More of those gold “Supercharger” Plays

By Travis Johnson, Stock Gumshoe, June 21, 2016

Late last week I started digging into a teaser from Sean Brodrick at Oxford Resource Explorer that promised “three supercharger plays” for the bull market in precious metals that he expects — and though I only “solved” the first teased stock that day I promised to follow up and catch up on the other two.

I got a bit distracted because of the furor over Michael Robinson’s “Little Black Box” pitch that got everyone excited last Thursday, but now we’re back on track — two more “Supercharger Plays” to be unearthed, tout de suite. And yes, gold is likely to be on a bit of a rollercoaster this week, just like US and European stocks, because speculators are trying to game the odds of the “Brexit” and figure out where they want their portfolio going into Thursday and Friday (there’s an interesting summary article here that repeats projections I’ve seen elsewhere, that gold could quickly hit $1,400 if the Brits vote to leave and fall back to about $1,200 if they vote to stay… for individual investors, I think this falls in the category of “things you can’t help thinking about or having a strong opinion about, but rolling the dice with a big bet either way is foolish.”)

The first stock we’ll seek out today is not really a gold “supercharger” … but silver is gold’s crazy younger brother, tending to follow the same path but with much wilder volatility. So what does Sean think you’ll be interested in when it comes to the silver shiny stuff? Here are some clues:

“Supercharger Play #2: Turn $5,000 in to $10,000

“My second pick is a metals play in the world’s largest silver producing country.

“The company was cash-flow-positive throughout silver’s downturn.

“It ended last year with $51 million in cash on the books. And it had $17.6 million worth of cash flow in the quarter.

“I recently visited one of its six producing mines….

“There I discovered the mine was ahead of schedule and under budget.

“Plus, I saw it also has two advanced-stage projects nearing completion.

“It is sitting on $2.2 billion in silver. Yet its market cap is $1.5 billion.

“So you are buying this silver stock at a 30% discount… in a market that’s going to rise as fear spreads….

“In fact, they expect to double production soon.

“On this one, I expect… at minimum… you could get the chance to double your money too.”

That one, sez the Thinkolator, is First Majestic Silver (AG, FR in Toronto). The market cap has gone up a bit since the article was composed (probably a few weeks ago) — it’s up to about $1.9 billion now, from a low of below $400 million in January. This latest bull market surge has really changed stock valuations dramatically, but you can see that over the long run AG has been a pretty solidly levered play on, well, Ag (using the silver bullion ETF, SLV, for comparison):

AG_SLV_chart5yr

It’s frightening to see the wild breakout leverage that so many mining stocks have had so far this year, though, and it seems to really represent the kind of wild enthusiasm that creates crazy bubble valuations — though we should keep in mind that valuations got so horribly depressed that much of this may just be a snap back to something more “normal.”

Still, it scares me when a 25% move in silver causes a 270% move in a silver miner… and this kind of wild leverage has been common across the board in the mining sector. First Majestic has been around for a while, so we can draw a little comparison to past strong markets for silver — back in the third quarter of 2012 silver had a nice 25% run in pretty short order, and this is what the shares of AG did compared with the price of silver (represented by the SLV ETF):
AG_SLV_chart20163qtr
And now, in the first six months of this year, silver is again up about 25%, and you can see what happened to silver compared to what happened to this big silver miner:
AG_SLV_chart20166mo

That doesn’t mean AG is necessarily overvalued, or that all mining stocks are overvalued, but it’s just a reminder that we’ve seen an extraordinary move in almost all miners and it’s not just the change in the price of the metal that’s driving fundamental improvement in the operations of the mines — there’s something much larger at play here when it comes to future expectations about metal prices, and a huge swing in sentiment. That feels wonderful when you’re holding the stocks that are tripling in a few months, but it comes with additional risk that we tend to overlook because we feel so good about registering a few big winners — silver and gold prices are clearly more volatile of late than they had been for a while, and sentiment is not nearly as stable as metals prices.

And yes, First Majestic has had positive operating cash flow every year since 2007, and has grown nicely in terms of both reserves and production — though expenses have risen fairly quickly and revenue has not grown (thanks, largely, to falling silver prices). They did have $51 million in cash at the end of 2015, and they have not had to dilute shareholders very much over the years (they did raise money last year, but not a huge amount). Other than that, I don’t know a lot about First Majestic other than the fact that it was built by Keith Neumeyer (and one of the stocks I own, the junior mining rollup First Mining Finance, was created by Neumeyer by spinning off some of the smaller “castoff” exploration properties from First Majestic).

So what’s the other miner? Here are our clues?

“Gold Supercharger Play #3: Turn $5,000 into $45,000

“If the idea of turning $5,000 into $45,000 sounds good to you, you’ll want to take a look at this gold explorer.

“It has the biggest short-term upside potential I’ve seen in a decade….

“This company’s technical team previously worked for the highly respected Newmont Mining in the same area, so it knows what it’s doing.

“It is right in the heart of gold country.

“… the company was sitting on 1.8 million ounces of gold.

“At the current price of gold that’s a $2.3 billion reserve.

“Yet it’s a company with a $200 million market cap.

“That’s trading at a 91% discount! And you can get a lot of shares too. It’s trading under $2.

