This one comes in to us from Louis James at Casey International Speculator, and it’s all about gold exploration and mining stocks — mostly small ones, it appears (it is called Speculator, after all), so perhaps we can consider this as a potential shopping list for contrarian and mostly hated small gold stocks.
Which is about as contrarian as you get these days — there are commodities that have done much worse than gold, including both oil and iron ore, but junior gold stocks are where most of the “animal spirits” of speculative natural resources investors are born… and there aren’t many of those folks around right now. They’re either licking their wounds after the last six months of “buying opportunities” blew up in their faces, at least for now, or they’ve moved on to other areas of exciting speculation like the small early-stage tech and biotech stocks.
So perhaps it’s now time to look at these little guys? I left my crystal ball in my other trousers, but I can at least dig through the tease from Mr. James and tell you what stocks he likes…
This sums up the gist of his big picture argument about the bear market in gold stocks pretty well:
“Here’s one thing I learned about bear markets.
“Mainstream investors generally view them as bad, but what they really are is gigantic filters: they separate the good from the bad, the jewels from the junk.
“The current bear market in gold stocks has been very effective in doing that—which means right now we’re looking at a gourmet selection of well-run companies with proven, high-grade assets to pick from.”
Of course, that won’t mean anything if gold spends the next five years going down to $500 an ounce — but if you have any certainty about where gold will be in five years you’re a wiser soothsayer than I am, I just allocate a bit to gold and to other commodity-type stocks and make sure not to let big “bets” about commodity price moves take over a large portion of my portfolio.
He starts off, as so many of these teaser pitches do, with a “freebie” … he says that his “Vertical Candidate #1” is Pretium Resources (PVG in both Canada and the US), which has the rich Brucejack project in Canada. That’s not terribly small — it’s got a market cap of about $600 million and it’s trading at about book value. He says he still thinks it’s undervalued because it’s such a “monster-sized, super-high-grade gold deposit.” Future valuation obviously depends on gold prices, as with any gold miner, but they have a lot of fans — including a large Chinese gold miner, which bought in to own about 10% of the company back in January at prices pretty close to where the shares now trade (they paid C$6.30, it’s C$6.75 now).
Pretium is up pretty nicely today so far and is doing much better than the average miner, but over the last six months or so it has been trading roughly in line with the group — so perhaps if it’s markedly better than the average gold stock, and all gold stocks are being sold off, that’s your “relative value” opportunity. The latest quarterly report came out a couple weeks ago, you can see the press release here.
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I can’t say I’m an expert on this or any other stocks where interpreting assay results is a key part of determining value, but Pretium does have strong management in Robert Quartermain, who has built strong mining companies before (the Casey folks and other investing pundits in the space talk a lot about the importance of “buying management” in natural resources stocks — perhaps because the industry is so full of charlatans).
So that’s one… how about the “secret” stocks that they don’t want to name for us?
“Vertical Candidate #2: Still Good Under $1,000 Gold
“This company is the only gold producer in my Vertical Portfolio….
it recently acquired a mine and mill that has saved shareholders a lot of time and money.
“The company is still ramping up production at its high-grade Nevada deposit but already exceeded its 2014 production guidance by 25%, pouring more than 107,000 ounces of gold-equivalent (with the “equivalent” being silver)….
“Pretium-style numbers from the latest (October 2014) drill holes—one hole generated 1,474.6 grams of gold per tonne (g/t) over 0.62 meters; another produced 1,404,6 g/t over 0.53 meters….
“The company expects to produce more than 100,000 ounces this year. While that’s not a huge amount, it’s plenty enough to keep this producer above water—even if gold goes nowhere for years or even drops below $1,000 for a time.”
