Yesterday I started looking into the latest James Rickards ad, a gold-related spiel for his Strategic Investment newsletter, and today we’re going to close the loop on that and get a couple more names for you.
The full article from yesterday is here, if you’re curious about this whole notion of “Reagan Gold” and the conspiracies Rickards spun, as well as his long story about Reagan’s enthusiasm for the gold standard… but the short version is that Rickards is pitching junior miners as “Reagan Gold” investments, and we’re trying to figure out what they are for you. The first one we looked at yesterday was Pershing Gold (PGLC), and now we move on…. what are the clues for #2?
“In investing, sometimes the smartest thing you can do is follow the lead of someone smarter than you.
“And considering the whopping $55 MILLION investment this second ‘Reagan Gold’ play recently attracted from one of America’s most iconic billionaire gold investors…
“That’s certainly the case here.
“Exceptionally well-capitalized to hunt for gold in the mining-friendly hills of Idaho, this tiny company currently trades for LESS than two bucks a share.
“But considering its new “celebrity shareholder,” it’s a safe bet that prices WON’T stay that way for long.
“With plenty of room for growth—and the sort of ‘tier one’ site portfolio that could potentially lead to a massive acquisition—this is one of those rare investments with both short and long-term payout prospects.”
So what is this “Reagan Gold Play #2?” Thinkolator sez those hints are leading us to Midas Gold (MAX in Toronto, MDRPF OTC in the US).
Midas is indeed a junior gold company with an appealing group of possible gold mines in Idaho that htey call the Stibnite Gold Project, it does trade for less than $2 a share (actually, less than $1 now), and it did pick up a “celebrity shareholder” earlier this year in hedge fund billionaire John Paulson, who did provide $55 million in financing.
Why did they need $55 million? Essentially, to pay for their permitting process and the development of a bankable feasibility study. Paulson didn’t actually invest $55 million, but he promised that much as a “backstop” investor (other shareholders participated, so Paulson’s funds actually only took on about $35 million… this is all in Canadian dollars). The company says that this financing, which is a convertible bond that doesn’t pay a coupon, will be enough to fund the permitting process for the next 3+ years.
Midas has graced the pages of Stock Gumshoe before — notably, Chuck de Castro teased the stock in the Summer of 2015 when it was pretty close to all-time lows below 30 cents (remember, it wasn’t that long ago that all penny gold stocks were in the doghouse — most have bounced sharply this year but are still, like Midas, far, far below the highs they reached in 2011 and 2012).
And, like all miners who are in the mine development process, they have both a pretty high binary risk level (ie, the mine could or could not get financed and built, depending on both permitting and financing), and a pretty high amount of leverage to gold prices. The risk of the permitting process is not something I have a guess at, I don’t know whether they have 50% odds of getting approval to build the Stibnite mine, or whether it’s 20% odds or 90% odds, the permitting process has really barely begun (though they have been collecting baseline data for years), but the leverage to the gold price is a little clearer — they even include some calculations about the net asset value (NAV) sensitivity of the project to gold prices, which note that if you use a 5% discount rate (that’s too low for me when it comes to mining stocks, but other folks use it too), the net present value per share of the mine at $1,200/ounce gold is $1.75; the NPV at $1,500/ounce gold is $3.69.
So that’s where the leverage comes in — at current gold prices it’s worth buying if you think the odds of permitting (and the time it will take to get the mine permitted and built, at least a few years) make it worth your while to pay a dollar for something that should be worth $1.75. At $1,500 gold it gets far more interesting, so that’s how you line up your probabilities and your notions of risk — if gold is lower than $1,200, or permitting or building the mine hits real snags or takes longer than expected, then it would also be tougher to finance mine construction and the bad news kind of snowballs, and Midas could easily fall 75% from here (that’s where it was last Summer, at the lows).
Alternatively, if gold is higher at $1,500 an ounce in a few years, and the permitting and development process proceeds smoothly, then financing for the mine should also be pretty easy and the stock could easily be well over $3 for 200% gains… and if gold is higher they will probably identify more reserves as the drilling continues. You don’t usually find stable and boring in junior gold miners, particularly those who are trying to develop a mine for a relatively large deposit like this one — even beyond the permitting process, which depends on environmental and local concerns, the sensitivity to gold prices can have a huge impact on the share price.
