Here’s the headline of an ad that a few folks have been asking about recently…
“The man who made $4 BILLION shorting the housing market in 2008 goes all in on…
“THE BIG LONG
“This same legend just made an even bigger bet on the crash of 2020… only it’s NOT a short trade.
“Instead, he’s betting the house on a virtually unknown gold miner.
“And my research shows it’s poised for a historic 10,000% surge… in the wake of a new gold bull market and coronavirus economic fallout.”
The pitch is from Nick Hodge, in ads for his Wall Street Underground Profits ($99/yr), and it’s an aggressive spiel about how his secret billionaire buddy, John Paulson, is piling into a gold miner:
“… he’s going all-in on a tiny gold miner that evidence shows could surge 10,000% as this mine gets permitted and comes online.
“And it doesn’t matter what the Dow does, or how long the coronavirus lasts and the fallout lingers.
“It doesn’t even matter the price of gold.
“Because this company is sitting on what I think will be the world’s biggest new gold mine.
“And NOBODY knows it.
“Nobody except for him, company insiders, me…
“And now you.”
This is, as many of you will already realize, yet another pitch for Midas Gold (MAX.TO, MDRPF), which Paulson & Co. has bankrolled for several years now. And this ad has been running for about six weeks, I first saw this version right before I went on vacation and included a quick note in my Friday File as I headed out the door — so for those of you who aren’t Irregulars (for shame! Didn’t your parents teach you any better?), here’s what I wrote in mid-July:
“And finally, I just have to answer one final question that a few readers have sent in — yes, the new teaser pitch from Nick Hodge titled “The man who made $4 BILLION shorting the housing market in 2008 goes all in on… THE BIG LONG” is indeed just a mildly updated tease of Midas Gold, a stock he’s been touting for at least 2-1/2 years — I covered the original version of that same ad in January of 2018. The John Paulson connection is not new, Paulson has been a major backer of this company for several years (though he did ante up more cash early in 2020).
“The latest news is that the USFS will be releasing the draft Environmental Impact Statement for public review in August, which is not a surprise (they announced earlier this year that the latest delay meant it would be released “in the third quarter,” and they still expect that environmental permitting process to be completed in 2021), but otherwise the story seems about the same as it was when I covered the stock for a pitch from Mark Skousen back in May or, a little earlier, when Hodge’s colleague Gerardo Del Real was pitching it as a “Tier 2 Gold” idea in March.
“Midas is still a reasonable prospect, as such things go, with hopes for good permitting news and a solid feasibility study as soon as the end of the year, and like all miners if will look even better with rising gold prices… but there’s still meaningful risk since it’s still pretty early days, and permitting and development/construction can always surprise. Even with pretty fortunate and steady progress and a good feasibility study, none of which is guaranteed, it’s pretty unlikely we’ll see gold produced from a mine on this site before 2024. That’s the plight of all mine builders, the big costs and unpredictable delays come a long time before the payoff, but little companies with big potential mines can be big beneficiaries of rising gold prices… and soar if a real gold mania hits the markets.”
(I’m just kidding about the shame, by the way — we love our free readers too. Just not quite as much as we love the people who send us money).
Since then, the ad continues to circulate and there have been two items of note for Midas: The draft Environmental Impact Statement was finally released for comment by the U.S. Forest Service on August 14… and then today, Paulson & Co. indicated that they will be exercising their convertible notes in Midas Gold, which the company says “simplifies the capital structure and demonstrates support for the Stibnite Gold Project.”
That conversion is bringing a paper windfall for Paulson, though they’ve indicated they’re not going to sell — the conversion prices averaged about 40 cents, and the shares are now in the C$1.70 neighborhood… and Paulson & Co. will now be a 44% shareholder (they already had board representation as critical partners). That will also dramatically increase the market cap for Midas, and give the company more flexibility to take on construction debt without worrying investors, and the increase in the market cap might by itself help to spur more interest in the shares and get them included in some indices. If the other convertible note holders also exercise their rights (they don’t have to right now, but they probably will at some point), there will be about 518 million shares outstanding, of which Paulson controls 209 million. As of this Paulson conversion, there are 475 million shares outstanding, so the market cap is now about C$820 million, which translates to about US$625 million.
