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

by Travis Johnson, Stock Gumshoe | June 23, 2010 9:01 am

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.

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“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[1], 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.

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][2], 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?).

Will the price go up? Well, Vista Gold has resisted the skyrocketing tendencies of some small gold miners over the last year, but they’ve also done some smart things (spinning off Allied Nevada a couple years back to “create value;” focusing on politically “easy” areas), and if we assume that they really can get their environmental permits they are on the verge of beginning to build a mine, even though they’re at least a year from that first pour of gold (which often does nice things for a stock price). That doesn’t mean they won’t have hiccups, the mines aren’t built or fully permitted yet, and “reserves” for a producing miner are always worth more than reserves that are just sitting untouched in the ground, even if you do believe that gold prices will continue the relentless march North.

But “safe?” The latest problems with the permitting process should be a good reminder that a little tiny exploratory gold miner that hasn’t mined anything is hard to call “safe,” no matter how confident you are in the gold price.

And yes, I promised a second gold miner that I had never mentioned before — this one was also teased in a very off-handed way in de Castro’s ad that’s recirculating now, here are the hints:

“Plus, as an extra bonus, you’ll get Chuck’s Special Report on another tiny penny miner that’s sitting on a huge 250,000-acre gold-rich property in South America. This company has already found 3.36 million ounces of gold after exploring less than 1% of the property.

“The street value of this much gold is $4 billion. That’s more than 37 times the market capitalization, so I think the shares are low-risk and have the potential to more than double your money within the next two years.”

This one must be Sandspring Resources (SSP in Canada, SSPXF on the pink sheets)

Sandspring is off its highs from over the Winter, too, currently trading around $1.30 — and yes, they are in South America, their property is in Guyana, which is sandwiched right inbetween Suriname and Venezuela, and it is 250,000 acres. The first gold deposit to get their attention as they identify potential resources is Toroparu, which did report 3.36 million ounces of gold equivalent as of a few months ago — earlier this month they updated those numbers, so it’s now an indicated resource of almost 3.7 million ounces (roughly 2/3 of that is gold, the rest of the “gold equivalent” is from the copper, so that number would change as the prices of the two commodities fluctuate).

I wrote about a similar teaser from de Castro for Vista Gold back in November — though I didn’t look into the Sandspring one at the same time, not sure if it was included or not in that earlier teaser ad. Since I’m also stealing some of that earlier article for updating here, I’ve appended everyone’s comments from November below for you to see some other thoughts on Vista Gold … and of course, you’re more than welcome to add your own thoughts as well.

And if you’ve ever subscribed to Chuck de Castro’s Penny Mining Speculator, please click here to share your thoughts on the newsletter[3] — you could be one of the first to review it[4] for Stock Gumshoe Reviews!

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  1. taken over Vista Gold’s homepage: http://www.vistagold.com/
  2. an interesting investor presentation that they gave at an April gold conference [pdf file]: http://www.vistagold.com/presentations/downloads/Vista%20GolVista%20-%20DGG%20European%20Forum%20-%20Zurich%20April%2013-16%202010%20v3.pdf
  3. Chuck de Castro’s Penny Mining Speculator, please click here to share your thoughts on the newsletter: http://www.stockgumshoe.com/reviews/penny-mining-speculator/
  4. first to review it: http://www.stockgumshoe.com/reviews/penny-mining-speculator/
  5. You and I can each earn a free share of stock right now if you open an account!: https://join.robinhood.com/travisj369

Source URL: https://www.stockgumshoe.com/reviews/penny-mining-speculator/this-once-shunned-tiny-penny-gold-sitting-on-17-3-million-ounces-chuck-de-castro/

  1. Avatar
    Nov 12 2009, 12:17:13 pm

    The current price of gold/silver is often used in comparison to a company’s market cap to show “fabulous gain potential”. Actually valuing gold in the ground starts at ~$20/oz for Inferred resources,~$40 for M&I resources, and ~$140/oz for Proven and probable. Also, keep in mind that a resource is mined over many years,e.g. 10 yrs or more, so these total ounces need to be divided into annual output in order to evaluate the company’s expected value. There is a lot more to consider as well – but having a reasonable idea of the potential value starts with realistic valuations of ounces in the ground.

