-May 2024 (a direct result of its underperformance of gold/silver bullion and related peer miners over the past year), it may honestly be a safer, contrarian moment to accumulate a position. I rate shares a Buy, again assuming you limit the amount of capital invested in the idea.
Thanks for reading. Please consider this article a first step in your due diligence process. Consulting with a registered and experienced investment advisor is recommended before making any trade.