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De-Teasing “The Amazing Discovery Behind This Hill Could Be Worth $100 Billion”

What's Stephen Leeb's "Number One Mining Pick for 2023?"

Questions continue to roll in in about Stephen Leeb’s mining ad, which seems to pop up whenever gold is rising a bit — the ad is for The Complete Investor, his entry-level newsletter over at Investing Daily ($39/yr), and the ad starts out with that “tiny $9 company” headline and a pretty photo of a creek flowing through a misty valley.

The bad news? This ad is essentially unchanged in the past two years, as far as we can tell… and the stock in question is actually trading at almost exactly the same price as it was on March 9, 2020, when I first posted this article (hint: it ain’t at $9 anymore, the years have not been kind to the share price). So what follows has not changed much, either, this is the same company, the same tease, and the same stock that was being touted just before the pandemic hit our shores here in the US. I’ll add a few updates below… but to be honest, not all that much has changed with the company fundamentally, either.

Back to our tease, the evergreen dreams of digging up gold that Leeb tantalized us with in early 2020…

Of that sylvan photo, Leeb says that…

“The Amazing Discovery Behind This Hill Could Be Worth $100 Billion….

“And early investors in the tiny $9 company that holds the key to unearthing it could see their stake surge by as much as 20-times.”

So what’s the “tiny $9 company?” That’s what we’ll endeavor to find out, time to take a wee look at the clues…

“Now, to most people, this just looks like any old tree-covered hill.

“However, there’s something currently hidden from view behind this hill and beneath the forest floor…

“A massive mineral deposit.

“Possibly, one of the largest ever discovered.”

OK, so some kind of big gold discovery. What else? Here’s a little more from the ad:

“… why hasn’t it been dug up?

“And why aren’t there giant excavators and rock trucks swarming all over it?

“Well, first, it’s located just below the Arctic Circle.

“That means much of the ground lies frozen almost year-round… and it has remained so for centuries.

“Second, and more importantly…

“The location of this massive treasure trove has been so cold, that few people have been willing – or able – to live near this remote location year-round.

“In fact, some days the temperature drops to -37 degrees.”

And apparently the shifting climate is going to open this deposit up, and make it easier to get this mine developed. In Leeb’s words:

“Warming Temperatures and Melting Ice Here Could Hand You LIFE-CHANGING Profits….

“… right now, the latest geological estimates are that there are over 33 million ounces – just waiting to be unearthed.

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“That’s over 1,000 TONS of gold….

“that’s over 1/3rd of all the gold that was mined throughout the entire world last year.”

OK, so comparing “possible reserves in the ground” to “how much gold was produced” is not terribly useful… but I guess it gives some perspective. And no, I should not have used the word “reserves” there, that word is reserved for gold that has meen identified through drilling and is very likely to be not just available underground to be dug up, but economically viable to produce. Before you define your reserves you start with a “resource,” which doesn’t care about the economics and just tries to estimate with some precision how much gold is there… and before you have resources you have “a little guessing fueled by initial drilling results.”

Which are we dealing with here? They don’t say, so let’s see what other clues we get…

“One of these factors I pay very close attention to is the executives who are running the show.

“From what I’ve seen – the management team running the miner that’s sitting on the ‘mother lode’ of gold deposits – is one of the best I’ve seen in this sector of the market.”

OK, so what hints does he drop about that management team?

“… the billionaire executive that’s getting this massive mineral deposit ready to be mined has a track record second to none….

“He and his team discovered and financed one of the largest deposits of silver and zinc in the world.

“He founded a natural gas exploration company that became the fastest-growing privately held hydrocarbon exploration and production company in the US.

“And today, he currently holds significant financial interests in the companies that own several of the largest proven gold deposits in the world.”

And they try to make this idea seem urgent…

“As I write this, the stock price is hovering right around $9.

“But I suspect it won’t be for long…

“As gold prices rise, investors pay more attention to gold mining companies.”

