“This once-shunned tiny penny gold … sitting on 17.3 million ounces.” (Chuck de Castro)

By StockGumshoe ⋅ November 12, 2009
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I’ve written a few times about Chuck de Castro’s Penny Mining Speculator, and even invested in one or two of his little microcap ideas from time to time (the most recent was Hill End Gold, which I no longer own) … and I know folks always love to find out about teensy little gold miners with breakout potential, so I thought I’d give this one a look-see today.

de Castro first describes his basic philosophy — here’s how he puts it:

“All of these gains grow out of a simple, commonsense truism about the penny golds: If you buy into flea-sized companies drilling on hot properties, you can make a ton of money when they find gold.

“Even if it’s a small-sized strike, you can double or triple your money very quickly regardless of what the price of gold is doing.

“What high gold prices do is make it easier for these flea-sized companies to raise money for drilling. And of course when they strike gold, the deposits are more valuable, so the shares rise more.

“I go to some of the most outlandish and out-of-the-way places that you can imagine to find penny golds that are going to find gold. From the rainforests of Thailand to the scrubby deserts of Turkey; from the Outback of Australia to the frozen tundra of Northern Canada.

“The markets these days are teeming with tiny, unknown gold companies, but most of them will never amount to more than a hill of beans. I sift through them”

Well, most of the “out of the way” places your Gumshoe goes are much more likely to have sandy beaches or hot tubs than gold mines (the big newsletters can brag about their “boots on the ground” research, I’ll stick with “toes in the sand”), so I’ll have to take his word on the personal visits to these spots … but he does provide some clues about his favorite new little miner, so I can at least dig into those for you:

“Looking forward, one of the hottest gold stocks right now is …

“A tiny company that bought up slews of gold-rich properties — for pennies on the dollar — years ago when gold was so out of favor nobody would touch them.

“People thought they were crazy, but now with gold firmly above $1,000, the shoe’s on the other foot. Properties which were virtually worthless when gold was down around $300 an ounce have suddenly become immensely valuable.

“Indeed, this once-shunned tiny penny gold, with a market cap of only $106 million, is now sitting on 17.3 million ounces of gold. The street value of that much gold is $17.4 BILLION — about 165 times its market cap.

“Now, this tiny penny gold is starting to cash in its chips and bring two of its mines into production. When you have a tiny company bringing tons — literally tons — of gold to market, you know the shares are ready to move up.

“And with gold solidly entrenched above $1,000 an ounce, I don’t see how the move can help but be explosive.

“Their first mine will come on stream next year and produce an average of 127,400 ounces of gold per year.

“Their cost of production will be about $406 per ounce; with gold anywhere above $1,000, it will be wildly profitable

“Indeed, their gross profits will run upwards of a whopping $594 per ounce. That will generate net revenues of $88 million dollars a year.

“Then, the main event, a huge Australian gold mine, will come online the following year. This mine could produce an average of 245,500 ounces of gold per year, at an average cost of $453 per ounce.”

So who could that be? Well, as usual, we feed those tasty tidbits into the mighty, mighty Gumshoe Thinkolator … and the answer comes spitting out the other end, nice and clean and pretty. This is …

Vista Gold (VGZ in both NY and Toronto)

Vista Gold is one of the junior miners that’s still well off its recent highs — the shares were actually well over $10 back in 2006 and they were near $5 in 2008 when Gold was hitting $1,000 for the first time, before the, well, stuff hit the fan and all the gold miners collapsed last Fall (VGZ bottomed out well under a dollar at the October/November 2008 lows). They have come back a bit though, with the share price up a dollar or so over the last couple months to where it now stands ($2.72 as I type this).

Be careful, please, if you are interested in these shares — the stock is tiny, with a market cap of under $100 million, and it already bounces around plenty with gyrations in gold price expectations. If it happens to jump up in response to the attention from Chuck de Castro or from yours truly today, odds are awfully good that it’ll come right back down, it rarely hurts to be patient and wait for your price.

And it’s a perfect match for those clues — the project that’s coming “on stream” next year is called Paredones Amarillos, in Baja California, Mexico, and it is now projected (after a recent update) to produce 127,400 ounces of gold per year for ten years, at a production cost of $406 per ounce. They’re now projecting that engineering and construction of the mine will begin in 2010, with initial production in 2011 — permitting and “community engagement” are now underway, and they already have the “bankable” feasibility study from September to support project financing (that feasibility study is the source of the numbers above).

