June 6, 2012
Adrian Day recommends Cartier
Issue No. 496, 4 pages 2
In this letter, we conclude the brief overviews of our holdings—answering the question,
“Why do we hold this?”—with a look at our junior gold stocks. Given what has
happened to the markets in the month since we started this review, there will be more buy
recommendations in this list than in our earlier ones, a reflection on prevailing prices.
Having completed this overview of all our holdings, next we’ll look more in-depth at
some with particular developments or near-term catalysts.
MANY JUNIORS UNDERVALUED TO ASSETS, BUT FINANCING A RISK
Several of our junior gold stocks have bounced off their recent lows, but remain very
inexpensive, and undervalued relative to their assets. The main risk for most, however, is
the need—sooner or later—to raise more money to continue their work.
(VGZ, NY, 3.09) is very inexpensive on resources in the ground (less than
$30 per proven and probable ounce, versus well over $200 for most similar companies).
The challenge is how to unlock the value, and raise the large amounts of cash necessary
to push projects forward in the absence of property deals. The Midas transaction was an
excellent example of unlocking value. Though the shares have slipped significantly this
year, Vista’s shares in Midas are still worth around $110 million. With $15 million in
cash, that means Vista’s projects are valued at only $90 million. Its Mount Todd,
Australia project alone is worth a multiple of that; an updated feasibility is expected by
the end of summer.
When I drafted this note a couple of weeks back, to be included with our senior gold and
silver stocks, Vista was trading at $2.61, which I then described as “ludicrously
inexpensive”. After a near-20% jump, it’s just plain inexpensive! We are a buyer here,
but would look for pullbacks (to $2.90 or less) to
The prospector generator model minimizes risk
(VGQ, Toronto, 8.85) is a long-term favorite. If you have been a
subscriber any period of time, you know why we like it. It is a prospect generator, though
with its growth and balance sheet ($42 million), Virginia is more willing
pursue more projects for longer itself, before bringing in partners. There are 19
exploration programs this summer (most continuations of successful winter programs just
concluded); three of these are with partners, though many of the others are early stage,
and we do expect some more to be partnered over time. Virginia also owns a base-metals
project, Coulon, where there was an additional discovery just announced; the project
continues to grow to a size where it would be economic and then possibly sold.
Cash flow ahead
But most of the current value—and what provides both the near-term certainty and
downside protection—is its royalty on the Eleonore discovery it sold to Goldcorp, and
which is advancing towards late-2014 start up. We have reviewed this royalty before
(see, for example, #446, plus subsequent). As the start-up dates gets nearer, the present
value of the royalty increases; now, at today’s gold price, the royalty alone is worth more
than the entire market cap of the company. With near-term cash flow and a large cash
balance, it is appropriate to call Virginia one of the lowest-risk companies on our list.
The biggest risk would be a deeper-than-expected decline in the gold price, reducing the
value of the royalty and increasing the difficulty in finding partners. Virginia remains a
buy at today’s level. It is somewhat thinly traded and can be volatile—trading down to
$8.50 the week before last—so there is no need to chase it. But if you do not own it, you
should buy it.
(MD, Toronto, 1.28) is a dynamic and disciplined prospect
generator, also in Quebec, which I have called “the next Virginia”. It has multiple joint
ventures, mostly in gold but including base metals and rare earths, and with well-funded
companies. There are currently six high-profile active joint ventures, with encouraging
news on most of its projects, including a new gold discovery on a property joint-ventured
to Aurizon. Behind that, is a large property pipeline—Midland continues to add
properties—and we expect additional joint ventures in coming months. Its disciplined
approach gives it $4.5 million in cash and just 26 million shares outstanding. The risk, as
with all exploration companies, is the difficulty of finding something of economic value.
After a stock price decline from a peak of $1.80 in mid-March, Midland is a buy once
Exploring the Americas
(AAU, NY, 2.04) is another prospect generator, focused on Mexico
and British Columbia, mostly gold and copper. It has top management, a strong balance
sheet (over $20 million in cash, plus $2.5 million in bullion), and multiple projects and
partners (over 40 projects, 21 of which are in some kind of deal, including properties sold
on which Almaden holds a royalty). Two key projects, which could be catalysts for the
company, are a gold property (Caballo Blanco) advancing towards production (on which
Almaden holds a royalty), and the 100%-owned Ixtaca, a silver-gold property, which
continues to grow. The main risks are that many of its partners are small and not
necessarily well financed so a prolonged downturn might see some partners struggle.
Almaden is a long-term buy here, at an attractive price, with almost half the market cap
accounted for by cash, gold bullion, and shares in other companies).
(MAD, Toronto, 0.32) is another prospect generator, centered on Nevada
but with an active program in Colombia and a project in Alaska, in all 16 projects (13 in
Nevada) of which nine are under active joint venture. Drilling on three properties has
just finished, with results to be released, while drilling is currently underway, or about to
start, on two others. We expect to see more activity in target-rich Colombia increase in
coming months. So there is plenty of news potential in coming months.