Nothing in there about how many ounces have been identified at this site, or how big the company is, or why it’s a particularly good idea to buy it now (other than the intimation that Leeb thinks gold will hit new all-time highs at some point, presumably in the near future, and that the central banks buying up gold in recent years is a good indicator)… but we do get a few clues to feed to the Thinkolator, so what’s the story?

Well, the photo is not really any help — it’s not actually a photo of the site, looks like it’s actually a stock photo that anyone can download online, I found it at unsplash if you’re curious. It’s a nice picture, but that site indicates it was taken in Gasquet, California. Which even the most geographically challenged among us must know is nowhere near the Arctic Circle (though it is very far north in California, just a few miles from Oregon). Here’s that stock photo of the pretty valley, in case you missed the original ad:

Just to further tease you a little bit, here’s what the actual site looks like from the other side of the hill… dunno why Leeb didn’t use a real image, other than that this particular photo doesn’t show the melting water of the arctic thaw:

And here’s what the actual camp for the project looks like:

So yes, this is yet another tease from Stephen Leeb about the Donlin Gold mine that has been in permitting and development (or pre-development, I guess) for more than a dozen years now — Leeb has touted this stock several times in the past, I think the first one we covered was in 2009.

Donlin Gold is a joint venture, split 50/50 between Barrick Gold (GOLD) and NovaGold (NG), but if you really like the potential of the project then NG is the obvious play on Donlin — NovaGold is fairly small, with a $2.7 billion market cap, and doesn’t really own anything else (they do have some cash, and some cash coming in as a result of their sale of Galore Creek, but it pales in comparison to the capital requirements of the Donlin Gold mine). And if built, it will indeed be a doozy — the resources were estimated at 33 million ounces a few years ago, though that’s now up to 39 ounces, and the last early-stage plan I saw was for a mine that would produce more than a million ounces of gold a year for 27 years.

But, of course, it’s also in Alaska, and in an area quite devoid of infrastructure, so it will be very expensive.

The challenge for Donlin Gold, and the reason it has not been sped through to development, seems to be both in permitting and in investment — they have gotten most of their permits now, though the key permit for their big tailings dam is not in hand yet and getting that approved will be a key for 2023 (everyone’s worried about damaging fisheries or waterways in Alaska, and the reports of tailings dam collapses in other parts of the world probably bring more attention than this issue would have had 20 years ago). The latest Investor Presentation highlights where they are in the permitting process, though there are environmental groups and some Alaskan tribes who are continuously appealing all the permits Donlin receives — so far they’re not blocking anything, but they’re certainly slowing it down.

And on financing, now that they have gotten the permits for most of the big projects that will make Donlin Gold possible (assuming the appeals don’t cause a backtrack on permitting)… they still have to decide whether or not to go ahead, since going ahead with this gold mine also means they’ll have to build, among other things, a 300 mile natural gas pipeline so they can fuel an on-site power plant for the mine. The capital cost for the project was estimated, way back in 2012, at $6.7 billion. I can’t imagine that number will have come down in the subsequent eight years, but even at a cost like that the long-term potential probably makes economic sense (they do think, per recent presentations, that they can reduce up-front capital costs by bringing in third parties to do things like build the pipeline, though that should, of course, also increase operating costs, all else being equal).

Which doesn’t mean that they’ll decide to build it next year, or that they’ll be able to raise the money — that will depend on a lot of factors, starting with the next update to the feasibility study (they haven’t updated it since 2012, as far as I can tell). They’ve also been continuing their large drilling campaigns in recent years, as they try to further delineate the reserves and find the highest-grade spots to help design the initial mine plan, so the results of that drilling and the updated reserves numbers might move the shares as well, I suppose, but we already know that there’s a huge amount of gold there and a couple million ounces more or less shouldn’t make a huge difference. What investors are really waiting for is the final permitting, final “go ahead” decision from Barrick and NovaGold, a final feasibility study that lays out the updated economics of the project, and an actual timeline that lets us map out when they might begin to generate some revenue.