The second project, the Australian one, is Mt. Todd in the Northern Territory — and it also matches the clues perfectly, with current projections for 245,000 ounces per year at $453/ounce. They bought that one in 2006 (Paredones they bought in 2002, well before gold was a hot topic), and it does sound like it could be a pretty decent-sized mine, though it’s not as far along in development. This site apparently has a lot of gold but came with “legacy issues” that slowed down prior development, and they claim to be resolving those issues and that the mine will have “robust project economics” as long as the gold price remains above $750/ounce. That’s far higher than the project cash costs of $453/ounce, so we might infer that they’re expecting to be a fairly high cost producer at this site, which would tend to mean that Vista Gold should be extremely levered to high gold prices — if gold goes up, their potential margins at Mt. Todd would improve significantly, if it goes down by 30% for an extended period, one might imagine that they’d be unprofitable, and maybe even have to shut down the project (they’re not alone in that, many young gold mines would be in trouble if gold goes back to the $600-700 range). Mt. Todd is also in a pretty big exploration area with other targets that they’re hoping to drill to expand their reserve base. Production at the site right now is projected to start in 2013, but this many years out it’s awfully hard to be definitive about the start of production.

Vista’s other potential properties weren’t teased, probably because they’re all just exploratory — that “pipeline” of projects includes Yellow Pine and Long Valley in the US, Guadalupe de los Reyes in Mexico, and Awak Mas in Indonesia.

de Castro goes on to make some earnings projections in his tease …

“… this tiny penny gold will produce about 372,900 ounces a year. I expect them to pull in net revenues of $236 million and profits of at least $92 million!

“That would equate to a forward earnings of $2.17 per share, or forward price-earnings ratio of about 1. By contrast, large profitable gold miners are priced at much higher ratios. Barrick Gold for example, is priced at 53 times earnings. Newmont and Newcrest, two other gold mining giants, are at 38 and 67 times earnings, respectively.

“Well, this tiny penny gold I’m talking about is not going to be tiny for long. Soon, it’s going to be a large, profitable gold miner. I’m NOT counting on its P/E ratio rising to somewhere between 38 and 67 times earnings.

“But I expect the P/E ratio to rise to at least a quarter of that. That would mean every $1,000 you invest is going to grow into $14,000. And the company would still be vastly undervalued relative to Barrick, Newmont, and Newcrest.”

I have no idea if his projections will hold water, but they do at least make sense and come from the company’s releases — I’m not sure if or how he accounts for the startup costs of the mines in those numbers, or the need for additional financing, but they do at least provide some excitement ($2 a share in earnings for a stock that trades at $2.72? That’ll get your synapses firing).

If you’d like to read up on Vista Gold, they have all the technical filings on their website — and they also have an interesting investor presentation that they released last month [pdf file], it does a pretty good job of outlining the “bull case” for their shares (so who needs Chuck de Castro’s $2,500 service for that?). One of the slides on the presentation compares Vista Gold with other exploration and production companies — they are, of course, all cherry-picked to make Vista look good, but when you look at it from Vista’s perspective they do seem to compare pretty favorably with oft-teased stocks like Paramount Gold & Silver and Minefinders.

Will the price go up? Well, Vista Gold has resisted the skyrocketing tendencies of some small gold miners over the last year, but they’ve also done some smart things (spinning off Allied Nevada a couple years back to “create value;” focusing on politically “easy” areas), and they are on the verge of beginning to build a mine, even though they’re at least a year from that first pour of gold (which often does nice things for a stock price). That doesn’t mean they won’t have hiccups, the mines aren’t built or fully permitted yet, and “reserves” for a producing miner are always worth more than reserves that are just sitting untouched in the ground, even if you do believe that gold prices will continue the relentless march North.

But there is at least something of value under Vista’s share price. If I were putting new cash into the market today I’d consider researching this one more fully and speculating a little bit on these shares, as I would the other mining stock I wrote about earlier in the week, AuEx … but I certainly wouldn’t bet the milk money on any little tiny pre-production gold miners. If you’ve got an opinion on Vista Gold, or any other little miner, please feel free to share with a comment below.

And if you’ve ever subscribed to Chuck de Castro’s Penny Mining Speculator, please click here to share your thoughts on the newsletter — you could be the first to review it for Stock Gumshoe Reviews!

