HELIOSTAR (HSTR – TSXv / HSTXF-OTC) AND MAKO MINING (MKO – TSXv)BOUGHT CHEAP AND SEE THEM NOW!

The stocks of junior gold producers are FINALLY waking up–and having a BIG run.

Two of the biggest are juniors who bought their mines when gold was higher–but interest in gold stocks was definitely not. So these two management teams bought their mines for SUPER CHEAP.

The lack of interest in gold until now—Has has some un-appreciated consequences.

The lack of capital has had a direct impact on reserves. Proven and probable reserves at major gold miners have been in decline for years.

Source: BMO Capital Markets

As you’d expect, that puts prospective gold mines at a premium. Gold mine developer stocks are not particularly cheap.

The BMO coverage universe average valuation of developers, based on their measured and indicated resource, is $190 per ounce. That increases to $400+ per ounce for tier-1 deposits like Artemis Gold (ARTG – TSXv).

As for producing miners, juniors are coming in at a premium.

Source: BMO Capital Markets

The price of mid-tier producer is roughly the same as a couple years ago. But small producers, which are usually single mine names, are up substantially – 38% higher than two years ago.

Investors are betting companies need reserves and will pay up to bolt a mine on.

But not always! This post is about two examples of companies that have bought producing gold mines on the cheap.

And I do mean on the cheap. In the first case, Heliostar Mining (HSTR – TSXv) purchased two mines for under $300 per producing ounce.

In the second case, Mako Mining (MKO – TSXv) bought a producing mine for under $100 per producing ounce.

Of course, these mines come with a lot of hair. But $3,000 gold buys a lot of lipstick.

Which makes these companies, which are very different in almost every other way, worth a closer look.

HELIOSTAR

BUYING WHAT OTHERS

ARE THROWING AWAY

12 months ago, Heliostar Mining was years away from production.

Today they have two producing mines and a growth profile.

Talk about transformation!

Heliostar did it the old-fashioned way. They waited for a fire sale–which they found with the demise of Argonaut Gold.

Argonaut Gold was a Mexican gold producer with a few small mines that wanted to become a mid-tier producer.

To get there, Argonaut planned to develop their large Canadian gold project called Magino, which they hoped would rocket them to mid-tier status.

But Argonaut’s timing couldn’t have been worse. They raised money for construction in the summer of 2020 and announced shovels in the ground in fall of 2020.

That was right about the time that inflation began to roar. As construction commenced, typical cost overruns escalated into massive increases.

Magino’s original cost of construction was estimated at C$510 million. That became C$800 million by December 2021, C$920M in June 2022, and C$980M by early 2023.

The upfront capex per ounce rose from $231/oz to $445/oz!

Argonaut was in over their head. The needed a buyer to bail them out, which they found in Alamos Gold (AGI – TSX) in March 2024.

Alamos was motivated by the strategic fit of Magino and their Island Gold mine. These mines are virtually side by side.

A Magino-Island Gold complex meant that capex could be spread over far more ounces–which is what Alamos has done, with a lot of success.

Source: Alamos Investor Presentation

But Alamos had no interest in the other Argonaut assets – their Mexico mines. Those assets were spun-off into a place-holder company to get them sold.

To make a long-story short, that gave Heliostar the opportunity to pick up those assets for almost nothing.

For just US$8M Heliostar bought two producing mines – La Colorada and San Augustin.

Now these aren’t top-tier assets. Both mines are old. Both are high-cost. They are effectively not profitable at $2,000 gold. And they are in Mexico, which has not ALWAYS been mine friendly.

But these mines can produce gold. And at $3,000 gold, that can be a profitable venture. This year Heliostar is expecting the mines to together produce 30-40Koz of gold.

Source: Heliostar Investor Presentation

The costs of production remain high. The midpoint of guidance is that all-in sustaining costs (ASIC) will be $2,025/oz.

At $3,000 gold, it is mine level FCF of close to $1,000 per ounce.

With that base Heliostar is hoping to grow. Before buying La Colorada and San Agustin they made another attractive acquisition (again from Argonaut Gold) when they bought the Ana Paula project.