And, of course, in the meantime we’ve got the price of gold to keep us busy, and keep the stock moving around. If gold continues to rise, as it has been recently, that makes the feasibility study look that much better, and brings in more investor attention.

That “billionaire businessman” teased as leading the charge is NovaGold Chairman Thomas Kaplan, in case you’re curious, and his Electrum Group is the largest shareholder (more than 25%). John Paulson’s hedge fund is also a big backer, and has been for a long time.

The challenging thing, in my mind, is that the numbers are still pretty iffy if gold doesn’t rise substantially. According to the latest presentation (slide 25), the calculated net present value of Donlin Gold, using the 2012 feasibility estimate and a 5% discount rate (which is low for a mining project, in my opinion, especially when inflation is above that rate), is just under $5 billion at a $1,700 gold price… and right around $7 billion at a $2,000 gold price. That’s a lot of money, but NovaGold owns only half of the project and already carries a market cap of $2.8 billion. So really, if you’re buying it now you really need the gold price to be above $1,700, the gold production to be higher or last longer, or the next feasibility study update to have better economics (and they could be worse, with higher borrowing and construction costs, though they have identified more high-grade gold targets and are still drilling, so the reserves might be upgraded). With these numbers, at $1,700-2,000/ounce gold prices, it really seems to me like NovaGold is just treading water… nobody buys a gold mine developer because they hope to make 5% a year. It still may make plenty of sense as an investment in the long run, if they’re going to produce well over a million ounces a year for 30 years (and probably extend beyond that, eventually), but if gold prices don’t go up meaningfully it could require a LOT of patience.

And since we’re probably at least a year or two from a “go ahead” construction decision and financing, that means there’s still a lot of uncertainty. It’s a huge project, with great potential to produce high grade gold for 30 years or more, but how much it should be worth today, when we’re still mostly working from 2012 assumptions and don’t know when that gold might be produced, is open for some reasonable debate.

And to address the headline number, I suppose there’s some case you can make for the deposit being worth $100 billion at some point… but even if the mine does turn out to be much bigger than the latest estimates, that would require a really, really high gold price (yes, 40 million ounces of gold would sort of be “worth $100 billion” at $2,500/oz gold, that’s just math… but, of course, it’s not the raw “in the ground” asset value that matters, it’s how much can be extracted, how long that extraction takes, and what’s left over after paying to build and operate the mine).

That doesn’t mean the stock can’t go up, of course, but it means a lot of success is already priced in… and while we’re arguably getting closer to potentially building the mine (and the pipeline) in the next couple years, it’s certainly not guaranteed. If gold drops by 30% at the time that financing decisions have to be made, things could quickly get a little bit ugly. That’s the risk of all mining projects, of course, but most of them aren’t nearly this big, and most don’t have a $5-10 billion construction budget.

That sensitivity to higher gold prices isn’t all bad, though — it means that they really depend on high gold prices, so if gold goes a lot higher their potential profit margins will climb a lot faster than those at lower-cost mines. It’s not unusual for the biggest mining stock winners in a gold bull market, at least in the short term, to be the more marginally economic projects — those that are worth doing at $1,500 or $1,600 gold, say, but become dramatically more appealing at $2,000 gold. Those projects get better, faster, than the more conservative projects that can be profitable at $1,000 gold, and that is often reflected in the stock price.

Part of the “fun” of mining stocks is that yes, they are levered to the commodity — but they’re also stocks, and they are also move with investor sentiment about equities to some extent… especially when people are panicking and selling everything, or have to offload stocks to meet margin calls. If you look at NovaGold’s chart you can see that the shares are moving with gold… but also that some days the leverage they show during drops in the price of gold is greater than the leverage they have on the upside, when gold rises. That’s sadly typical of mining stocks, they often soar when gold spikes higher… but they have a hard time keeping up with gold when there’s a longer and sustained rise in the price of the metal, probably because mining is a dirty and difficult business that sucks up a lot of capital.

