Cabot Small-Cap Confidential Issue: December 5, 2024

The Big Idea

Deep in Central Idaho’s Payette National Forest lies an abandoned mine that could soon become one of the largest gold, silver and antimony mines in the country.

Final approval, which could come any minute from the U.S. Forest Service, would cap off a remarkable turnaround for the defunct mine, which hasn’t produced anything since 1997, other than arsenic and sediment that has leached into the Salmon River.

Despite a nearly three-decade hiatus, there’s a rich mining history to the area, beginning in 1899 with the Thunder Mountain Gold Rush. Through the 1930s and 1940s, antimony and metals mined from the area helped the World War II war effort.

While the area’s gold resources are clearly attractive, the market has become enthralled with the potential for the mine to help the U.S. secure domestic supplies of antimony, a critical mineral essential to national security and economic prosperity.

Antimony is used to make bullets and other munitions, semiconductors and clean-energy storage batteries.

Currently, around 90% of the world’s supply of antimony comes from China, Russia and Tajikistan. And China has just put the U.S. on notice that exports will be restricted.

This past Tuesday, a Chinese Commerce Ministry directive stated, “In principle, the export of gallium, germanium, antimony, and superhard materials to the United States shall not be permitted.”

This development ramps up trade tensions between China and the U.S. and puts further pressure on the U.S. to secure domestic production of antimony.

This mine in Idaho could be part of the solution.

It’s estimated to hold 148 million pounds of antimony, making it one of the largest reserves not controlled by China. The proposed mining plan means antimony will be produced as a byproduct of gold mining and could satisfy roughly 35% of U.S. antimony demand in the first six years of production.

This is the story of a company that’s aiming to make that potential a reality.

The Company

Perpetua Resources (PPTA) is a start-up mining company focused on the exploration, site restoration and redevelopment of gold-antimony-silver deposits in the Stibnite-Yellow Pine district of central Idaho.

The Stibnite Gold Project is located in one of the most historic mining districts in Idaho. Thousands of miners and several different companies have worked in the area since Albert Hennessy first discovered antimony-gold mineralization and staked the first Meadow Creek claims in 1914.

During World War II and the Korean War, antimony trisulfide was produced for the U.S. war efforts. In fact, antimony trisulfide from Stibnite is the only known domestic source of antimony that can meet U.S. defense needs for many small arms, munitions, and missile types.

But people left the town of Stibnite after the war years. Mining activities were sporadic from 1952 through 1996, then all production ended in 1997.

While the U.S. government attempted to clean up the site somewhat, it did a shoddy job.

Midas Gold then stepped in around 2009 to study the potential to get operations going again. Fast forward to today, and after seven years of prep work Perpetua Resources is on the cusp of getting the green light to move on to construction activities.

The company’s vision is to: (1) provide the U.S. with a domestic source of the critical mineral antimony, (2) develop one of the largest and highest-grade open-pit gold mines in the country, and (3) restore the stream and lake habitats (after reclamation) in an area that was abandoned after 100 years of mining to achieve a net increase in stream length and accessible fish habitat.

The Stibnite Project

With an estimated 4.8 million ounces in open pit reserves, the Stibnite Project is expected to be one of the highest-grade open-pit gold deposits in the country not owned by Barrick (GOLD) or Newmont (NEM).

It should be able to produce around 463,000 ounces of gold at about $438/ounce annually in its first four years of operations, then almost 300,000 ounces per year at $636/ounce for the next decade or so.

Antimony production will come as a byproduct of gold production. Over the first six years of production, the Stibnite Project is expected to produce around 35% of 2023 U.S. demand.

These figures are based on a Feasibility Study (FS) completed in 2020. These studies are meant to give a rough idea of the economics of a project. Naturally, the input variables change over time, but the FS works as a good baseline of assumptions.

Rather than go into all the details of the FS I’ve included an image of the highlights below.

