A Compelling M&A Target Near Africa’s Largest Gold Mine

Report Highlights

• A 2021 Preliminary Economic Assessment (PEA) returned an AT-NPV5% of $600M, and an attractive AT-IRR of 25%, using $1,600/oz gold vs the spot price of $2,515/oz. LN is trading at just 6% of the AT-NPV. The AT-NPV increases to $1B at $1,840/oz gold. Adumbi has potential to produce 300+ Koz ever year, making it a mid-sized gold mine. 
• We note that the Imbo area has significant resource expansion potential as the Adumbi deposit remains open at depth, and multiple targets have not been drill-tested. 
• Gold is trading near record highs. We are more bullish on gold stocks than the metal itself, with gold producer valuations averaging 17% lower than the past three instances when gold surpassed $2k/oz.
• We continue to believe that Loncor is an attractive M&A target. Relative to other gold juniors, LN is trading at a 62% discount (C$19/oz vs the sector average of C$51/oz). 

Price Performance (1-year)

The Democratic Republic of the Congo (DRC) is the 10th largest gold producer in Africa, the largest cobalt producer in the world, and second in copper. Despite its rich natural resources, the country is ranked low in mining attractiveness due to concerns of political instability and security concerns. Nonetheless, ongoing conflicts between government forces and rebel groups have not materially impacted operations for Loncor or its neighbor Barrick. Barrick even expects 2024 production at its Kibali mine to remain steady, supported by successful partnerships with local businesses. We also note that several other majors like AngloGold Ashanti (NYSE: AU), Glencore (LSE: GLEN), Ivanhoe Mines (TSX: IVN), and Zijin Mining (SEHK: 2899) continue to operate in the DRC, signaling a willingness to navigate political risks in exchange for access to the country's rich cobalt, copper, and gold reserves.

Imbo Project

Despite ongoing conflicts, several majors remain active in the DRC. Located in the Ngayu gold belt of northeastern DRC, 220 km from Barrick’s Kibali gold mine

Ngayu hosts Banded Ironstone Formation (BIF) gold deposits, which are typically large-tonnage.  Should the project advance to production, management envisions hydro power as a viable source, which is a significant factor contributing to Kibali's low cash costs

The advanced-stage project hosts three open-pittable deposits (Adumbi, Kitenge, and Manzako), and multiple targets, along a 14 km long mineralized trend. These three deposits are 3 km from each other, and can likely be part of the same mine plan

Most of Imbo’s resources come from Adumbi. Adumbi holds a relatively high-grade/large open-pit resource. The Adumbi deposit has been drilled along 900 m strike, and 650 m downdip. The open-pit resource grade at Adumbi (3.7 Moz at 2.3 g/t Au) is comparable to that of Kibali’s open-pit and underground resources (16.9 Moz at 3.1 g/t Au)

2021 PEA Highlights of Adumbi

85% of its resources are within fresh rock (sulphides); metallurgical tests indicate a high recovery rate (90%).  A PEA completed in 2021 returned an AT-NPV5% of $600M, and a high AT-IRR of 25%, using $1,600/oz gold vs the current spot price of $2,515/oz

LN is set to commence a resource expansion drill program (15 holes/ 11,000 m) to potentially delineate underground resources below the open-pit shell. Management has assigned an exploration target of 1.5 Moz (4.8 g/t) below the Adumbi pit-shell. 

2024 Proposed Drill Holes (Adumbi)

Annual production of 303 Koz, which would make it a mid-sized gold producer. AT-NPV5% increases to $1B at $1,840/oz gold 

Adumbi is open at depth with significant resource expansion potential to a depth of 800 m below surface

In addition, LN intends to drill-test four targets (12 holes/2,400 m) 8 km from Adumbi - the 1.9 km long Esio Wapi trend, the 1+ km Paradis trend, the 3.1 km Mungo Iko trend, and the 3.2 km Museveni trend. Management’s long-term plan is to delineate a mining district along the 14 km-long Imbo trend.

Imbo  Exploration Targets

Surface sampling at the four exploration targets returned high gold grades of up to 22.4 g/t 

Financials

At the end of Q2, LN had $6.6M in working capital. No outstanding options/warrants are in-the-money

Comparables Valuation

African gold juniors are trading at C$51/oz (previously C$44/oz). LN is trading at C$19/oz (unchanged), reflecting a 61% discount. Applying the sector average EV/oz of C$51/oz to LN’s resources, we arrived at a comparables valuation of C$0.87/share (previously C$0.79/share)

FRC Valuation and Rating

Since our previous report in January 2024, we have raised our long-term gold price forecast from $1,400 to $1,600/oz. Additionally, we have increased our OPEX/CAPEX forecasts by 15% to reflect sector-wide inflation

Our DCF valuation is C$0.73/share (unchanged), as the positive impact of higher gold prices was offset by higher expense forecasts 

We are reiterating our BUY rating, and raising our fair value estimate from C$0.76 to C$0.80/share (the average of our DCF and comparables valuations). We believe LN is an excellent acquisition target due to its attractive valuation metrics, high-grade resources, robust PEA, and potential for resource expansion.

Risks

Maintaining our risk rating of 5 (Highly Speculative)

We believe the company is exposed to the following key risks: 

• The value of the company is dependent on gold prices
• Geopolitical 
• Exploration success
• Potential for share dilution
• Delays in project financing
• FOREX