So it’s probably useful to really think about opportunity cost when dealing with a very long-term project like building a massive mine — this story has been going on for a very long time, with their partner Barrick even offering to buy them out to get full control back in 2006 at $16 a share… and here’s what the company has returned to investors during those 13-1/2 years since that offer (NG shares in purple, gold in blue — that’s the S&P in orange, for context):

NG Chart

Of course, big ol’ Barrick didn’t fare that much better — let’s add them to the chart (in green):

NG Chart

I don’t know if we can draw definitive conclusions from all of that about what the future might hold, and I apologize for getting a little chart-happy there, but when it comes to significant allocations of capital to mining I’ll stick with the royalty businesses — they don’t rise as much as the best miners when things are good, but they also don’t go out of business or have to raise capital when things are bad. They can still stink for long periods of time, but these financiers generally hold up better than the miners.

OK, just one more chart — here’s what those years look like for Royal Gold (RGLD), the only large gold royalty stock that has traded for that whole period (in pink), compared to that group (I would have used Franco-Nevada (FNV), which has better returns than RGLD, but that went private for a few years and didn’t trade in 2006):

NG Chart

And with that, I’ll leave you to chew on your gold thoughts and spit out some comments and opinions for us — like the potential of NovaGold here, as they inch a couple years closer to a feasibility study and construction decision? Prefer other projects? Feel free to make your case for whatever miner you like… our friendly little comment section below awaits your wisdom. I’ve left the comments from the past few years attached at the bottom, in case that provides some insight for you.

Disclosure: Among the investments mentioned above, I currently own physical gold and shares of Royal Gold (RGLD). I won’t trade in any company covered for at least three days after publication, per Stock Gumshoe’s trading rules.

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timcoahran
Irregular
March 9, 2020 7:11 am

To say that the cold weather is a reason this hasn’t been mined is a bullshit line. There are plenty of large outdoor industries in Alaska, and they’ve been around for decades. The cold just increases expenses a bit (using number 1 diesel fuel instead of #2, using more of it, paying employees who can keep machinery running, and not leave the area, etc.).

To say that climate change would ease these costs is not correct either. Melting permafrost under buildings, and especially roads, causes much more upkeep. Leeb obviously hasn’t worked in Alaska.

JimT
Guest
JimT
March 10, 2020 12:19 pm
Reply to  timcoahran

“Never let the facts get in the way of a good story”.

Investor Clouseau
Investor Clouseau
March 9, 2020 12:04 pm

Any chance that $BIP is on the RMP radar? They aren’t cryptic teases, but I’ve seen mentions of it in a lot of articles about where to put money during this downturn.

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gatespalmer
Member
gatespalmer
March 9, 2020 5:50 pm

Worked on Donlin in 2000’s – running the camp….
Barrick’s desire to inventory Donlin to use its borrowing power on harder-to-finance overseas targets (knowing they can always get the money to build Donlin in the US) first, has always been my stumbling block. I’ll be interested to look at the situation in August, especially in seeing what Kaplan does in light of the 2020 drilling program, the state’s dam permit, Presidential election implications and the price of gold/state of the world economy. Will Barrick continue to fudge for more information or will they actually decide to construct.
Let’s talk in August.

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ssanford
March 9, 2020 8:41 pm

What is the $7 gold royalty that Stansberry is recommending?

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Angus
Member
Angus
March 10, 2020 6:32 am

It sure IS Travis a stock well worth accumulating. Of the Royalty stocks this is still an affordable stock.

BJI
Member
BJI
March 10, 2020 10:33 pm

Thanks, TJ, but WHAT EXACTLY MAKES SAND such a good stock???!!!
https://finance.yahoo.com/quote/SAND?p=SAND&.tsrc=fin-srch
Sandstorm Gold Ltd. (SAND)
NYSE – NYSE Delayed Price. Currency in USD
5.74-0.05 (-0.86%) At close: 4:02PM EDT
5.73 -0.01 (-0.17%) After hours: 5:43PM EDT
EPS (TTM): 0.09
Forward Dividend & Yield: N/A (N/A)
Ex-Dividend Date: N/A
1y Target Est: 6.35

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Investor Clouseau
Investor Clouseau
March 11, 2020 11:55 am
Reply to  BJI

I’ve been wondering this myself since it’s always been a popular stock in the Real Money Portfolio here. Outside of trading in and out of it when it surges and drops I can’t figure it out. Unless it’s just a hedge position in the event panicked people flock to the gold sector. Seems like it should pay a dividend (from a logical standpoint, not an informed stock analysis standpoint).