As you can see the study gives figures for two prices of gold, the highest one (the green area) being $1,850 per ounce. At that price, given these assumptions, the Stibnite Project has a net present value (NPV) of about $1.86 billion.

However, at the current gold price of over $2,600 an ounce, the NPV is estimated to be well over $3 billion.

That’s a healthy premium to Perpetua’s market cap, which is hovering just under $800 million today.

Of course, plugging numbers into a spreadsheet to arrive at a NPV is one thing; getting a mine up and running is an entirely different thing altogether.

Actual NPV could be a lot less if costs run high and the gold grade ends up being less than expected. Or it could be many, many multiples more if the gold grade is higher, more gold is discovered (often happens with good mines), etc.

This is why PPTA is a speculative stock.

Growth Initiatives

Advancing to Final Approval in December 2024: In Q3 2024 the U.S. Forest Service (USFS) published the Final Environmental Impact Statement (FEIS) and issued a Draft Record of Decision (DROD) for the Stibnite Gold Project. Additionally, The U.S. Fish and Wildlife Service issued its Final Biological Opinion on September 6 and the National Marine Fisheries Service issued its Final Biological Opinion on October 7. We are now nearing the end of the final 45-day resolution period prior to the publication of the final Record of Decision (ROD), which should be on or around today, December 5. However, the USFS can extend this period.

Non-Dilutive Financing Potential: While major financing is dependent on the final ROD, Perpetua Resources is working with RBC Capital Markets and Endeavour Financial to line up strategic and financing options. At the top of the list is an application with the Export-Import Bank of the U.S. to secure funding of up to $1.8 billion. The company is also pursuing awards of up to $75 million from the U.S. Air Force ($59 million for environmental and engineering studies and to advance construction readiness), U.S. Army and Defense Ordnance Technology Consortium (DOTC) and Defense Logistics Agency & Small Business Innovation Research Lab.

Exploration Potential: The 2020 Feasibility Study focused on the three areas of the Yellow Pine Deposit, West End Deposit and Hanger Flats Deposit. But as the image below shows, there are other gold and antimony prospects that could completely change the scope of the project, for the better, if things go well.

Antimony-Based Liquid Metal Batteries: Subject to Stibnite Project approval and eventual production, Perpetua has an agreement with the battery company Ambri to supply antimony for their containerized-based liquid metal battery system for clean energy storage. Ambri is an early-stage story of its own that emerged from MIT and has pilot programs with Microsoft (MSFT), Xcel Energy (XEL) and India’s Reliance Industries, and there’s no guarantee it will succeed. But it’s an interesting technology that’s received investments from Bill Gates, Paulson & Co. and the Japan Energy Fund. More on this in the future.

Royalty Stream Potential: Among potential financing options is selling gold, silver and/or antimony production via a streaming arrangement. Perpetua has already begun this process, agreeing to a streaming arrangement in which Franco-Nevada (FNV) will receive 100% of the silver produced from Stibnite in years seven through 15. Perpetua was paid $8 million for this potential future stream.

Business Model

Perpetua is a development-stage mining company with a dream, a team, and a seemingly rational game plan to make progress toward its vision and create value for shareholders along the way.

The Bottom Line

For a stock like this to work it’s all about the company achieving milestones along the way to eventual success. This is what that looks like at a high level, starting with the final Record Of Decision (Q4 2024) as the next big event:

While actual cash flow from the project will be different from the 2020 Feasibility Study, the following image gives an idea of the cadence. As you can see, the next few years (years -3 to -1) will mean money going out the door, and nothing coming in from production. This is where equity offerings, loans, grants, strategic investments/partnerships, etc., will come into play.

With the recent $35 million equity raise Perpetua should finish 2024 with around $43 million in cash. That should be enough to fund pre-construction efforts for the next 10-12 months. Money will need to be raised to get to production stage.

Once things get going it’s reasonable to expect that further exploration efforts will result in more reserves being found. But let’s not get ahead of ourselves.