This one, sez the Thinkolator, is Klondex Mines (KDX in Toronto, KLNDF OTC in the US) — you can see the press release where they announced those impressive drill results back in October here. The market liked those drilling results, the stock is up about 15% since then (or 25% if you’re thinking in Canadian dollars). They report in a week, and analyst are expecting 2014 to be finalized at a profit of 12 cents a share — and for that profit to double in 2015 to 24 cents (all Canadian numbers). I don’t know what gold prices they’re using for those estimates (there’s a wide range of estimates, no surprise), but that would mean a forward PE of about 10 — not bad. You can see their latest investor presentation here from a February conference, but the stock could easily react when they update their 2015 forecast next week on their earnings call.
“Vertical Candidate #3…
“Until recently, this company was a small, under-the-radar explorer advancing a significant, high-grade, but not huge gold project in Canada.
“Then, last October, the company surprised everyone by buying a fully permitted and operational 2.4-million-ounce mine ‘next door’ for pennies on the dollar….
“The new mine comes with underground infrastructure that can be used to access the company’s existing property without building a new portal or having to use new civil engineering on surface.
“And on top of all that, the company recently delivered a new discovery of high-grade gold, including 1.6 meters grading 101.8 grams of gold per tonne….
“An updated preliminary economic estimate—which doesn’t even account for the drill results I just mentioned—shows an after-tax internal rate of return (IRR) of 59%.”
This one, sez the Thinkolator, is tiny little Integra Gold (ICG in Canada, ICGQF OTC in the US), which has a market cap of about $55 million. They did make an acquisition of more mining land and a mill adjacent to their Lamacque project in the Abitibi Greenstone Belt in Quebec that have improved their economic assessments, they now say that their internal rate of return for the project is 77%, which sounds pretty good, and they give a “net present value” of C$185 million on the project as of January (with gold at $1,175).
As usual, I don’t know much about this one — their stock has done better than the average miner over the last six months or so, but are also down sharply over the last couple weeks and it’s very small and volatile. They won’t be profitable this year, but they do have about $10 million in cash for their drilling and exploration costs and their property is in an established mining area and should be low-cost — they think they will have a sustaining cash cost per ounce of only about $650, so if that’s true the mine could pay for itself in just a year or two if gold stays at these levels and they can get decent mine financing. There’s a little summary of some pundit/analyst opinions on this one over at the Gold Report if you’d like to do some browsing, and you can also see the company’s presentation here.
More? You got it!
“Vertical Candidate #4: This one’s a straightforward value proposition. The company discovered a large, high-grade gold-silver deposit in Colombia and has plenty of cash to advance it through feasibility work to a production decision. Despite this, the company’s enterprise value is less than book, let alone the billion-dollar net present value of the project.”
That’s not a lot of detail for the Thinkolator to work with, and there have been several very large deposits discovered in Colombia in the last decade or so and that haven’t yet been mined — but the best guess is that this is Continental Gold (CNL in Toronto, CGOOF OTC in the US) and its Buritica multi-million-ounce property in Colombia that they hope to put into production by 2018 (and yes, if you had asked a couple years ago, that goal would have been 2016). The resource value looks huge, it has been given a net present value of $1+ billion, and they do have C$60 million or so in cash to keep working even with gold prices weak. The stock has recently done far worse than most of the miners noted here, down about 60% in the last six months — I haven’t looked into the details to see if there’s a good reason for that or not.
And still more:
“Vertical Candidate #5: This company makes our list via another of those rare beasts in the mining world: its gold deposit in Europe is both large and high grade. This combination makes it likely that barring any yet undiscovered fatal flaws, the project will become a highly profitable gold mine at any likely gold price (including significantly lower than today’s).”
So… another one that’s fairly light on the clues, and I can’t be certain, but the Thinkolator’s best candidate here is Gabriel Resources (GBU in Canada, GBRRF OTC in the US) and their Rosia Montana mine in Romania. This is a huge potential mine that they think can produce half a million ounces of gold per year for a decade or longer, but the permitting process has been up in the air for several years, with waxing and waning fights with environmental and local groups, and they’re currently trying to get moving with a “dispute resolution” process with the government.
