“A safe investment with large upside potential” (Chuck de Castro)

By Travis Johnson, Stock Gumshoe, June 23, 2010

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. This is actually an updated teaser for a stock that he has teased before, so I’m updating my comments and notes as well … and, as a special surprise, I’m adding a second teaser solution down at the bottom, about a second stock that he teases with a few meager hints.

This time, the lead-in to the tease is all about gold’s prospects due to global turmoil — the stage is set by saying that Greece was just the beginning of European financial collapse and that folks will run to gold, and that the next stage may be something to do with an Iranian nuclear weapon, which will force even more people to panic and rush into the shiny stuff, a trend that has clearly already begun (and who knows, may be peaking) with the US Mint selling gold and silver coins selling at an unprecedented rate.

” My colleague, Chuck de Castro, has uncovered a great little company…. Between 2002 and 2006, with gold
prices low, this company bought up 6 then-unprofitable gold properties all around the world in anticipation of much higher
gold prices.

Because these properties were unprofitable to mine at prices anywhere near those prevailing at the time, they were able to pick them up for literally pennies on the dollar. For example, they picked up one property with upwards of $2.5 BILLION of gold in the ground — for a mere $1.5 million.

Now the higher gold prices they were looking for are here. These properties — which were next to worthless with gold at $300 an ounce — are now immensely valuable and ready to mine.

“This is now a $79 million company sitting on approximately $21.6 billion of gold. With the street value of their gold worth 273 times the market cap, in my considered opinion that makes them …

A safe investment with large upside potential

“They’re getting ready to bring their two best properties into production. The first will come on line early next year. Their feasibility study shows that this mine will produce an average of 127,400 ounces of gold per year, with an average cost of $406 an ounce.

“With gold upwards of $1,200 an ounce, they’re going to be making about $800 gross profit for each ounce pulled out of the ground. Multiply that by the expected production of 127,400 ounces, and we’re talking about $101 million in gross profits per year.

“The second mine they’re developing is even bigger, and will be more profitable. This should come on line in the first few months of 2012, and could produce an average of 245,500 ounces of gold per year, at an average cost of $453 per ounce.

“The gross profits at this mine will be about $747 an ounce ($1,200 – $453). Again, multiplying by the number of ounces, you can calculate that the second mine should generate gross profits of $183 million per year.

“Total gross profit for the two mines: $284 million. Chuck, who writes the Penny Mining Speculator, expects them to net $90 million on that. That’s an enormous amount of profits for a company with $79 million market capitalization.

“The forward price-to-earnings ratio will be less than 1. Profitable gold mining companies don’t sell at p/e ratios less than one…

“It seems obvious to me that the shares will have to adjust sharply upwards. Clearly, two years from now, this small company could see its shares triple in value, and still remain way undervalued when compared with its peers in the industry.

“Longer term, this company has 4 other really hot gold properties. Once they get the cash flow from the first mine, they’re going to start bringing these other properties into production as well. As their other 4 gold-rich properties come on stream, the company has potential for much larger gains.”

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 late in 2008 (VGZ bottomed out well under a dollar at the October/November 2008 lows). They came back to around $2.75 or so when I wrote about a similar teaser, but — thanks in part to some problems with their lead project in Mexico, including environmental review concerns — the stock has fallen substantially from the Winter highs, to about $1.65 as I type.

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 theoretically closed to coming “on line” is called Paredones Amarillos, in Baja California, Mexico, and last I saw it was projected to produce 127,400 ounces of gold per year for ten years, at a production cost of $406 per ounce (about 1.3 million ounces of proven and probable reserves). They were saying that engineering and construction of the mine would begin in 2010, with initial production in 2011 — but they may have hit a significant hiccup with the permitting process — this is a big enough deal that it has taken over Vista Gold’s homepage, with the headline, “Vista Reviews Legal and Strategic Options Following Dismissal of the Change of Forest Land Use Permit Application for the Paredones Amarillos Project.” This will obviously delay things, though I have no way of knowing for how long, or if it will actually stop the mine — but there is, at least, more uncertainty about this project now than there was in November.

The second project is Mt. Todd in the Northern Territory, Australia — 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.

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

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 gave at an April gold conference [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?).