By Dr. Michael Green

The outlook for Bluebird Merchant Ventures is looking brighter and brighter. This morning brought cracking news that the South Korean investors have accelerated the funding schedule for the company’s South Korean projects. This comes before the deal which will see Bluebird’s stake in the Gubong and Kochang gold projects increased from 50% to 100%.

Already, BMV has received the first tranche of funding, enabling progress on the ground in South Korea and allowing construction to begin.  Basically, it will work like this. Bluebird will repay this debt in gold out of production though a 20% discount to the gold price based on the gold price at the time of delivery. The gold loan is for a minimum of US$5 million, up to a maximum of US$20 million – in the latter case more than sufficient to get to nameplate production of 100,000 z’s gold p.a.

The initial $5m tranche will get Gubong and Kochange into production in the short term and allow BMV to meet its goal of increasing production to 100,000 ounces of gold per annum. Even better, there is no timescale for debt repayment – be assured we checked that with the company. Investors can breathe a sigh of relief as this funding will allow Bluebird to achieve gold production without needing an equity placing to fund the construction phase.  

We also do not believe that the gold price will be staying around current levels for long. But for the sake of argument, using a gold price of US$1,850, a 20% discount gives US$1,480. At this level, repaying US$5 million would equate to delivering just 3,378 ounces and US$20 million equates to 13,513 ounces – negligible against full capacity production expectations. This doesn’t seem too problematic given the plans to rapidly ramp up production in the early years.

There was also welcome news from the sale process with Southern Gold. Apparently, this has taken another step towards completion, with Southern Gold electing to go to the Institute of Arbitrators and Mediators Australia (IAMA) in order for an Independent Expert to be appointed.  Once the Independent Expert has been appointed, a value must be determined within 30 days.

At the time of this latest announcement, Colin Patterson, CEO, pointed out that: “I am delighted that our South Korean funding partners have demonstrated such confidence in our gold projects to provide financing by way of a pre-payment for gold.  We are eager to move forward to the construction phase and produce gold, at which point I believe that considerable value for shareholders will be generated.”

Recent weeks have now seen three cracking announcements. Firstly, the joint venture update. The Independent Expert that Southern Gold will be bringing in will be required to use best practice for the technical assessment and valuation of mineral assets and so this expert is certain to be using the VALMIN Code. It is the VALMIN Code that professionals rely on for technical assessments and valuations of mineral assets because it is the industry yardstick for valuations.

So the Independent Expert is most likely going to be using the VALMIN Code in making a valuation – we cannot think that this valuation can be wildly different to that which BMV’s expert has come out with (which Southern Gold rejected). At this stage, we must point out that investors should not be too worried, as the VALMIN Code methodologies do not take into account the market capitalisation or the share price of a company. In fact, the VALMIN Code seems to be a lot less generous than stock market valuations.

Secondly, the hot news from the Philippines is that the locals are clamouring for mining to open up again. BMV’s project over there is 100% owned and has a JORC compliant resource of 440,000 ounces of gold, which we have determined (on a Conroy Gold & Natural Resources’ EV/ounce number) to be worth around 1p per share based on the number of shares currently in issue and the number of shares on a fully diluted basis.

All this has been eclipsed by BMV now getting funded into gold production in South Korea, which look set to start within the next 12 months. That is the benefit of bringing old gold mines back to life. Not only is it far quicker but also a lot cheaper to rehabilitate old gold mines than fund exploration. These old gold mines at Gubong and Kochang ceased production a couple of decades ago due to a low gold price –  when it was under US$140/oz).

Technically, BMV cannot do any work on the ground until the Southern Gold procedure is out of the way, but with the funding coming into BMV it will allow the management team to do a lot of detailed planning and order the long lead time delivery items. So, the stage looks set for Bluebird to comfortably commence gold production in 2021 with a swift trajectory to 100,000 oz per annum (with BMV’s stake increased to 100%) by 2026. With attractively low operating costs of US$576/oz, this could be a real money spinner and utterly transformative for shareholders hence our view HERE & target price many multiples of the current woeful level.

With, imminently, a 100% interest in the Gubong and Kochang projects under its belt, Bluebird looks poised to become a potentially industry leading gold producer in South Korea with its targeted 100,000 oz per annum low cost mine. Plus, there is the potential of the Philippines that has just been re-ignited. At a current share price sitting of just 4.55p, we don’t believe there are many risk/reward opportunities in the wider stock market at present that are anywhere near as attractive and this reaffirm our Conviction Buy stance.

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Bluebird Merchant Ventures is a research client of Align Research. Align Research owns shares in Bluebird Merchant Ventures and is bound to the company’s dealing policy ensuring open and adequate disclosure. Full details can be found on our website here (“Legals”).

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