  2. Avatar
    Nov 12 2009, 09:40:06 pm

    VGZ was under pressure and went down from $5 to $1.55 even thought their reserves in Mt.Todd almost doubled. They even got their permit and actually have most of the equipment to start mining, they only need a loan for about $140M to build Paradones. This gold will get them the cash to build Mt.Todd

    I can easily imagine looking at this in a year and seeing it at $39, it’s been oversold in anger because of the permit delays in my opinion. Anger takes time to recover but this pre-miner firmly belongs over $10 with all those interesting prospects and the lack of risks.

  3. Avatar
    Nov 12 2009, 09:43:20 pm

    VGZ was under pressure and went down from $5 to $1.55 even thought their reserves in Mt.Todd almost doubled. They even got their permit and actually have most of the equipment to start mining, they only need a loan for about $140M to build Paradones. This gold will get them the cash to build Mt.Todd

    I can easily imagine looking at this in a year and seeing it at $39, it’s been oversold in anger because of the permit delays in my opinion. Anger takes time to recover but this pre-miner firmly belongs over $10 with all those interesting prospects and the lack of risks.

  4. Avatar
    Dr. Henry .M. Chakoian
    Nov 13 2009, 09:04:03 am

    Ah yes. Another opportunity to get wealthy. Rather than wait one or two years for a possible payoff, Consider options. In my younger days, I searched the blue skies for the blue bird of happiness. If you do that, be prepared to duck if the returns falling from the sky require avoidance. I do own some PM stocks, GG and Slw with great results. I have more recently backed my conviction that PMs are headed higher by buying DGL call options. DGLis a double leveraged long option based on gold prices. As in all options, there is risk, but your investment is little or greater as you wish. You can cut losses if necessary, but receive substantial and immediate returns if your assessment of PM prices is correct. That’s why we buy gold mining stocks isn’t it? I am not a broker or financial advisor, so relating my personal experience is not advice, but sharing of personal experience. Eldorado, where are you?

  5. Avatar
    follower of chuck's portfolio
    Nov 20 2009, 11:01:25 pm

    Chuck’s Penny Mining speculator started in October of 2005. 4 years later, the newsletter continues to rake in profits for the subscribers. The newsletter never changed its name. It’s always and have been named as penny mining speculator.

    chuck also limits his susbcriber base so that not to adversely affect the price of the stocks. he sends out weekly alerts to his subscribers via fax and via email. and he constantly monitors the performance of his recommendations.

    just today, one subscriber called in happy because he made $100,000 today, Friday, from following a partial sell recommendation from chuck’s newsletter.

    he is a subscriber of the publication’s sister newsletters since 2000. and he is very happy of his subscriptions.

    how do I know? i heard him.

  6. Avatar
    Chuck's follower
    Sep 16 2010, 11:03:04 am

    @ Jonathan: Hill End is still in Chuck's portfolio. That' means that he continues to believe in its potential.

    Chuck's recommends buying stocks usually when the stocks are being sold at less than 50 cents a share. No surprise if he made a lot of money for his subscribers when he asks them to sell the shares when the stocks are already selling at $7each.

    The newsletter has been around since 2005. I bet it wouldn't last this long if his recos didn't make money for his subscribers.

  7. Avatar
    Missing Something
    Oct 29 2010, 08:34:31 pm

    At the top of my computer screen, in the address box (I think that it is also referred to as the URL, although I don’t know what that means)is this: http://stockgumshoe.com/2010/06/this-once-shunned

    Why no mention of the 17.3 million ounces anywhere in the article itself? That’s a lot of gold, which makes speculating on some stock a lot more enticing.

  8. Avatar
    Oct 29 2010, 10:30:44 pm

    The wickinvest Portfolio tracker is very good for US – listed stocks and online feed.Is there any Portfolio tracker that works well with multi-exchange stocks – and tells you about news updates ? I am planning to try Yahoo Finance next.

  9. Avatar
    Nov 3 2010, 02:15:35 pm

    Google Finance might be a good idea.I jut input a stock into my portfolio and it flashed up some recent news.
    Yahoo Finance does cover a lot of foreign stocks,though.Not sure if Bloomberg does portfolios.
    Morningstar is a bit odd.They do portfolios,they charge,and they do analyst reports.They tried to sell me their annual service.But when I look up a stock on their website,I'm not sure it mentions the analyst report..Don't know if the annual package gives access to the analyst reports.

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