transition metals corp. (tsxv: xtm) – preparing for two ......management diversifies their...

Siddharth Rajeev, B.Tech, MBA, CFA

February 5, 2019

2019 Fundamental Research Corp. “15+ Years of Bringing Undiscovered Investment Opportunities to the Forefront” www.researchfrc.com

PLEASE READ THE IMPORTANT DISCLOSURES AT THE BACK OF THIS REPORT

Transition Metals Corp. (TSXV: XTM) – Preparing for Two IPOs in 2019 – FINAL REPORT

Sector/Industry: Junior Resource www.transitionmetalscorp.com

Market Data (as of February 5, 2019)

Current Price C$0.09

Fair Value C$0.29

Rating* BUY

Risk* 4 (Speculative)

52 Week Range C$0.06 - C$0.20

Shares O/S 43,354,906

Market Cap C$3.90 mm

Current Yield N/A

P/E (forward) N/A

P/B 0.7x

YoY Return -35.7%

YoY TSXV -22.9% *see back of report for rating and risk definitions

Highlights

Transition Metals Corp. (“Transition”, “XTM”) remains focused on the prospect / project generator (“PG”) model across seven jurisdictions in Canada. The company has 38 projects, including 28 in Ontario. Approximately 50% of the current portfolio is focused on gold, and 50% is focused on energy metals.

Of the 38 projects in the portfolio, 10 are held by two

spinout companies, 13 are partnered, and the remaining are currently being considered for joint venture.

Management is preparing to take both spinout companies, namely Canadian Gold Miner and SPC Metals, public this year.

At the end of FY2018 (ended November 30, 2018), the

company had cash and working capital of $0.85 million and $1.30 million, respectively, with no debt.

We estimate that the current average Price to Book

(“P/B”) of PGs (listed on the TSX and TSXV exchanges)

is 2.1x. Transition is trading at just 0.7x.



Portfolio

Update

Transition continues to follow a PG model with a strong focus on Ontario, but has recently acquired various projects in the Maritimes. Its land package is held across seven jurisdictions, as shown in the map below. The company currently holds a portfolio of 38 projects, covering more than 140,000 hectares of land, in well-known mining jurisdictions in Canada.

Transition’s Portfolio

Source: Company

Management diversifies their portfolio across commodities by investing in precious metals and base metals. Approximately 50% of the current portfolio is focused on gold, and 50% is focused on energy metals.

Portfolio by Commodity

Source: Company

Of the 38 projects in the portfolio, 10 are held by two spinout companies, 13 are partnered, and the remaining are currently being considered for joint venture



Source: Company

Transition’s largest partners include: IAMGOLD (TSX: IMG), Impala Platinum

Holdings (JSE: IMP), North American Palladium (TSX: PDL), Gowest Gold (TSXV:

GWA), and Nunavut Resources Corporation (an Inuit-owned resource corporation).

Key JV Partners

Source: Company

Excluding the projects held by the spinout companies, the Sunday Lake project

remains the most advanced stage project within the portfolio. The property is a Joint Venture between the company (25%) and Impala Platinum Holdings (75%), wherein Transition has a free carried interest through to the completion of a feasibility study. In June 2017, the company entered into a definitive agreement with North American Palladium, wherein NAP has the option to acquire Impala’s 75% interest in the project for $4.5 million in exploration expenses, and $3.5 million in cash ($0.35 million to XTM and $3.15 million to Impala) over a five-year period. The project is located 25 km north-east of Thunder Bay. NAP’s Lac des Ilse mine is just 90 km from the Sunday Lake project. The following map shows the well-known projects in the region. The closest project to Sunday Lake is the Thunder Bay North project (JV between Rio Tinto / LSE: RIO and Panoramic Resources / ASX: PAN).



