Highlights
 Silver Quest has a 25% interest in the Davidson property, part of the Blackwater
Project operated by Richfield Ventures. On April 4, New Gold announced a takeover
bid for Richfield. We explain why it may also be motivated to buy Silver Quest.
 Silver Quest has a large strategic land position in the region around the Blackwater
Project in central B.C. that an operator of the project would likely want to control. It
also has one of the largest land positions in the White Gold district in the Yukon,
where one of Canada’s largest staking rushes occurred in 2010–2011.
 We believe that Silver Quest shares offer excellent underlying value and exploration
upside. We initiate coverage with a Speculative Buy rating and one‐year target of
C$1.30.
Investment Thesis
The April 4 announcement of New Gold’s $550M bid for Richfield highlighted the highquality
of the latter’s Blackwater Project, despite its relatively early stage. Naturally, it
turned our attention to the joint‐venture partner, Silver Quest, which owns 25% of the
Davidson joint‐venture property, the northern portion of Blackwater. Despite being onethird
of the 4.2Moz Blackwater resource, exploration of the Davidson property was limited
by the lack of a signed joint‐venture agreement. The agreement was signed on March 29
and two sets of drill results have since indicated the potential to add resource ounces and
boost the average 1.0 gpT grade of the Blackwater resource. We outline reasons why we
believe Silver Quest’s 25% joint‐venture interest might be deserving of a premium. The
company also has other properties, including two promising and potentially strategic
projects in the same region as Blackwater, and a large land position in the Yukon.
Collectively, we believe that Silver Quest’s property positions offer investors excellent
value and upside.
Catalysts
Richfield shareholders vote on New Gold’s acquisition offer on May 30. We expect
Richfield shareholders to vote in favour and the closing to follow shortly thereafter. An
aggressive exploration project is under way on the Davidson joint‐venture that has
delivered two promising sets of drill results. We expect more results before the May 30
vote, but also expect New Gold to place a priority on exploring Davidson. It would be
uncharacteristic of a major mining company to want a junior as a joint‐venture partner,
especially given that Blackwater will probably need to be operated with two sets of books,
virtually as two mines. Once the Richfield acquisition is closed, we would expect New Gold
management to come knocking on Silver Quest’s door. With drills turning, the longer New
Gold waits, the more valuable Davidson will likely become. Silver Quest investors also have
exploration results from the company’s other properties to look forward to.
Valuation and Conclusion
We have applied two methods to assess Silver Quest’s underlying value. We have assigned
what we believe to be conservative values to the non‐Davidson properties, yet still
conclude that Silver Quest shares offer attractive value. Our calculated ITC of $706/oz is
well below our Takeover 20 average of $841/oz, and at 0.55x NAV Silver Quest shares are
in line with its peer average of 0.53x NAV, attractive given the low political risk and
exploration upside. We initiate coverage with a Speculative Buy recommendation and a
$1.30 target price.