Solved: ’29-Cent Stock just finds $4.12 billion of gold, Forward P/E of 1′ (Chuck de Castro tease)

What's Penny Mining Speculator's "make 5 to 6 times your money" gold stock?

By Travis Johnson, Stock Gumshoe, August 25, 2015

We write about Chuck de Castro teasers every now and again, and this one caught the eye of quite a few Gumshoe readers — as you can guess from the headline, it’s about a junior mining stock, not exactly the headline favorite for today’s markets… though you never know when the “currency wars” might help gold finally catch a real bid and make another big move, and when gold optimism rises it’s the junior gold explorers that tend to be the most wildly levered plays on gold.

Doesn’t always work, of course — even if gold does go up sharply on some kind of “flight to safety” or “currency devaluation” fear, we might not have the “animal spirits” in the market to get greed impulses really flashing and convince speculators to pile in to little mining stocks again… but, well, gold stocks have been down so hard, for so long, that it seems downright cruel not to nurture at least a wee modicum of hope.

So what is the stock being teased by Penny Mining Speculator? Well, if you’re curious (as I am), and don’t want to pay up $1,950 just to sate that curiosity (I sure don’t), let’s take a look-see at the clues De Castro uses to entice us and see whether we can name that stock for you…

Here’s how the ad begins:

“Cost to produce an ounce of gold: $616. With gold currently at $1,150, they’re going to be making $534 an ounce. Estimated production will give them gross annual profits 4 times their market cap. So their forward price/earnings ratio is less than 1….

“This new recommendation is already up 16% in a week. With a forward price/earnings ratio way under 1, this 29 cent stock is headed for $3.00. Get in now.”

I imagine we’re probably going to want to quibble with the notion that the possible gross profit that might be earned eventually from a mine that is yet to be built belongs in the denominator of a PE ratio, but we’ll leave it for now. Suffice to say, don’t look at that “P/E of 1” the same way you’d look at the PE of a company that actually has an operating business now.

And then we get into some more specific clues:

“This 29 cent-a-share company holds 28,000 acres near the heart of one of America’s richest, most famous gold mining districts.

“Since 2011, the company has drilled over 400 holes, which hit 3 gold-rich zones:

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* Zone 1: 2.5 million ounces of gold reserves
* Zone 2: 700,000 ounces reserves, and
* Zone 3: 1.3 million ounces reserves”

He says this 4.5 million ounces of “mine-able reserves” makes it one of the ten largest gold reserves in the US, and that the company anticipates (in their pre-feasibility study) that they’ll produce more than 350,000 ounces a yeaer.

And one other clue…

“The gold ore is rich in antimony, a metal used in cameras and smartphone screens, including the iPhones and Samsungs. By selling its antimony by-product, this company’s all-in cost to produce an ounce of gold will be lowered to $616 an ounce!”

So what is this $40 million company that de Castro says will be generating “nearly $200 million a year” in gross profits? (Once they start producing those 350,000 ounces, that is)…

Thinkolator sez that Penny Mining Speculator is teasing: Midas Gold (MAX in Toronto, MDRPF OTC in the US)

Midas is indeed a little junior gold explorer, sitting on substantial resources (or reserves, depending on who you ask) of gold in Idaho — and, like most junior gold miners, their stock is a mere shadow of its former self… Midas had a half-billion-dollar market cap back in 2012, and the value of the company has fallen by about 90% since then. The share price, in US$, is down from a high of about $4.50 to the current 29 cents… so it has indeed showed some recovery already, de Castro hinted that it’s up 16% in a week and that’s true, but it’s still awfully close to that all-time-low of 24 cents that it hit last month. And the leverage to metal prices that you look for with mining stocks is certainly there… at least on the downside — with gold dropping 3% so far this year, Midas Gold is down about 30% in 2015.