Update on

Spinout

Companies

Source: Company

XTM also owns the Saturday Night project, located 16 km from the Sunday Lake project. Another key project is the Highland Gold project in Cape Breton, Nova Scotia. The company can acquire a 100% interest in the project by spending $1.5 million in expenditures and providing $345k in shares and cash over a five-year period. The project is considered to host a large-scale epithermal gold system. Recent reverse air blast (RAB) drilling returned an intersection of 9.14 m @ 23.22 g/t Au. SPC Metals (“SPC”) – 30% owned by XTM

SPC holds two Ni-Cu-PGM exploration projects in the Sudbury Basin - Aer-Kidd and the Lockerby East Project. Both projects have already identified highly conductive drill targets identified from UTEM surveys. The Lockerby project contains approximately 10 Mt of historic resources: - Graham West Deposit: 8.55 Mt @ 0.45% Ni, 0.31% Cu (Indicated), and 2.0 Mt @

0.38% Ni, 0.30% Cu (Inferred) - Lockerby East Deposit: 0.18Mt @ 2.32% Ni, 0.78% Cu (Indicated) The projects are in the prolific Sudbury Igneous Complex, which is estimated to hold 1.56 Bt of Ni-Cu-PGM mineralization.

The Aer-Kidd project is a historic producer (approximately 125,000t produced in 1967) and has a historic reserve estimate of 786,000t @ 0.57% Ni, 0.76% Cu. Management believes the Aer-Kidd project is comparable to Vale's (LSE: VALE) Totten mine and KGHM's (WSE: KGH) Victoria development project.



Source: Company

SPC recently drilled two holes (totaling 1,265 m) to test an electromagnetic anomaly detected earlier in 2018. Both holes intercepted high grades over short intervals.

Drill hole AK-18-030 intersected 0.61% Ni, 0.92% Cu, 0.02% Co and 2.50g/t PGM (Pt+Pd+Au) across13.35 m (683.40 - 696.75 m), including higher grade 2.35% Ni, 2.16% Cu, 0.05% Co and 5.57g/t PGM over 1.25 m.

Drill hole AK-18-030A intersected 0.66% Ni, 1.22% Cu, 0.03% Co and 3.46g/t PGM over 13.60 m (651.50 - 665.10 m), including higher grade 2.19% Ni, 3.55% Cu, 0.05% Co and 3.41g/t PGM over 1.10 m.

XTM plans to continue drilling at Aer-Kidd and develop a plan to advance Lockerby East. In June 2018, SPC completed a $1.91 million financing. Each unit (common share + warrant) was priced at $0.20. The implied market capitalization of SPC is $10.2 million (previously $12.3 million) based on the recent financing of $0.20 per share (previously $0.30 per share) and 50.8 million (previously 41.4 million) in total shares outstanding. Key shareholders include - 30% Transition, 13% RNC Minerals (TSX: RNX), 12% Resource Capital Fund, 13% Leede Jones Gable, and 9% by the Technica Group. Management intends to take the company public this year. Canadian Gold Miner (“CGM”) - 38% owned by XTM

CGM holds 229 km² of land (previously 165 km²) across the Cadillac Larder, Lincoln-Nipissing and Ridout Structures in the southwestern part of the Abitibi Greenstone belt. The portfolio has six projects (previously four), as shown in the map below:



XTM’s Near-

term Objectives

Management

CGM’s Portfolio

Source: Company

South Kirkland, located 10 km southeast of Larder Lake ON, has a historic resource West Matachewan is west of Alamos Gold’s (TSX: AGI) Young Davidson mine Ridout West consists of two projects that are optioned to IAMGOLD DeSantis – a historic gold producer in Timmins Catherine – a project south of Kirkland Lake

CGM is currently planning to raise $3 million to initiate a 15,000 m drill program at South Kirkland. As with SPC, management intends to take CGM public this year. The implied market capitalization of the company is $6 million, based on a recent financing of $0.15 per share (previously $0.20 per share). The company has 39.6 million shares outstanding (previously 29.9 million), of which, 38% is held by Transition, and 19% by Osisko Mining (TSX: OSK). Management’s focus on the next 12 months are the following: Complete 10,000 to 15,000 m of drilling at the South Kirkland project Complete 3,500 m of drilling at DiSantis Take SPC and CGM public

CEO and Director, Scott McLean, continues to be the largest shareholder with approximately 2.55 million shares, or 5.9% of the total. The following table shows the ownership of senior management and board members. Institutions hold approximately 20%, with Sprott US Global being the largest institutional investor at about 15%. The company’s board has six members, of which, five are independent.



