This article was originally published on January 16 — the teaser pitch in question is still being actively sent and we’re still getting questions about it, so we re-publish it here for your information. It has not been updated or revised, the stock rose sharply in January around the time the ad started running, but has since been more or less flat.
Lots of questions rolling in this morning on the gold front… which probably shouldn’t be surprising, since gold has had a nice little run lately (up about 7% in the past month or so), and a rising gold price tends to get gold mining speculators a little hot and bothered, a state of affairs that is not missed by the promoters of mining-related newsletters.
Nothing sells a newsletter like profit lust, and it’s an even easier sell if you can manufacture the feeling that you’re getting in on something secret and special, just for you… which leads us to the latest pitch from Nick Hodge for his Wall Street’s Underground Profits newsletter (a relatively inexpensive letter, $99/yr). Here’s how the ad gets our juices flowing:
“Why NOBODY Knows About America’s Biggest Gold Discovery
“In this presentation, you’ll discover…
“The American deposit with 20 million ounces of gold — and why few have ever heard of it
“When news of this major discovery will be released to the public
“The tiny 50-cent-per-share miner with complete ownership of the mine… and how to buy in now for life-altering returns”
What more could one person want, right? Apparently it’s a stock Nick Hodge has been following for a while… more from the ad:
“I’ve spent the last five years studying this deposit and the tiny company that owns it….Are you getting our free Daily Update
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“Officially, there are 6 million ounces of gold there now.
“Which alone makes it one of the biggest in America. But that’s just one part of the equation.
“This gold is…
“Cheaper to mine than almost any other in America
“One of the highest-grade forms of gold
“And incredibly easy to extract, with minimal environmental impact
“Plus, as you’ll see in a moment, approval for permitting is now virtually guaranteed.”
OK, so that’s a nice little crop of clues. Do we learn anything more about the stock from this ad? He does go on and on for a while… Hodge tells us the he has personally explored all 1,500 acres of the property, which is Idaho, that there’s “over three times more gold here” than the official reports say, meaning as much as 20 million ounces… and that this “tiny, virtually unknown miner has complete ownership” and trades for about 50 cents a share.
And, for one more clue — almost superfluous at this point, though we’ll toss it on the pile — we learn about one of the major backers of this mine:
“… billionaires are betting the house on this play!
“Like John Paulson….
“I’ve personally uncovered the billionaire legend’s NEXT big bet…
“A bet unknown to the financial media.”
There’s more to the hinting, as Hodge lays it on pretty thick — he says that the permitting process will be smooth and easy because the miner says it can actually improve the environmental disaster left behind by previous miners on this same site… and that the mine also can produce a “critical strategic metal” called antimony.
So that’s about all the hinting we can stand, and the answer is quite clear — the Thinkolator doesn’t even need to shift into second gear to let us know that Hodge is (again) teasing Midas Gold (MAX.TO in Canada, MDRPF OTC in the US) and its Stibnite Gold Project in Idaho.
Which is, indeed, a pretty large past-producing gold mine (several mines, actually), with a nice resource base of 4.6 million ounces in probable reserves across three locations… and they do indicate in their latest investor presentation that they think they have potential upside to increase those reserves meaningfully as they upgrade historical resources and do more drilling to extend the defined ore body.
And yes, it is an unusually high grade open pit mine… and even at five million ounces, it would be pretty big. And it includes meaningful antimony resources, which apparently are in demand largely because antimony is a key fire retardant.
And they do have some pretty good financing in place from Paulson & Co., though he was the backer of the financing and didn’t actually take all the shares into his funds. That C$55 million financing, from early 2016, is said to be at least sufficient to get them through the regulatory process and the feasibility study…. it’s also not on their income statement yet, since the financing was done largely through convertible notes that haven’t been converted yet. At the time, the exercise of all those notes was expected to create a share count of 317 million, and the actual share count is still reported at 186 million (that makes a pretty big difference to the market cap, as you might imagine — fully diluted and converted, the market cap would be about C$265 million at the moment, with the shares at 84 cents).
So… that’s what the company is trading at today — what’s it worth? Is it worth 10,000% more than that? That’s apparently what Hodge is pitching… here’s some more from the order form:
“Yes, I Want To Earn 10,000% Gains On America’s Biggest Gold Mine! ….
“Once details of this historic gold discovery go public… this 50-cent miner will begin a breathtaking ride.
“The kind not seen since Diamond Fields surged for 200,000% gains on its nickel discovery.
“And you have the unprecedented opportunity to buy in ahead of the crowd.
“Remember, I’m only privy to this mine’s real wealth because of my insider contacts…
“My boots-on-the-ground visit to the mining site in Idaho…
“And my personal conversation with billionaire John Paulson — the company’s single biggest investor….
“When this mine’s true reserves become public knowledge, the major gold giants will begin the bidding war of a lifetime…
“Driving shares up to $5… $15… past $30.”
