Stonecap Securities – Global resources now at 6.4 million ounces

Global resources are now at 6.4 million ounces based on a 0.2 g/t cut-off. Although the size of the overall resource remained at 5.9 million ounces based on the previously used 0.3 g/t cut-off, the grade increased 15% to 0.78 g/t gold and a significant portion of the resource was upgraded to the indicated category (82% from 69%).

Constrained in-pit resource – mineable resources increase by 26%

Probe’s constrained in-pit resource increased 26% to 4.3 million ounces and although the cut-off grade was lowered from 0.6 g/t Au to 0.5 g/t Au, the grade increased slightly from 1.02 g/t to 1.03 g/t. The pit outline was generated using a $1,200/oz gold price assumption, which is unchanged from the previous resource estimate. The constrained in-pit resource is more important than the global resource as it will form the basis for Probe’s initial (PEA) expected later this quarter.

Higher-grade zone remains the core differentiator

The resource also outlined 1.3 million ounces grading 2.38 g/t using a 1.5 g/t cut-off as seen in Figure 3. This higher-grade zone bodes well for the upcoming PEA as it could be used to bring forward some of higher-grade material in the initial years to offset some of the capital expenses and bring down the payback period of the project. The higher-grade zone was just 700 thousand ounces in the previous resource estimate and increased 75%.

Valuation – Increasing target

We have updated our model to reflect the updated resource and have also made a number of changes to our estimates. We have now pushed out initial production to start in 2017 rather than 2016. Initial production is also at lower throughput of 10,000 tpd and ramps up to 20,000 tpd over three years. We have also increased our assumption for the strip ratio from 2.9 to 3.7 as expanding the pit to capture some of the deeper high-grade material has increased the amount of waste rock. In addition, we have adjusted our pre-production capital estimate to reflect the lower initial production and staged nature of the contemplated development plan.

These changes have resulted in our adjusted net asset valuation increasing to $3.74, which is based on DCF analysis of Borden Gold, while maintaining our 0.45x multiple. After incorporating the $14 million payment for its Goldex royalty sale to Agnico-Eagle Mines Ltd. (AEM-TSX) and the updated resource estimate, Probe is currently trading at $15/oz on a global resource and $22/oz using the pit constrained resource vs. its peers at $35/oz.

Conclusion

We feel that the increased size of both the overall constrained in-pit resource and the high-grade zone that could be used as a starter pit increases the economics and appeal of the Borden Gold project. We believe yesterday’s sell-off represents a compelling buying opportunity with aggressive drilling continuing at Borden Gold and a major catalyst underway in the form of a PEA based on this resource expected later this quarter. We reiterate our Outperform rating and we are increasing our price target to $3.75 from $3.60.