Financials

Source: Management Information Circular

At the end of FY2018 (ended November 30, 2018), the company had cash and working capital of $0.85 million and $1.30 million, respectively. The company has no debt. The total book value of its exploration assets, and long-term investments, were $4.62 million. Cash flows from financings have totaled $10.40 million since September 2011, at an average rate of $1.4 million per year. The total financings also include $5.8 million raised for SPC and CGM while they were subsidiaries of the company. The following table summarizes the company’s financial performance since 2012.

Source: FRC / Company Financial Statements

The following table shows the company’s operational performance since 2012.

Source: FRC / Company Financial Statements



Stock Options

and Warrants

Valuation and

Rating

Revenues from strategic alliances were nil in Q1-FY2019. Note, as mentioned in our previous report, these are not technically revenues, but a share of expenses from partners for exploration. From FY2012 to Q1-FY2019, the company spent $10.54 million in exploration and others, of which, $6.55 million was received from strategic alliances, or 62% of the total. General and Administrative (“G&A”) expenses, which include salaries, administration, and professional fees and investor relations, have averaged $1.05 million per year since FY2012. ($181k in Q1-FY2019). We estimate the company currently has 2.23 million options (weighted average exercise price of $0.25) and 7.95 million warrants (weighted average exercise price of $0.20) outstanding. At this time, none of the options or warrants are ‘in-the-money’. As PGs hold and advance several properties in their portfolios through partnerships, we believe the most appropriate method to evaluate a PG is through market comparables. We estimate that the average Price to Book (“P/B”) of PGs (listed on the TSX and TSXV exchanges) is 2.1x (down from 3.1x in our initial report). XTM is trading at just 0.7x.

Source: FRC / S&P Capital IQ



Risks

Applying a 2.1x P/B ratio to XTM’s book value, we estimate XTM’s fair value should

be $0.29 per share (previously $0.38 per share). We are reiterating our BUY rating.

The following risks, though not exhaustive, may cause our estimates to differ from actual results: The value of the company is dependent on commodity prices. The company does not currently have a regular stream of cash flows. Management’s ability to continue to identify and acquire good projects at a reasonable

valuation. Ability to identify partners with strong technical backgrounds and access to capital. As a PG holds a lot of projects in its portfolio, it can be challenging for investors to

understand and estimate the PG’s true intrinsic value. Access to capital and share dilution.

We rate the company’s shares a risk of 4 (Speculative).



Fundamental Research Corp. Equity Rating Scale:

Buy – Annual expected rate of return exceeds 12% or the expected return is commensurate with risk Hold – Annual expected rate of return is between 5% and 12% Sell – Annual expected rate of return is below 5% or the expected return is not commensurate with risk Suspended or Rating N/A— Coverage and ratings suspended until more information can be obtained from the company regarding recent events. Fundamental Research Corp. Risk Rating Scale:

1 (Low Risk) - The company operates in an industry where it has a strong position (for example a monopoly, high market share etc.) or operates in a regulated industry. The future outlook is stable or positive for the industry. The company generates positive free cash flow and has a history of profitability. The capital structure is conservative with little or no debt. 2 (Below Average Risk) - The company operates in an industry where the fundamentals and outlook are positive. The industry and company are relatively less sensitive to systematic risk than companies with a Risk Rating of 3. The company has a history of profitability and has demonstrated its ability to generate positive free cash flows (though current free cash flow may be negative due to capital investment). The company’s capital structure is conservative with little to modest use of debt. 3 (Average Risk) - The company operates in an industry that has average sensitivity to systematic risk. The industry may be cyclical. Profits and cash flow are sensitive to economic factors although the company has demonstrated its ability to generate positive earnings and cash flow. Debt use is in line with industry averages, and coverage ratios are sufficient. 4 (Speculative) - The company has little or no history of generating earnings or cash flow. Debt use is higher. These companies may be in start-up mode or in a turnaround situation. These companies should be considered speculative. 5 (Highly Speculative) - The company has no history of generating earnings or cash flow. They may operate in a new industry with new, and unproven products. Products may be at the development stage, testing, or seeking regulatory approval. These companies may run into liquidity issues, and may rely on external funding. These stocks are considered highly speculative.