This is one where it’s pretty clearly cheap if they can go forward as they have planned and gold doesn’t collapse, even though they have to raise probably $1.5 billion or so for construction once they have permitting and a “go ahead” — but I have no idea how to handicap the regulatory and political situation. They still have more than 100 families living in areas where they need to buy the land to do surface work for the mine, even after relocating about that many starting something like TEN YEARS ago… this has been a “story stock” based on the potential of Rosia Montana for a looooong time, close to 20 years, and it’s now very close to all-time lows.
Have a better guess for a big European gold mine? There are some large potential mines in Turkey and Serbia, too, and some that look like they have much less political risk like Dalradian’s (DNA in Toronto, DRLDF OTC) mine in Northern Ireland (much smaller than Rosia Montana, but still pretty large and high-grade) … but, flipping a coin, I’ll stick with Romania and Gabriel Resources for my guess about Louis James’ “vertical candidate.”
And yes, there’s more:
“Vertical Candidate #6: This junior miner’s Canadian gold project has all the signs of a large, low-cost mine in the making. The current preliminary economic assessment shows after-tax 5% discounted net present value of $285 million, yielding a 24% internal rate of return at $1,200 gold. That’s not the highest margin in our portfolio, but the project still works at $1,000 gold and has terrific leverage to the upside.”
This one, sez the Thinkolator, is most likely Kaminak Gold (KAM in Toronto, KMKGF OTC in the US). Those numbers mesh with their press release about their Coffee Project in the Yukon from last June. Interestingly, they also include a “sensitivities” table in that press release that illustrates the leverage the project has to gold prices — so yes, at US$1,200 gold they give themselves a NPV (discounted at 5%) of C$285 million… at $1,000 gold that number drops by about 60% to just C$99 million. They don’t really own any other projects, though they do have a bunch of “prospects” that they’d like to sell or partner — I don’t know anything about those, but I assume the market considers them largely worthless right now. Kaminak we’ve written about before, but it’s been quite a while — they were one of the “hot” names during the renewed Yukon gold rush that probably peaked in 2011 or so.
The market cap is right around $80 million right now, and they have about $20 million in cash — so they’re not in danger of disappearing, and they also have some big names invested in the company — Ross Beaty and Lukas Lundin, who are mining investment legends, invested after that new preliminary economic assessment came out last June (which accounts for a lot of that cash balance). If you feel like buying, I guess the good news is that today’s price is about the same price those two legends plunked down to buy their stakes (you won’t get warrants like they did — though those warrants should be worthless unless the stock climbs 50% by June).
And one more…
“The least undervalued miner in our Vertical Portfolio. That’s because its high-grade gold project in Ontario is the closest to production. Mining has already started underground, ore is being stockpiled, and construction of the mill is nearing completion. It’s still a good buy, though, and like all our other ‘vertical’ picks, it’s expected to deliver high margins.”
This is, very likely, Rubicon Minerals (RBY). They’re mining at their Phoenix project in Red Lake, Ontario, and the mill should be completed by this Summer — leading analysts to think they’ll pretty much break even this year. It trades at a sharp discount to book value, and they have plenty of cash, but it isn’t the same kind of crazy levered play as a $100 million stock with a billion dollar deposit. Whether it’s more or less undervalued, I’ll leave it for you to decide.
So there you have it — seven stocks, all gold miners or hope-to-soon-be gold miners, and I’m quite certain that most of these (a couple are educated guesses) are being teased by Louis James as his “vertical” picks in the beaten-down gold sector. Will many of them go shooting up in the years to come? Well, that I can’t tell you. I’m no mining expert, and certainly couldn’t tell anyone my forecast for next year’s gold price with any degree of confidence (if you’re wondering, yes, I do own some gold and have some gold equity exposure — but that’s kind of a currency insurance, my portfolio will probably do better, on balance, if gold collapses).
Have any opinion on Louis James, the Casey International Speculator, or any of these gold miners and explorers? Let us know with a comment below. Thanks!