How much is the mine worth? Well, they updated the prefeasibility study in 2019, this is one of the valuation tables from that document:
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You can see that from the pre-feasibility study estimates, the investment still makes sense for those who can tolerate the variable return potential — at the highest gold price they model, $1,650/oz, the net present value at a 5% discount rate is $1.4 billion… which, if achieved, would bring a more-than-100% return from the current $625 million market cap (if that sounds like Greek to you, a discount rate is just a way to account for time — since your money is sitting there idly waiting for the mine to be built and produce something, while if used elsewhere it could generate a return instead… 5% a year is the number they use to represent that opportunity cost, with the general idea being that money in five years should be worth less than money today).
Still, there are a lot of variables — yes, $1,650 an ounce is 15-20% below current prices for gold, so we might add another $500 million in value if gold stays at these prices, or far more than that if gold shoots substantially higher… but if the performance of the mine is 20% worse than expected (lower volume, or slower rampup of production, neither of which is unheard of), and the gold price falls to $1,200, then the mine might be worth as little as about $300 million using similar calculations, a drop of roughly 50% in value. Any drop worse than that might even be enough to delay the project further, since they’ll have to borrow a chunk of money and perhaps also sell some more equity to actually build the mine (which will cost roughly a billion dollars).
Gold has seen both $900 and $2000 in the past five years, so I’d hesitate to be certain about exactly what the gold price will do in the four or five years before this mine is producing (assuming permitting and construction go very well), but it’s still at least a decent setup. Lower reward than a lot of mining projects that are at similar stages of development, since this one has gotten so much attention from speculators and has that Paulson imprimatur that help to elevate the share price during good times for gold, but probably lower risk as well.
And, of course, any evaluation that’s based on numbers is making the assumption that the permitting process will go well, and that they’ll get permission to build this mine. The big argument in favor there is that they’ve got a lot of influential local people on board, and that building this mine is designed to actually help clean up the environmental devastation that was wrought by decades-ago mining at this same site. That’s fairly compelling to me, but you can never be 100% certain what will happen in a permitting process — just look at Northern Dynasty (NAK) and its Pebble Project in Alaska, which is in an environmentally sensitive area but began to be seen as a “shoo in” following the Trump election victory and some permitting progress in 2016 and 2017… but then got slowed down by regulators again, lost another partner, and is now being criticized by Donald Trump, Jr., bringing yet another setback in their decades-long fight over this project. That’s admittedly an extreme example of a permitting fight, I don’t think anyone expects a showdown like that over Midas’ Stibnite project in Idaho, but it’s important not to be too optimistic about outcomes with any permitting process.
We’ll probably know some more once the comment period is complete for the Stibnite Project, which will be in mid-October — that’s the big opportunity for local or environmentalist opponents of the project to really get some attention, so I’d guess that Midas management is crossing their fingers that the days pass quickly until then, with no surprises. Final word will be much longer in coming, though — the actual final Environmental Impact Statement and the Record of Decision that lets Midas move forward, assuming things progress nicely, won’t come until sometime next year. The latest Midas Investor Presentation continues to indicate that they see 2021 as their decision year, so they’ll probably also have to raise construction funding at some point, and maybe even raise some more equity funding (and presumably will completely a final feasibility study before that, which will give new numbers for the project), and then they still see a ~3 year project to do their site restoration (of that old mining project) and build the new mine, so 2025 or so is probably the earliest date you might foresee for gold production.
And that’s all I’ve got for you on this “Big Long” and the prospects for Midas — we’ve covered this one many times over the years, and I don’t think I’ve ever owned it personally but I’m sure a lot of readers have invested in this one… so if you’ve been following the story or have anything to add, or a different favorite little gold miner to recommend, I’m sure your fellow investors would appreciate hearing your thoughts. Just use the friendly little comment box below.
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