“You’ve seen some of the companies that rocketed from just a few dollars to $10, $20, even $90 above.

“This is my pick to be next.”

Thinkolator sez that’s Gold Standard Ventures (GSV), which is perhaps “sitting” on 1.8 million ounces of gold, though that’s in the “indicated” and “inferred” categories at their Pinion and Dark Star deposits in the Carlin Trend in Nevada — and “indicated’ and “inferred” resources are, of course, generally much less valuable than proved reserves (resources means they’re pretty sure it’s there, reserves means they’re doubly sure not only that it’s there, but that they’ve also calculated it can be produced economically).

And yes, their technical team did come from Newmont, and participated in discovering some of Newmont’s assets in the Carlin Trend (which is where several of the huge US gold mines are, including the massive Goldstrike — GSV’s property is very close to Newmont’s Rain and Emigrant mines).

Gold Standard Ventures might sound familiar to some longtime readers, it was teased by Frank Curzio back in January of 2012 when he was running Stansberry’s Phase 1 letter (and from mentions in his podcast over the past few months, he may well still like it). Back then the shares had a huge spike on some good news and lots of attention, going from 80 cents or so up over $2.50 for a brief while. That didn’t last, and the stock spent the weak gold market bouncing around from 40-80 cents or so until the gold mining market rekindled this year and the shares shot up to the current $1.75 or so, for a $350+ million market cap (yes, it was around $200 million a little over a month ago).

This is very much an exploration-stage junior miner, they have several different identified deposits and several “target” areas where they have high hopes and are targeting exploration, all within what they call their Railroad-Pinion Project. This is really an exploration play as they continue to drill around a few large potential targets with the goal of possibly identifying an “elephant” deposit in what they say is the most unexplored land package in the Carlin Trend. There is no hint of investing in development anytime soon, other than that note in their investor presentation that “the combined Pinion and Dark Star deposits represent a potential near-term development option with characteristics that suggest low capital and operating costs.”

So they’ve got good geologists who are experts in the area, and they’ve got plenty of cash for exploration, and no near-term production seems likely — which means that as they drill and book some reserves there’s certainly some potential for the stock to get bid up further if they find some genuinely huge deposits that could become large mines. I don’t know whether the exploration will be successful or not, obviously, or if they’ll find one of those “elephant” deposits that produces another Emigrant or Goldstrike mine, but the price is likely to move on discoveries and reserves updates at least as much as it moves based on future gold price sentiment. All it takes is a generally positive background sentiment about gold miners to make a miner with a big discovery really shoot higher, so they may not need $1,400 gold to survive since they have cash and they’re drilling and exploring… but the share price will likely suffer considerably if gold falls 20%.

And… that’s all I’ve got for you today in the “Gold Supercharger” world — a significant silver producer and a high-potential and probably pretty high-risk (though well-pedigreed) gold explorer. Have any opinions or thoughts on those or others? Let us know with a comment below.


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15 Comments on "More of those gold “Supercharger” Plays"

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Sam
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Sam

What is the “Gold Supercharger Play #1″ ?

Antonio
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Antonio

McEwen Mining Inc. (MUX)

Sam
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Sam

That’s what exactly I was expecting. Thanks a lot.

credenhill
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15
credenhill

My Father in law helped to build out the Brucejack mine for Pretium, and reports that the gold samples are very rich

Bob Schmeling
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Bob Schmeling

You made my day with your research, Travis. You have a great Thinkolater.
I bought MUX three or four years ago and AG and GSV five or six months ago. I hope they do as well as Mr. Brodrick predicts

Greatly enjoy your analysis of stocks and comments–and especially the humorous and insightful detective work.

I can’t remember what publication name I used before.

investor101
Irregular
28

Thanks so much Travis. I have learned so much through your site and I am grateful!! Karen

LostOkie
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141
LostOkie

ASM is another promising miner you should look at for a silver play.

Tom Robertson
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Tom Robertson
Travis, I would appreciate your current feeling about PNPL. I know you have covered it a couple of times, already, and have admitted that you owned some shares. Since that last time, I watched it go from about $3 a share, pumped up to the mid 20’s, and then pull back all the way to $2 recently. They were even suspended from trading for a couple of weeks, when investigations were looking at one of their co-founders and the failure to provide the necessary paperwork, required by the SEC. I will be honest and tell you, that I purchased 4,000… Read more »
SoGiAm
Irregular
5285

The DEA may soon reschedule marijuana form schedule 1 to 2 or less.
Recreational MJ or at least MMJ may be legalized at federal level prior to or after November POTUS election.
Daily news from mjbiz is posted here: http://www.stockgumshoe.com/2016/03/microblog-420-investors/

Donald Karger
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Donald Karger

Would like to see any thoughts and opinions on lithium miners given the high interest in development of higher battery storage capacity related to solar power and electric cars ie. Elon Musk. Thanks in advance.
DonK.

who noze
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who noze

the text is rather light w//alight background seems to me as an eye strainig poblem for me

microcapwiz
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microcapwiz

you want to play the more leveraged ones with good management teams. those who have done it before. in the gold space take a look at Northisle copper and gold (ncx-tsx) and for the lithium side Noka resources (nx-tsx) lithium americas founder leading the co. multi-bagger potential

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