Looking at Casey’s “Red Gold” teaser: “The Maverick Behind Some of History’s Rarest Mining Stock Gains (3,900%, 9,536%, 1,608%) — Has Just Made a New Discovery”

by Travis Johnson, Stock Gumshoe | February 6, 2017 1:52 pm

This ad talks up "red gold" and says that "One small, publicly traded small-cap owns the rights to this massive deposit. And when this news reaches the mainstream by April 2017… share prices could go parabolic."

This teaser is not particularly secretive — most people who follow mining stocks will recognize the stock they’re talking about almost immediately (and the shares are already rising this morning as a result). But most people don’t follow mining stocks in much detail, so when they read the ad it sounds like an incredible secret that only the Casey[1] Research folks possess… which, naturally, is their argument about why you should subscribe to their newsletter.

And it’s not one of those “entry level” letters — this is a pitch for Casey’s International Speculator[2], which is helmed by Louis James[3] and costs $2,000 a year. We’ve been writing about Louis’ teasers every now and again for years, his most successful picks that were promoted this way came out in March of 2015 when gold[4]-stocks-with-vertical-potential/">Casey was pitching the “7 top gold stocks” — four or five of those did fantastically well (Kaminak was taken over a year later for 250% gains, several others did almost as well and outperformed the GDXJ ETF), and a couple were stinkers, which is probably par for the course for junior miners (the worst by far was Rubicon, which was a favorite of several newsletters from time to time but essentially went to zero in bankruptcy reorganization, though Dalradian Resources has been very weak compared to the sector).

That turned out to be a really, really good time to pick a bunch of junior miners, but he did pick an above average bunch. We shouldn’t overstate that — his prior picks that were teased at worse times for junior miners mostly did quite poorly, so picking the right sector at the right time is clearly important, but that time Louis James and the Casey folks did, at least, choose upper echelon juniors to get behind.

So what is it that they’re pitching now? Here’s a little taste of the ad about a “two-mile stretch of land” in Canada[5]…

“Just like the search for King Solomon’s Mine, for 155 years over 800 prospectors and geologists have scoured this region of Canada hunting for the elusive Main Vein….

“Finally, after a century and a half of exploration, a little-heralded mining company led by a Maverick geologist has hit the mother lode – a high grade gold deposit that everyone was after.

“Word is spreading fast among insiders in the mining community. But the news still hasn’t hit Wall Street’s radar.

“But that’s going to change fast this April when we believe an announcement will be made about a modern day King Solomon’s Mine.

“It’s sitting on an estimated 9 billion dollars worth of gold according to current estimates. And it’s controlled by one mining company and the maverick geologist who pulls all the strings.”

The ad talks about a “maverick” geologist who they call “Mr. Q” — and Mr. Q is, we’re told, the “Elon Musk[6] of mining” — his company had weak results from initial drilling in this area, but put up much of his personal fortune to finance the exploration because he was convinced that the small number of high grade sections that they did find mixed among the multitude of disappointing drill cores were not anomalous, but represented a larger high-grade gold formation.

So yes, if you follow mining at all you’ve got your answer there already… but don’t spoil the surprise for everyone else, let’s see what else they say in the pitch:

“This ‘red gold’ mine, based on the results so far, averages 16.1 grams per tonne. If you add in what Dr. Q and the geologists suspect they’ll extract once mining begins—they estimate an average of at least 17.2 grams per tonne.

“Within this there are sweet spots with not just grams, but kilograms of gold per tonne—up to 41.5 kilos of gold in a space the size of a wheelbarrow….

“If they can average 17 grams per ton out of the ground…

“We’re talking about the richest deposit mining experts have seen in decades. 17-times richer than the average gold mine. This is literally one of the biggest, richest gold deposits in the world.

“And instead of being part of a big gold company’s portfolio…

“One small exploration company owns the rights to the whole thing.”

And one final bit of clues for you, about that “April 2017” date that they put in the headline:

“If this “red gold” deposit has already been discovered, then how is there still so much upside?

“When a company builds a mine, there is typically a major run up in the share price.

“As it gets closer to the date that the mine is actually supposed to produce gold, silver[7], copper[8]… or whatever…

“The run up in share price accelerates.

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“Why?

“Because mining companies tend to promote their mines as the actual production date nears. You’ll see more press releases, photos released, interviews with journalists….

“Institutional investors come to the table.

“The market begins to ‘get excited.’ And stocks begin to climb.”

He calls this the “first pour phenomenon” and says he has researched it at least a little bit:

“My researchers have dug up a list of 49 companies that set out to build their first mine in recent years. Of these, 44 saw their share prices more than double, on average, in relatively little time. That’s an 86% success rate, much better odds than the 1-in-300 bet on a new discovery.”