Risk

• Financing: Perpetua will need to raise cash to achieve its goals. While the company just completed an equity offering ($33.6 million raised at $10.17 per share) in late November, dilutive offerings are still likely in the future.
• Conservation Organization Pushback: A coalition of organizations including Save the South Fork Salmon, Idaho Conservation League, Idaho Rivers United, Advocates for the West, American Rivers and Earthworks have pushed back against the Stibnite Gold Project due to concerns about pollution, damage to fish habitat in the Salmon River watershed, violation of treaties with Native American tribes and permanent scarring of public lands. While the ROD approval process and a settlement with the Nez Perce Tribe that requires various site cleanup actions (many of which have already been completed) are important steps, there’s no guarantee issues with various interest groups won’t arise in the future.
• Speculative Stock: PPTA is a speculative mining stock with no operations, no production, not a lot of cash in the bank and exposure to a plethora of operational, financing, reputational and market-related risks. It could all work out, or not. Invest accordingly.

Competition

There are a lot of gold and silver miners out there but they’re not really “competitors” in the traditional sense of the word. The main U.S.-listed antimony company is United States Antimony (UAMY), which has two of the three operating antimony smelters in North and Central America, but no proven or probable reserves, and hasn’t produced antimony since 1983 when all production went overseas. There’s potential UAMY could be a processing partner for PPTA down the road.

The Stock

Trading Volume: PPTA trades an average of 480,000 shares daily. We could move this stock.

Historical Price: PPTA became the ticker symbol for Perpetua in February of 2021 when the company changed its name from Midas Gold. At the time the stock traded near 8.6. In the months afterward PPTA was on a downhill ride, ultimately bottoming near 1.7 in October 2022. The stock rallied to 5.5 by May 2023, then pulled back again, to about 2.7 by March 1, 2024. PPTA has acted much better since then. While there have certainly been plenty of dramatic pullbacks (including 30% drawdowns in April and June) the trend on the weekly chart is clearly higher. Since mid-August, when the stock broke above 7, shares have mostly been making a series of higher highs and higher lows on their way to yesterday’s multi-year intra-day high of 11.6. Granted, the action has been a little choppy on a daily basis, so don’t expect a super smooth ride here.

Valuation: Exploration and early-stage mining stocks are speculative. While Enterprise Value/Gold Equivalent Ounce (EV/GEO) multiples can give some idea of whether one of these stocks is “cheap” or “expensive,” the method is crude, at best. The bottom line is PPTA is cheap if the Stibnite Project is approved and lives up to/surpasses expectations, and it’s expensive if the project is denied and/or doesn’t live up to expectations. The National Bank of Canada believes PPTA should trade based on the assumption of $125 per GEO. This implies the current share price should be just north of 15.

Short-Term Buy Range: Expect to buy in the 9.5 to 11.5 range in the very short term. This could/will likely change once a final ROD is released. BUY HALF

The Next Event: Final Record of Decision (ROD) expected any day, certainly by the end of the year. Permits and financing updates expected early 2025. Financing and construction efforts throughout 2025. Estimated first commercial operations 2027-2028.

Current Recommendations

Glossary

Buy means accumulate shares at or around the current price.
Hold means just that; hold what you have. Don’t buy, or sell, shares.
Sell means the original reasons for buying the stock no longer apply, and I recommend exiting the position.
Sell a Half means it’s time to take partial profits. Sell half (or whatever portion feels right to you) to lock in a gain, and hold on to the rest until another ratings change is issued.

Disclosure: Tyler Laundon owns shares in one or more of the stocks mentioned. He will only buy shares after he has shared his recommendation with Cabot Small-Cap Confidential members and will follow his rating guidelines.

Please note that, unless otherwise credited, all images in this Issue are sourced from Perpetua Resources’ October Investor Presentation, which can be found here.

The next Cabot Small-Cap Confidential issue is scheduled for

January 9, 2025.

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