Disclaimers and Disclosure

The opinions expressed in this report are the true opinions of the analyst about this company and industry. Any “forward looking statements” are our best estimates and opinions based upon information that is publicly available and that we believe to be correct, but we have not independently verified with respect to truth or correctness. There is no guarantee that our forecasts will materialize. Actual results will likely vary. The analyst and Fundamental Research Corp. “FRC” does not own any shares of the subject company, does not make a market or offer shares for sale of the subject company, and does not have any investment banking business with the subject company. Fees were paid by XTM to FRC. The purpose of the fee is to subsidize the high costs of research and monitoring. FRC takes steps to ensure independence including setting fees in advance and utilizing analysts who must abide by CFA Institute Code of Ethics and Standards of Professional Conduct. Additionally, analysts may not trade in any security under coverage. Our full editorial control of all research, timing of release of the reports, and release of liability for negative reports are protected contractually. To further ensure independence, XTM has agreed to a minimum coverage term including an initial report and an update report. Coverage cannot be unilaterally terminated. Distribution procedure: our reports are distributed first to our web-based subscribers on the date shown on this report then made available to delayed access users through various other channels for a limited time. The distribution of FRC’s ratings are as follows: BUY (72%), HOLD (7%), SELL / SUSPEND (21%). To subscribe for real-time access to research, visit http://www.researchfrc.com/subscribe.php for subscription options. This report contains "forward looking" statements. Forward-looking statements regarding the Company and/or stock’s performance inherently involve risks and uncertainties that could cause actual results to differ from such forward-looking statements. Factors that would cause or contribute to such differences include, but are not limited to, continued acceptance of the Company's products/services in the marketplace; acceptance in the marketplace of the Company's new product lines/services; competitive factors; new product/service introductions by others; technological changes; dependence on suppliers; systematic market risks and other risks discussed in the Company's periodic report filings, including interim reports, annual reports, and annual information forms filed with the various securities regulators. By making these forward looking statements, Fundamental Research Corp. and the analyst/author of this report undertakes no obligation to update these statements for revisions or changes after the date of this report. A report initiating coverage will most often be updated quarterly while a report issuing a rating may have no further or less frequent updates because the subject company is likely to be in earlier stages where nothing material may occur quarter to quarter. Fundamental Research Corp DOES NOT MAKE ANY WARRANTIES, EXPRESSED OR IMPLIED, AS TO RESULTS TO BE OBTAINED FROM USING THIS INFORMATION AND MAKES NO EXPRESS OR IMPLIED WARRANTIES OR FITNESS FOR A PARTICULAR USE. ANYONE USING THIS REPORT ASSUMES FULL RESPONSIBILITY FOR WHATEVER RESULTS THEY OBTAIN FROM WHATEVER USE THE INFORMATION WAS PUT TO. ALWAYS TALK TO YOUR FINANCIAL ADVISOR BEFORE YOU INVEST. WHETHER A STOCK SHOULD BE INCLUDED IN A PORTFOLIO DEPENDS ON ONE’S RISK TOLERANCE, OBJECTIVES, SITUATION, RETURN ON OTHER ASSETS, ETC. ONLY YOUR INVESTMENT ADVISOR WHO KNOWS YOUR UNIQUE CIRCUMSTANCES CAN MAKE A PROPER RECOMMENDATION AS TO THE MERIT OF ANY PARTICULAR SECURITY FOR INCLUSION IN YOUR PORTFOLIO. This REPORT is solely for informative purposes and is not a solicitation or an offer to buy or sell any security. It is not intended as being a complete description of the company, industry, securities or developments referred to in the material. Any forecasts contained in this report were independently prepared unless otherwise stated, and HAVE NOT BEEN endorsed by the Management of the company which is the subject of this report. Additional information is available upon request. THIS REPORT IS COPYRIGHT. YOU MAY NOT REDISTRIBUTE THIS REPORT WITHOUT OUR PERMISSION. Please give proper credit, including citing Fundamental Research Corp and/or the analyst, when quoting information from this report. The information contained in this report is intended to be viewed only in jurisdictions where it may be legally viewed and is not intended for use by any person or entity in any jurisdiction where such use would be contrary to local regulations or which would require any registration requirement within such jurisdiction.

transition metals corp. (tsxv: xtm) – preparing for two ......management diversifies their...

Documents