I haven’t checked those conclusions, and don’t know what time frame he’s using — obviously, the price of gold (or silver, or whatever they’re mining) has a huge impact on the share price of mining companies that are just entering production, but generally a company that’s about to produce its first gold or silver is a safer bet than a company that is still doing exploratory drilling. Certainly it’s a different kind of investor who buys the much lower risk mining company that’s just about to begin producing (and can be examined based on expected cash flows, etc., even though we acknowledge that there’s always the risk that the actual mine production will disappoint), rather then the much higher potential and higher risk of an exploration company that hasn’t found or proven a big deposit yet, or has yet to get financing or permits to build a mine.

James says that “the market expects this mine to go online toward the middle of 2017,” but that he “feels in his bones” that news will come much sooner, which is why “we cannot risk waiting”.

And he talks about his certainty that although the stock has already posted gains, it is going to rise much higher:

“Already, shares have begun climbing since they said they would build the mine. But I believe that we haven’t even scratched the surface of what this stock will deliver.

“Remember, those companies I listed above returned their most spectacular gains as they approached their ‘first pour,’ which is where this company is now. You still have a chance to make as much as 1,000% or more on this ‘red gold’ discovery.”

And he says he thinks the company wants to “under promise and over-deliver” because of the skepticism that so many mining analysts have had about the deposit over the years, and that much of the work for the mine is already done ahead of schedule, which is what makes him have that “feels in his bones” sentiment that the first pour announcement will come early — here’s what he says they’ve completed now:

“They’ve already tunneled down into the heart of the deposit, and have several areas ready for mining.

“They will have grid power connected shortly.

“The buildings are done and they are working on installing the heavy equipment inside.

“And it’s a relatively simple mine. Most companies have to build what’s called a ‘tailings dam.’ Dr. Q and his team don’t have to.”

So… enough with the clues? I agree, the Thinkolator is filled to the brim with input and quickly confirms that yes, “Dr. Q” is Robert Quatermain, and this “Red Gold” company is Pretium Resources (PVG)[9], which is in the process of completing construction of the Brucejack Mine in northwestern British Columbia, Canada.

Brucejack is indeed an anomalous mine — which is why there has been so much skepticism about it over the years, enough so that I’ve not been comfortable buying the shares. That has mostly been to my detriment, though the timing has certainly mattered as well — Brucejack and Snowfield were bought by Robert Quartermain[10] from his old company, Silver Standard Resources, when he founded Pretium late in 2010, and right around then, on the initial flurry of excitement about the new Premium and some of the bonanza-grade potential for the deposit, the stock spiked up to pretty close to where it is now. Gold prices were much higher, and investors were enthused about paying $10 and more a share for the stock in early 2011… so it hasn’t all been straight up for Pretium shareholders, who have seen both $16 a share (shortly after gold peaked around $1,800) and $3 a share in the ensuing six year period.

The past year has certainly been a good one, though — Brucejack has been under construction for over a year now and is indeed nearing completion, though the latest update was that the construction is a bit over budget. Pretium had a big run along with all the other small gold companies in the first half of 2016 and then fell back, but has been recovering a bit lately as construction has progressed and junior miners have come back to life in the past six weeks (since the mid-December lows, the GDXJ ETF of junior miners is up 35% and Pretium is up 63%). So as long as you didn’t Btu at the July peak last Summer it has certainly been a good pick if you bought the stock almost anytime during the past three years.

Does that mean it will do even better going forward? On that front, I have no idea. Pretium is a pretty large company by mining standards now, with a $2 billion market cap, so it’s not like the expectations are soft or the company is unknown. It is not the most widely held emerging miner among institutions, but from looking at the institutional ownership of peers it’s sort of average — about the same level of institutional ownership as Novagold, a bit more than Alamos Gold and less than B2Gold, though those numbers are based on the US listings and may be skewed (all three of those, like Pretium, are in the $2-3 billion range when it comes to market capitalization and are listed in both NY and Toronto). Pretium does have substantial insider ownership from Quartermain and others, along with a big investment from Chinese miner Zijin and a chunk of shares still owned by Silver Standard.

Brucejack is a good-sized project, but Pretium is not necessarily going to be a shockingly big mine, at least not right away and not going by their feasibility studies — that $9 billion number in the teaser ad is just taken by multiplying the current proven and probable reserves of 8.1 million ounces by the current gold price, which is something newsletters do all the time, but, obviously, an ounce of the gold in the ground is worth much less than an ounce in your pocket.