Midas has a presentation on their website here if you’d like an overview of the company and project. What they envision is a relatively low-cost, high-grade open pit mine that’s on the site of historical gold production — so part of the argument in their favor, beyond the local economic boost, is that they will run a much cleaner mine and actually improve the environment in the area that was degraded by previous mining practices.
It’s a pretty compelling potential mine, with a clearly attractive prefeasibility study — I suppose it’s probably mostly a question of permitting, the permitting timeframe (which should be at least a few years, I imagine), and what the price of gold does during the next couple years when they’re publishing more specific feasibility studies and beginning to look for partners or mine development financing. For the next couple years, they’re fine and well-financed for the permitting process — so they’re not going to be in dire straits financially, but that doesn’t mean we can really predict where gold prices will be over a few years or whether there will be substantial permitting concerns from the US Forest Service or the local community in Idaho.
And what’s the other “Reagan Gold” idea? Here are our clues:
“A highly diversified company—run by a battle-proven, fiercely intelligent CEO—this ‘Reagan Gold’ company is digging for treasure in the United States’ other ‘Wild West.’
“And with over $38 million (and nearly 230,000 feet in exploratory drilling) already invested in its premiere Alaskan site…
“My ‘Millionaire Miner’ colleague thinks it could be days away from hitting it BIG.
“Other than that…well, I simply can’t give any more detail.
“To be totally honest: I may have already said too much.
“At less than $5.00 per share, these companies are genuine ‘hidden gems’ investments…”
This one is far less certain, but it sounds very much what one would have written about the Donlin Creek gold project in 2008, when that project had hit about 230,000 feet of core driling and $38 million invested. So perhaps that’s the project being teased here, and the copywriter for Rickards just used some older data? I don’t know for sure, but that means the best answer to come out of the Thinkolator on this one is our old friend NovaGold (NG). There’s been a heck of a lot more than $38 million cumulatively invested in the Donlin Gold project now by NovaGold and their 50/50 partner Barrick… NovaGold itself — just this year, in the permitting process, will be spending about $23 million, and more than half of that is for Donlin Gold (NovaGold’s other project, Galore Creek, partnered 50/50 with Teck, is a copper mine in British Columbia and is not as far along in development as Donlin Gold).
So there’s one potential for you — NovaGold is a pretty low-priced stock, the shares are under $5, but it’s not a small company for a junior miner… they have a market cap of about $1.5 billion, which is still not huge compared to the vast size of the potential Donlin Gold mine, which would be a mega-mine if it is built, but it’s certainly not a little guy. It does seem like the stock is something of a consensus pick among gold newsletters, at least if the teaser flow is an indicator, so perhaps there’s some investor confidence that their environmental impact statement (EIS) process will go smoothly when it is finalized next year, and that permitting will go well.
It is a massive, massive project that includes building a natural gas pipeline across a mountain range to fuel the on-site power plant, but it is nowhere near as environmentally controversial as the Pebble Mine to the South that’s the other potentially huge future Alaska gold mine (both the Donlin Creek deposit and the Pebble deposit were first discovered in the 1980s, incidentally, which should serve as a good reminder for any junior miner investors who like the thrill of discovery that these kinds of projects take a loooooong time to go from discovery to development).
And beyond that, you’re on your own — I do own some speculative warrants on Northern Dynasty, for full disclosure’s sake (they own the Pebble deposit, I wrote a little about that one last week here), but I don’t have a position in either NovaGold or Midas Gold and I’m not investing in a lot of little gold speculations at the moment.
Jim Rickards’ ad also includes a pretty strong push specifically around December 13 as a trigger point for gold, but his ad started running before the election and I think he’d probably moderate that stance at this point. Any chance of the Federal Reserve not raising rates at their December 13 meeting (which was what he implied would spike gold higher, given the boost that zero or negative interest rates give to gold) is now vanishingly small, given the rising long-term rates after the Republican sweep in the elections. Gold is in a period of pretty high uncertainty at the moment, according to most of the notes I’ve read from technical traders and fundamental investors — the rising rates that have driven the rising dollar have hurt gold, and rising inflation expectations are better for stocks than they are for gold, but so far we’re really just dealing with a knee-jerk reaction to the election, not to any actual news.
I would be skeptical of anyone who claims certainty about the direction of almost anything at this point, frankly, which is helping to keep me in a state of stasis… and that extends to my gold positions, which tend to be highly levered to shifting sentiment, while I wait out some of the chatter and see what really might happen to the dollar, interest rates, and gold next year.