Optionality Plays For The Patient Precious Metals InvestorBy David Erfle contributor for Kitco News
Thursday March 24, 2016 12:18
It is my belief that the worst precious metal miner bear market in 90 years has ended. If correct, I also believe there is a wonderful opportunity in a certain few development stage companies that should be worth considerably more in the near future when Gold and Silver find floors at $1350/oz and $20/oz respectively.
Aside from strong deposits, these developers have management teams that have done an incredible job over the past decade advancing large discoveries close to the financing stage while maintaining a reasonable capital structure.
However, the 5 to 10 year price chart of these companies would lead you to believe they have no clue how to run a business. While the precious metal bull was raging from 2008 to 2011 the shares of these companies were rocketing higher while they were still in the process of proving up a deposit. Most did not even have a defined resource yet as their share prices screamed higher with the price of metals.
Now that they have done most of the hard work with a profitably defined resource and are at, or close, to being developed, the share prices are at a fraction of their former highs. I say profitable if you believe, as I do, that the gold price will make a solid $1350 floor this year. Essentially when share prices were multiples higher, the companies were intrinsically worth less. Now that the same companies are trading at rock bottom prices with large and defined resources they stand a very good chance of appreciating substantially within the next few years. That is, if they are not taken out by a major before realizing their full potential.
Here is a list of 6 optionality plays that I have accumulated since December of last year with the intention of holding until they are either bought out, or have fully matured during the next bull cycle.
Western Copper and Gold (WRN.TO)
In February 2006 Western Silver was purchased by Glamis Gold in a $1.2 billion all share transaction. $38 million cash was shifted to the new exploration company Western Copper and Gold along with the wholly-owned Casino property in the Yukon. During the bull market from 2008-2011 the share price of WRN went from $.19 to over $4 in the US before a feasibility study had even been released. Management has since moved the project to the finance stage with minimal dilution and the share price is now under $.60 US. They have $10 million cash with no debt and are waiting for the tailings waste permit that is now in panel review by the Executive Committee of the Yukon Environmental and Socio-Economic Assessment Board (“YESAB”). The $2.5 billion CAPEX project is a massive porphyry system with P+P reserves of 4.5 billion lbs copper and 8.9 million oz of gold. M+I reserves are 5.4 million lbs copper and 9 million oz gold. The company also has very good relations with the First Nation groups in the area. I spoke with CEO Paul West-Sells at the just concluded PDAC in Toronto and he assured me they have enough cash until the end of 2016 while looking to finance, or do a JV deal with a major. Western has less than 101 million fully diluted shares out with a market cap of under $50 million US as well as an NYSE MKT listing.
Exeter Resources (XRC.TO) Exeter Resource Corporation, founded in 2003, is focused on the exploration and development of the Caspiche copper gold porphyry project in the Maricunga District in Chile. Exeter’s Cerro Moro Gold-Silver Project, Don Sixto Project and all other Argentinean exploration projects were spun into Extorre Gold Mines in March 2010, and on August 22nd, 2012, Yamana Gold completed the acquisition of Extorre Gold Mines for C$414 million cash. The company’s flagship 100% owned Capiche project is a massive 37.9 Moz. AuEq sulphide M&I resource with a 1.7 Moz AuEq oxide cap. In May 2014 they published a PEA that showed three possible scaleable development options for the project with the first option that would mine the 1.7 Moz oxide cap for 10 years at a total cash cost of $589/oz. I spoke with CEO Yale Simpson at PDAC and he fully understands the optionality of his project and assured me they have enough cash to last until 2018. The company has C$21 million cash, no debt, with under 96 million shares out fully diluted and a US NYSE MKT listing. The current market cap is below $60 million US.
Vista Gold (VGZ.TO) Vista has a long track record of success since being formed in 1983. Their current flagship project is the wholly-owned Mt. Todd brownfield development project with significant existing infrastructure including paved access from the major transportation corridor, a natural gas pipeline to site for future power generation, medium-tension power lines for present power needs, a fresh water reservoir, water treatment facility, and readily available labor and technical personnel. Mt. Todd, located in Australia, boasts P&P reserves of 5.9 Moz and is the third largest consolidated Australian reserve position after Newcrest and Newmont. The company has $12.9 million cash and securities, which is enough to fund planned programs into 2018. Vista has no plans to seek financing through an equity offering under current market conditions. They have no debt with under 83 million shares out fully diluted and a US NYSE MKT listing. The current market cap is below $45 million US.
Sandspring Resources (SSP.V) Sandspring has been working on it’s Toroparu gold project in Guyana for more than 15 years while raising $115 million since it went public in 2009. The project has nearly 7 Moz M&I with an additional inferred resource of 3 Moz. and includes an airstrip, 150km of roads and a 120 person camp. Silver Wheaton committed $15M to Sandspring and will commit another $138M based on the results of an upcoming feasibility study, which should cover 30% of the finance requirement. The company has over $4 million cash with no debt. There are 118.7M shares outstanding which includes 24.3M warrants at an average price of 39c and 6.7M options at 53c. Prominent mining executive and financier Frank Giustra acquired a large stake in 2015 and has recently purchased over 4 million shares in the open market. The current market cap is under $20 million US.
Bear Creek Mining Corp. (BCM.V) Bear Creek Mining was formed in 2000 as an exploration and development company focused on Peru. The Company's Corani and Santa Ana Projects collectively host reserves and resources containing more than 450 million ounces of silver, plus by-product base metals, and provide near-term production potential and excellent leverage to silver prices. The Santa Ana project has a very storied history. The company is currently pursuing an international arbitration proceeding against the Republic of Peru under the Canada-Peru Free Trade Agreement ("TPA") before the International Centre for Settlement of Investment Disputes in Washington D.C. and the hearing is set for September of this year. Here is a link to the suit: https://icsid.worldbank.org/ICSID/FrontServlet?requestType=CasesRH&actionVal=showDoc&docId=DC5432_En&caseId=C3745 I believe Bear Creek has a very strong case and there is a chance of a settlement before the hearing at any time which could also be a near term catalyst for the share price. They have US $20 million cash and no debt. There are 93 million shares out with 7.8 million options that are all currently above the share price. (Exercise prices from Cdn.$1.41 – Cdn.$10.77) The market cap is below $90 million US.
Orezone Gold Corp (ORE.TO) In my piece last week I mentioned this company and the synopsis can be accessed here: /news/2016-03-18/Opportunity-in-West-Africa-High-Grade-Deposits-at-Low-Prices.html This company has the most risk of the six companies mentioned here, as it is located in Burkina Faso which has had a few regime changes recently. However, I do believe that the government has stabilized now with the share prices of precious metal miners in this region starting to catch up with the market. One fifth of Burkina’s GDP depends on gold mining and the nation is the 5th largest African producer. Seven gold mines have been built since 2007 with two more currently in construction, including the Karma mine being constructed by True Gold (TGM.V). Endeavour Mining made a take over bid for TGM earlier this month, which also mitigates some of the jurisdictional risk.
My recommendation is to put at least 1% of your portfolio into each one of these companies as they are trading at rock bottom prices (assuming the sector has indeed bottomed). I believe they stand a very good chance of returning at least 5-10 times your investment within 2-3 years.
David Erfle; Contributor to Kitco News