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Article published November 12, 2009 ⋅  Email This Article ⋅  Print This Article ⋅ Subscribe to Free Daily Update
Subjects: Chuck de Castro, gold, Penny Mining Speculator, Vista Gold

1. The current price of gold/silver is often used in comparison to a company’s market cap to show “fabulous gain potential”. Actually valuing gold in the ground starts at ~$20/oz for Inferred resources,~$40 for M&I resources, and ~$140/oz for Proven and probable. Also, keep in mind that a resource is mined over many years,e.g. 10 yrs or more, so these total ounces need to be divided into annual output in order to evaluate the company’s expected value. There is a lot more to consider as well – but having a reasonable idea of the potential value starts with realistic valuations of ounces in the ground.

   [Reply]

   Posted by tomt | November 12, 2009, 12:17 pm

2. http://www.thestreet.com/video/index.html#49735187001

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   Posted by jenniferdow2005 | November 12, 2009, 12:31 pm

3. Just to be clear, VGZ was over $10 a share prior to splitting into two companies (ANV and VGZ).

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   Posted by rogblake | November 12, 2009, 3:09 pm

4. VGZ was under pressure and went down from $5 to $1.55 even thought their reserves in Mt.Todd almost doubled. They even got their permit and actually have most of the equipment to start mining, they only need a loan for about $140M to build Paradones. This gold will get them the cash to build Mt.Todd

   I can easily imagine looking at this in a year and seeing it at $39, it’s been oversold in anger because of the permit delays in my opinion. Anger takes time to recover but this pre-miner firmly belongs over $10 with all those interesting prospects and the lack of risks.

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   Posted by somebody1 | November 12, 2009, 9:40 pm

5. VGZ was under pressure and went down from $5 to $1.55 even thought their reserves in Mt.Todd almost doubled. They even got their permit and actually have most of the equipment to start mining, they only need a loan for about $140M to build Paradones. This gold will get them the cash to build Mt.Todd

   I can easily imagine looking at this in a year and seeing it at $39, it’s been oversold in anger because of the permit delays in my opinion. Anger takes time to recover but this pre-miner firmly belongs over $10 with all those interesting prospects and the lack of risks.

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   clarlie Reply:
   November 19th, 2009 at 10:16 pm

   think i would stay clear of mt todd i worked there years ago and it has never made money been sold a few times and each time it just never produces plus the riches vane of gold bearing ore is hindered by the greenies there is an endangered little bird that live in that area so tehy cant mine it, dam greenies

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   Posted by etcimon | November 12, 2009, 9:43 pm

6. Ah yes. Another opportunity to get wealthy. Rather than wait one or two years for a possible payoff, Consider options. In my younger days, I searched the blue skies for the blue bird of happiness. If you do that, be prepared to duck if the returns falling from the sky require avoidance. I do own some PM stocks, GG and Slw with great results. I have more recently backed my conviction that PMs are headed higher by buying DGL call options. DGLis a double leveraged long option based on gold prices. As in all options, there is risk, but your investment is little or greater as you wish. You can cut losses if necessary, but receive substantial and immediate returns if your assessment of PM prices is correct. That’s why we buy gold mining stocks isn’t it? I am not a broker or financial advisor, so relating my personal experience is not advice, but sharing of personal experience. Eldorado, where are you?

   [Reply]

   Posted by Dr. Henry .M. Chakoian | November 13, 2009, 9:04 am

7. Chuck’s Penny Mining speculator started in October of 2005. 4 years later, the newsletter continues to rake in profits for the subscribers. The newsletter never changed its name. It’s always and have been named as penny mining speculator.

   chuck also limits his susbcriber base so that not to adversely affect the price of the stocks. he sends out weekly alerts to his subscribers via fax and via email. and he constantly monitors the performance of his recommendations.

   just today, one subscriber called in happy because he made $100,000 today, Friday, from following a partial sell recommendation from chuck’s newsletter.

   he is a subscriber of the publication’s sister newsletters since 2000. and he is very happy of his subscriptions.

   how do I know? i heard him.

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   ilan Reply:
   November 24th, 2009 at 8:26 pm

   can you make a more blatant advertising? this is not what this site is about (i think)

   [Reply]

   

   ilan Reply:
   November 24th, 2009 at 8:31 pm

   can you make a more blatant advertising. this is not what this site is about (i think)

   [Reply]

   Posted by follower of chuck's portfolio | November 20, 2009, 11:01 pm