All of the numbers do match up with the tease — you can see Midas’ latest investor presentation here, from April, and that includes those same numbers of 4.5 million ounces of “probable reserves” (or 4.6 million, depending on how you do your rounding) at their three sites (Hangar Flats, Yellow Pine, and West End) in the Golden Meadows project near Stibnite, Idaho. All three sites are old mines — the whole area was mined off and on for decades, though apparently mining stopped in the late 1990s. Midas’ reserves numbers (and those are probable reserves, not proven reserves) are from their prefeasibility study that was released in December of last year.

I have seen no indication of when the company might try to get financing and start to build the mine, but from the prefeasibility study presentation scenarios it looks like they anticipate construction costing about a billion dollars and taking three years. They don’t have that money, obviously, so they’d have to borrow it to get to building — at the base case scenario, they estimate that the net present value of the mine, using $1,200/ounce for gold and $20/oz silver (the lowest scenarios they included), is about $187 million after taxes at a 10% discount rate. It may be that’s too conservative, either because you think gold should be higher than $1,200 or because you think a lower discount rate is fair (given the risk of a junior miner, I think 10% is the minimum you’d want to consider… but if you use a 5% discount rate the net present value would be over $500 million, so you see how assumptions about the future — and about the value of money — flavor your assessment of the value of a project), but it is, at the least, a more sobering number than $4.12 billion, so hopefully that will mean you can give yourself time to think about it, read the studies, and understand the potential of the mine before you jump in and assume that $40 million is “cheap” for this stock.

Maybe it is, maybe the stock really should be worth $100 million given the reasonably attractive project and the fact that even at current gold and silver prices the NPV is probably at least $150 million, and the large size of the project that has a decent hope of being a major economic force in their little corner of Idaho for close to 20 years. That all depends on your assessment of the likelihood the mine will be permitted and built, the price of gold (and silver, and antimony) at the time they start producing, and the cost to finance the development of the mine. The estimates set the “payback” at about four years (under their most conservative scenario, which is the only one that interests me at all), which gives plenty of time to generate meaningful profit over time, and they have gotten some decent partners — Franco-Nevada bought a royalty on the project, and Teck owns about 10% of the company.

But the fact remains, they’re going to have to raise a lot more money and borrow a lot of money even to get the permitting process really underway, and unless permitting is a lot easier at this site than it is elsewhere you could certainly be forgiven for adding some “margin of safety” to your value assessments by guessing at the number of years it will take to get permits, particularly for the water disruption and diversion and the amelioration of the old mining site that will have to be part of the project. Idaho may indeed be generally mining-friendly, and I’m sure the neighboring towns could use the jobs, but this is also Federal land and there are seemingly dozens of permitting steps outlined in the prefeasibility study, none of which I have any idea about when it comes to potential problems, delays, or even how long it would take to get started if everything goes swimmingly.

And, of course, banks aren’t going to be thrilled about financing the project with $1,200 gold prices underlying the low-end estimate if the price of gold falls to $1,000 or below again, so gold prices will always be a key consideration — this is a much larger potential project than are a lot of the little junior mining stocks that get teased, but that doesn’t mean it’s particularly safe.

So what do you think? 4.5 million ounces of gold dispersed among hundreds of millions of tons of rock at an old mine on forest service land in Idaho is obviously not worth $1,000 an ounce (that’s where the $4.12 billion comes from), but is it worth more than one percent of that ($40 million or so, where the stock is trading now)? That’s a good question — let me know what you decide. I’m not itching to add a junior miner to my portfolio at the moment, but there are certainly a growing number of investing pundits and newsletter folks who are calling for that gold rally to finally restart itself as global currency craziness gets everyone nervous, and they might be right one of these times. Let us know what you think about Midas Gold, or gold in general, with a comment below.


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david
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david
August 25, 2015 9:54 am

A better prospect is MAW toronto MWSNF usa OTC
Much higher grades and much larger resource.
Yes I own shares.