Is that likely? I have no idea… it probably depends as much on the price of gold as anything else, but here’s what we do know from the company’s disclosures and filings so far, at what is still a relatively early stage in their planned development…
They expect permitting to be done within a year or two, with the biggest upcoming events being the draft environmental impact statement that’s going to be released for comment by the lead permitting agency in the next nine months or so, and the major decisions made roughly a year later, by the third quarter of 2019. They are concurrently working on the feasibility study, which would be used to get financing for building the mine and is likely to be complete sometime in the next six months or so. So there are things happening, and there has also been substantial additional drilling and exploration done which could change the economics of the mine when it is analyzed and include in that next feasibility study, but I don’t see any critical news anticipated in the next few months — this coming Summer and Fall should be pretty news-heavy for Midas.
They do have a prefeasibility study (PFS), so that’s the easiest data on which to base your assessments of the value of the project — the 2014 PFS included a NPV at a 5% discount rate of US$832 million, or about $2.60/share… which sounds pretty good compared to the $0.70 share price. So why is the stock trading at such a steep discount to that “net present value?”
I don’t really know… this is a prospective mine developer, so the possible issues are legion. The regulatory prospects are presented as very optimistic by the company, but perhaps investors are more skeptical on that front…. the net present value figure is calculated on a pretty low discount rate for a relatively risky enterprise (though that’s not unusual)… the estimates were made at a time when silver prices were much higher, so lower silver is likely to drive that down a little bit (though gold is by far the most important driver)… the economics of the mine got less attractive in the years between the preliminary economic analysis in 2012 and the prefeasibility study in 2014, and investors hate to see things moving in reverse… the site is relatively complicated and expensive to build, mostly because it’s three separate open pit mines. You name it, none of those things are obviously insurmountable problems, but you don’t have to dig very deep to find possible problems and risks in a mining company.
So we’ll know quite a bit more when the real feasibility study comes out, presumably later this year, and the expectation is that they’ll be adding some reserves to that study. Then they’ll have to get funding, a process that will be influenced by the permitting process (including any stipulations about how much of a recovery bond they have to post, given that the site is already a mess and getting that mess cleaned up eventually is a big part of the non-economic rationale for building another mine there). They’ll have to raise about a billion dollars, assuming that the PFS capital cost estimates were at all accurate, so whatever the sentiment of mining financiers is like at that time will have a lot to do with how quickly or happily the project proceeds.
They have already sold a royalty, so Franco-Nevada is on board with a 1.7% royalty stream from the Stibnite project that they bought for $15 million in 2013… which is a nice little indicator of what the project was valued at at the time, and how Franco-Nevada assessed the risk, and a reminder of how powerful a good royalty company can be.
I own Franco-Nevada shares, so I took a quick look at the math… if Stibnite is built and operates as the PFS predicts, it would generate about $7.5 million a year in cash flow to Franco-Nevada, returning their investment in year two and generating pure profit for a decade (or more) after that. The risk? Beyond the risk that the mine might not get built, of course, they risk time — they paid the cash up front in 2013 and likely won’t see any return until the early 2020s at the earliest, depending on how long it might take to build the mine and start mining… but if the project works out well or becomes far larger, as Hodge implies in his tripling of their reserve base, then that $15 million could generate 1,000% or more in return for FNV. That’s why FNV trades at 20X revenue and has outperformed pretty much every big gold miner over the past decade.
But Franco-Nevada won’t double in a week if there’s exciting news, and a junior miner might — so little guys like Midas Gold are certainly a delight for those who enjoy a little adrenaline with their investing. I don’t know how it will work out, but I can see how the large gap between the net present value of the Stibnite project and the current market valuation would make a junior mining enthusiast want to investigate further — maybe there are good reasons why the risks are high or the discount should be substantial, but plenty of junior mining stocks trade at much higher valuations than Midas relative to their prefeasibility net present value estimates.
The ads I’ve seen running this morning scream about how the shares will go “Vertical After Trump EPA Green Light,” and perhaps they will… but the verticality of the stock currently is being caused by the newsletter ad campaign, not by the EPA. The lead agency in the permitting process for this project, which is the US Forest Service, not the EPA (the USFS controls the site), is expected to be at least a year and a half away from making a decision.
So I’ll leave you to it, dear friends — as you can probably see from the current share price, the low cost of the newsletter and the relative ease with which the clues could be sifted in this case combined to put a lot of buying pressure on the stock as Hodge’s group has blanketed the e-waves with this teaser ad… that kind of surge in volume from promotional attention doesn’t tend to stick, but we can’t know for how long the ad will run or whether those speculators who jumped on the shares this morning are likely to become committed long-term shareholders. We can just caution that such surges tend to be temporary, and the market’s pre-existing assessment of the stock tends to return once the promotional barrage has faded… but the market is built on what each individual thinks about each company, so I’ll leave it to you to suss out your opinion on this one, please do let us know how you weight the scales with a comment below.
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Disclosure: As noted, I own shares of Franco-Nevada, and I own some gold and silver. I do not own any other investments noted above, and will not trade in any covered stock for at least three days, per Stock Gumshoe’s trading rules.