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Charles Eson
Member
Charles Eson
March 9, 2020 9:54 pm
Reply to  ssanford

I think it’s Franko-Nevada.

narr01
Irregular
narr01
March 9, 2020 11:51 pm
Reply to  Charles Eson

Franko-Nevada (FNV) is at $107 rather than $7….

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ShealTiel
Member
ShealTiel
March 9, 2020 9:53 pm

“TRQ ” in Mongolia might be a consideration for those interested in a low bid stock with a lot of potential in the future and some recent and future spending problems.. RIO has invested considerably?!

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JayBee1
Guest
JayBee1
March 10, 2020 9:06 pm

I think that I would rather own Ely Gold Royalties, Inc. (ELYGF) than Nova Gold. I mentioned in a previous post that I had purchased ELYGF at 40 cents per share some years ago and then rode it all the way down to approximately 1 cent. Miraculously (in my mind anyway), it rose from the ashes and peaked recently near 75 cents per share. I think that it has since fallen back to close to 44 cents per share. I’m still holding my shares, and I am planning on buying more. Eric Sprott owns at least 20 % of the company, and I think that he has recently increased his stake to almost 30 %. I believe that he is the floor underneath this stock’s price. If it dips, he will probably buy more. If it goes up, he will probably buy more. I’m just hoping that he doesn’t ever buy out the company completely.

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JayBee1
Guest
JayBee1
March 11, 2020 10:15 am
Reply to  JayBee1

Sorry, but my previous post got cut off a little bit. Here’s how I wanted to end it:

Eric Sprott owns at least 20 % of the company, and I think that he may own at least 30 % of the company. I believe that his ownership interest effectively puts a floor under the stock price.

socr
socr
March 21, 2020 6:37 am
Reply to  JayBee1

Dont see any reason for this stock to be more than bookvalue of 0.06/sh,unless something huge is going to occur,compared to other gold stocks way overvalued, the fact that Sprott has a nice stake in it doesn’t mean it can’t come down,I saw many goldstocks plunging while he had a substantial stake ,by the way if he wants out this could trigger a huge plunge.
It went already once down to 1 cent as you say, so expect a huge correction from current share price if things remain the same as it is now

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socr
socr
March 21, 2020 6:23 am

Almost every gold mining stock is been performing poorly in comparison with the gold price. NG for me not worth more than $1/sh unless gold breaks out substantialy towards $2000/ounce most of these companies wont deliver nice gains for investors ,in general overpaid management is the main cause.

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socr
socr
March 21, 2020 6:48 am

100 billion potential value of gold in the ground? What if it costs as much to build the mine and get the gold out above ground? Result is no value for investors. I would speculative pay not more than, $1/share because there are always stupid believers who will pay much more attracted by pump and dumpers who make easy money on the fees without risking losing money by investing.

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ELI HoSAM
Member
ELI HoSAM
April 7, 2022 1:17 pm

THANKS FOR ALL THAT YOU DO – LOVE THE TRACKING CHARTS

Lonsplace
Irregular
Lonsplace
April 11, 2022 4:26 pm

All I ever need to see, is that a promotion has been running for years, essentially unchanged. It’s like the guys on the street corners saying, “The world ends tomorrow!” Eventually, some guy on the corner will be right, but planning the rest of your life on that proclamation is not a great idea.

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facgatir
facgatir
February 1, 2023 2:09 pm

Did I miss something? I don’t see the chart with Royal Gold in it.

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