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WPCD
Member
WPCD
August 25, 2015 11:37 am

While I do like Midas, their 2012 PEA NPV of $1.45B is based on $1400/oz gold and a 5% interest rate. The NPV will come down quite significantly when $110/oz is used with an 8% interest. Even with an NPV of say only $700 million, 165 million shares outstanding and 20% of the NPV to be shareholder value, their share price SHOULD be around $1.06, rater than $0.40 today. Their biggest issue is a high CAPEX. They are much closer to production than Mawson which is still pretty much an explorer. Mawson has not done a PEA yet.

An even better investment in my opinion (being a mining engineer) is Claude Resources, who are in production (70,000 ounces projected for 2015).

I do not own shares in any of the three companies mentioned.

WD

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david
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david
August 25, 2015 1:10 pm
Reply to  WPCD

Very interesting viewpoint.
I still think that the stock price of Mawson is way too low and thus has a higher potential upside than Claude but Claude is in profitable production as you said.
The preliminary grades of Mawson also are quite impressive so I have great expectations for their PEA.
Thanks for the information.

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hendrixnuzzles
Irregular
August 25, 2015 10:26 pm
Reply to  david

David, WPCD: Since you guys seem pretty knowledgeable, how about an opinion on
PVG and CGOOF ? Long both

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WPCD
Member
WPCD
August 26, 2015 11:15 am
Reply to  hendrixnuzzles

Hendrix, just a quick comment on CGOOF. Reading their PEA (page 33), taking their Lower Case and guesstimating an NPV @ 8% the after tax NPV comes out at around $600 million. Assuming that 35% of this value today translates into shareholder value the current share price with 125 million shares outstanding should be no more than $1.70/sh. This compares to today;s price of $1.96.

Let me also look at PVG.

WPCD
Member
WPCD
August 26, 2015 11:32 am
Reply to  hendrixnuzzles

Hendrix, using the same approach for PVG as I did for CGOOF, today’s share price of about $5 should be compared to a guesstimated value of about $3.50/sh.

Clearly with the low gold price of today the potential for both stocks is quite significant.

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david
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david
August 28, 2015 12:31 pm
Reply to  hendrixnuzzles

I am into very conservative and basic valuations only, so the technical angle I will defer to
Mr WD.
I just look at the drill results for MAW and where they are located and how many hectares they have.
Its a strong case in my opinion.
Good Luck David

Harley
Guest
Harley
August 25, 2015 12:19 pm

I purchased Oxfords recommendation TRQ with big backing fro Rio Tinto.
I should have known better when I saw it was in Mongolia. You must take much into consideration for these lotto tickets!
Good luck

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takeprofits
Irregular
August 25, 2015 12:39 pm

Haven’t followed de Castro so can not comment on his creditability in respect to past picks, but I do know the project. It is also regularly teased by Nick Hodge of Angel Publishing but i have held off on doing the story until I could see a clear catalyst for the Midas project, which as Travis points out, is not in evidence currently. Potentially it is certainly worth looking at under the right circumstances, but there are so many mid-tiers already in production or at least permitted and financed to enter production in near terms that I consider this a highly speculative gamble whether it will actually get developed by the present owners. Steer clear for now since there are many well financed companies selling at bargain prices with much better risk/reward profiles. Same applies to another Nick Hodge teaser also at least 6 months old, (Midway Gold) I have also been “sitting on” for lack of a clear path going forward. These types of promo’s may be great for selling newsletters but they can be a “trap” for gullible investors because they tell only one side of a many facetted story.

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gillo
Irregular
gillo
August 25, 2015 2:12 pm

Well put as always Myron. It’s a pleasure to have you back, and I’m looking forward to your next piece. Also wondering if you’re aware of a company named Viscount Mining (V.VML) working in Nevada. And I’m also a fan of Mawson, and own some, due to the grades they’ve found in early exploration so far.
SL

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Illuminati Investments
Irregular
August 25, 2015 4:54 pm