Their projection is that Brucejack will produce about 500,000 ounces a year, and that number will decline once they get out of the highest grade segment of the mine in the Valley of the Kings and move on to producing from lower-grade deposits… but it is expected to be pretty cheap because of the high grade — as of the 2014 feasibility study that led to construction financing, they had an all-in sustaining cash cost (AISC) of only about $480 per ounce. That’s very, very low — B2Gold, by way of comparison, is roughly a $3 billion company that will probably produce almost a million ounces of gold next year from several mines, but at an AISC of more like $800 an ounce.

So that low per-ounce cost and the relatively low risk now that the mine is almost completed, combined with the large but uncertain exploration potential and the possibility that the mining might even produce better results than that 16-17 grams/tonnne of gold, is probably why Pretium is valued at $2 billion. Pretium’s own 2014 feasibility study valued Brucejack at about $1.5 billion after taxes (assuming $1,100 gold and $17 silver and a 5% discount rate), so clearly this is not a mine that is flying under the radar — this is a mine that is coming into production with some pretty strong expectations that they will “beat” those feasibility estimates either by producing more gold, or producing for a longer period of time, or making more substantial discoveries as the startup of the mine finances more exploratory drilling in the area.

Either that, or investors are paying attention to the Snowfield deposit, which Pretium also owns — Snowfield is a larger (26 million ounces of gold measured and indicated) but low-grade deposit nearby, next to Seabridge Gold’s KSM project, and Pretium has a cooperation agreement with Seabridge and would probably be delighted to sell Snowfield or spin it off into a combination with Seabridge of some sort but doesn’t seem to be in any hurry on Snowfield and isn’t spending much money on it right now. Pretium’s preliminary economic assessment from about six years ago gave a pre-tax net present value of $6 billion to Snowfield at $1,235/oz gold, so there’s clearly some upside possibility there if gold stays strong and someone gets interested in pouring a lot of money into building a real project based on the Snowfield and Seabridge KSM deposits.

We have many readers here who have been Pretium investors and have enjoyed the ride over the past year or two (especially hendrixnuzzles[11], who has brought it up in discussions many times over the past couple years), and I expect most of them follow it more closely and can fill in some of the information I’ve left out here — but that’s my basic conservative perception, that Pretium at $2 billion is pretty fairly valued for the current and just-about-to-open Brucejack Mine, a mine that will produce 500,000 ounces of gold at a cost of $500 an ounce. That gives roughly $250 million of potential profit per year if gold is at $1,000, and there’s some gold price leverage[12] — if gold is at $1,500, the annual profit potential doubles (though higher-cost mines have much more leverage to gold prices, all else being equal — if B2Gold gets $1,500 gold prices they go from making $300 per ounce to making $700 per ounce, a 130% increase in profits, which is much more dramatic than Pretium going from making $600 per ounce to $1,000 per ounce for a 65% increase in profits… but that leverage comes at an obvious cost, Pretium is in far better shape than B2Gold if gold prices fall to $800 an ounce because they’re still making a profit while B2Gold is losing money).

But I’ve been cautious about Pretium for quite some time, including when I covered the stock because it was being pitched as “God’s Gold” by Jim Rickards[13] about a month ago, so take my caution with a grain of salt — perhaps it will get more attention when they commission the mill (though the company has announced that will happen around the end of the first quarter, so it’s not going to be a surprise) or start producing gold. The forecast is that commercial production will be underway by the end of 2017, and there’s already a large stockpile of ore to be processed, so they could conceivably produce a little gold within a matter of months if that “first pour” coming early is a priority for them.

I’d be a bit surprised if that means the stock surges dramatically higher in the next few months, but it’s certainly possible that more investors will jump in once the construction is complete and the mill commissioned…. or, as James is probably saying in a more conservative voice to his actual subscribers, that the project could grow considerably larger over time as they explore and find more large high-grade deposits in the Brucejack neighborhood and build a real mining district on their lands. Which is certainly possible, they have plenty of exploring to do.

Still, if we assume that gold stays where it is for the next year, and the Brucejack Mine startup goes as projected, I’m not personally interested in paying $11 a share for Pretium based on Brucejack — that doesn’t mean it can’t go up in a hurry, of course, either because of “first pour” enthusiasm or higher gold prices or a deal to monetize the value of Snowfield, or even a takeover by a major miner, but at this point I will probably miss those gains if they come. If you’ve got an opinion on Pretium or Brucejack, feel free to shout it out with a comment below… thanks for reading!

P.S. Just to close the circle — yes, Louis James was also pitching Pretium back in the Spring of 2015 as one of his “top 7” mining stocks that he thought had vertical potential. It has roughly doubled since (the GDXJ ETF is up 75%), and is up a good 10% today — most similar miners are also up (GDXJ is up 3%), but the size of that move is probably mostly due to the impact of that current “Red Gold” teaser ad.

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