Why prospect generators?
Miranda is a classic prospect-generator company: a broad portfolio, with several jointventure
partners (both senior and junior companies), an ever-increasing property
portfolio, plus strong management (including top geological team), and a strong balance
sheet (over $6 million in cash, and low burn rate). Miranda is as well positioned as any,
yet exploration is always long-odds, and Miranda needs a success. The risk is that it
needs another financing before any kind of success to move the stock price higher. But
for patient investors, Miranda, with a market cap of only $17 million, is a buy.
At a conference in Toronto last month, Miranda held a session with Rick Rule,
Brent Cook, Paul van Eeden and myself, wherein we discussed investing in junior
and exploration gold stocks. It was an excellent introduction to the subject, with
four veterans approaching it from somewhat different angles—Brent the
geologist, Rick the financier—with many important insights and advice. Miranda
CEO Ken Cunningham concluded by tying the independent advice into Miranda,
its approach and activities. The
focuses on Miranda, while the
(48 minutes) includes all the commentaries from the four experts and,
particularly for beginners to the sector, is well worth the time.
A somewhat different approach
(ECR, Toronto, 0.23-0.25), though seeking partners on many of its
projects, has taken a different approach, undertaking more work on some properties to
build value and seeking more favorable partnership deals. This has not always been
successful and has been expensive, leading Cartier back to the trough several times. In
March, Cartier itself optioned two properties (Fenton and Benoist), and intends putting
most of its exploration budget into these properties, both previously worked with
encouraging results. At the same time, it will move more rapidly to joint venture its other
So, more of the company’s outlook now depends on a single project than in the past. We
are holding because this project looks attractive (and the deal terms were attractive), and
it has a meaningful portfolio of other encouraging projects (10 in all), energetic
management, and sufficient cash for now. (Like others on this list, Cartier has a very
valuable website, under its name.) The risks are that the new properties disappoint, as
well as the possibility of further financings. With a market cap under $10 million, Cartier
offers cheap options on exploration success. It can be thinly traded so use limits.
Very cheap, but…
(SGC, Toronto, 0.31-0.33) has advanced copper-gold projects in Eritrea.
We are holding because the sock is very undervalued on these properties. A feasibility on
its Debarwa deposit released mid-May was very attractive: IRR of 41% and payback in
little over a year (based on very conservative metal price assumptions). Though Debarwa
is part of its larger Asmara project, the company may decide to start Debarwa as a small
stand-alone project, to generate near-term cash flow; a decision will be made next year.
The value of this deposit alone is nearly twice the company’s market cap. Though the
company has nearly $5 million in cash, it has been spending at a high rate, so another
financing will be needed at some point.
The major risk, of course, is the reason the stock is cheap: Eritrea (both the reality and
perception). Moreover, despite the value of this large and attractive project, no buyers
have stepped forward. We are holding; high-risk investors can buy at these low prices.
Generating prospects in the Balkans and North Africa
(RMC, Toronto, 0.55-0.58) was spun off from Reservoir Capital,
with a base of projects in Serbia and elsewhere in Southeast Europe. With eight current
properties, and an active joint venture with Freeport among others, Reservoir intends to
follow the joint venture model. It is looking for other early stage properties to acquire,
mainly across west Africa—it already added projects in Cameroon—which it would joint
venture after initial work. It is well financed with well-respected management and board.
With diversity in geography, minerals, and project stage, it is spreading its risk.
The main risk, as with all junior explorers, is the need for more financing (by the end of
next year) before any particular success. With a treasury of $8.5 million of which about
half will be spent this year, Reservoir is in good position. At the current price, the market
cap is $15 million, making Reservoir inexpensive and a good bet on long-term success.
Although the stock traded as low as 35 cents at the end of April, the current price is still
attractive for long-term investors.
Disclosure: Clients of Adrian Day Asset Management hold significant positions in all the
above companies, including 5% positions in Virginia, Midland, Miranda, Cartier, and
Reservoir. We may buy or sell at any time depending on individual client circumstances.
remains open. Let’s maintain the limit for now.
GO AWAY AMERICAN, WE DON’T WANT YOU
That’s what many foreign banks
as well as money managers and hedge funds are saying. And it’s due to the impending
implementation of what’s called the Foreign Account Tax Compliance Act (FATCA),
which essentially requires non-U.S. financial institutions to implement U.S. rules,
requiring complete revamps of accounting systems and loss of privacy for clients. This
follows years of increasing harassment of foreign banks. Now, more and more, are
saying, like Su Shan Tan, head of private banking at Singapore’s DBS, “I don’t open U.S.
accounts, period”. While condemning the rules as “Draconian”. On a recent trip to
Singapore I was unable to find a single bank that would act as custodian to U.S. accounts.
Adrian Day’s Global Analyst
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Annapolis, MD 21401. (410) 224-8885. Publisher: Adrian Day. Owner: Investment Consultants International, Ltd. Staff may have
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