Ana Paula is halfway between Mexico City and Acapulco in the highly prolific Guerrero Gold Belt. With permits in place, CEO Charles Funk wants Ana Paula in production in three years—Way faster than the industry could build & permit a mine in Canada or the USA.

Ana Paula has 710Koz of measured and indicated resource and another 447Koz of inferred.

Source: Heliostar Investor Presentation

Heliostar bought Ana Paula paid $10M upfront with another $20M due based on milestones associated with getting the deposit into production. Then in a later deal, Funk got the $20 million CANCELLED. Cha cha cha!

That works out to about $14.09 per M&I ounce, which is not at all expensive based on the going rate of developers.

While we’re still a few years away from production, Ana Paula will be a high-grade underground mine capable of producing 100Koz per year – presumably at much lower costs.

If all goes according to plan, you are looking at a 300,000 ounce producer by 2030.

Source: Heliostar Investor Presentation

Put it together and Heliostar is building itself into a junior miner with mid-tier potential in just a few years – oddly enough what Argonaut was trying to be.

MAKO MINING – STARTING TO GET RESPECT

While Heliostar is making its mark by buying a mine no one wanted, Mako Mining (MKO – TSX) took it a step further and bought a mine straight out of bankruptcy.

Mako makes for a great story because this company is just so different. Until a few months ago Mako was a poster child for a junior miner that can’t get no respect.

This isn’t because Mako doesn’t deserve it. They have been a consistent producer since starting up their San Albino mine in 2021.

Source: Mako Mining Annual Reports

Nevertheless, the Street views Mako with a skeptical eye because San Albino is anything but a typical operation.

San Albino is an open pit mine in Nicaragua. Mako uses big trucks and earthmovers to plow away waste rock and scoop up ore.

Open-pit mines are almost always low-grade deposits with large swaths of disseminated gold. The economics comes from the gold being everywhere.

With every scoop of rock, you get at least some gold.

The most important ratio for an open pit mine is the strip ratio. This is the ratio of waste rock to ore. A typical open pit mine has a strip ratio of 1:1 (for every scoop of ore, you get a scoop of waste).

The punchline? At San Albino the strip ratio is 22:1!

Why? San Albino is a vein system. The gold isn’t everywhere. It is only in narrow veins (in red below) that traverse across the deposit.

Source: Mako Mining Press Release

Yet San Albino is economic because those veins are such high grade. Think of it like this: if you have 2 meters of 30 g/t gold or 30 meters of 2 g/t it is the same amount of gold.

But trying to mine this type of deposit as an open pit is unusual. The Street is reluctant (not without reason) to assume something unusual is going to work (especially in mining!).

As a result, San Albino has been producing gold for 4 years with little fan fare and only a slow change in perception from the Street.

But like Heliostar, Mako may start to get more respect in the coming months, not only because of mounting proof they can mine San Albino, but because they are no longer just a one-mine show.

In December, Mako announced that it had, through the Chapter 15 Bankruptcy process, acquired the Moss Mine in Arizona.

Elevation Gold Mining Corp was the previous owner of Moss. They entered bankruptcy in July.

The final acquisition price for Moss is $6.49 million. From that you can subtract $4.5 million in cash and bullion that Mako gets to keep.

That makes the effective price just $2 million.

Since being reopened 5 years ago, the Moss mine has produced between 28Koz and 42Koz per year.

Source: Mako Mining Press Release

Which gives you that price tag of well under $100 per ounce!

Moss is is a low-grade (0.4-0.5 g/t) open pit heap leach mine. You dig up rock, crush it into pebbles, put it on the leach pad and wait for the gold to leach out.

Moss is not a low-cost mine. There is a reason that Elevation Gold went bankrupt.

Cash costs in the last year of production were $1,500/oz. AISC was over $2,000/oz.

Source: Elevation Gold Investor Presentation

But again, just like Heliostar, there’s a lot more margin there at $3,000 gold. If Mako can even just keep costs at $2,150, that is $850 per ounce of margin.

Mako’s added advantage is that Moss is tacked on to an already stable San Albino operation. If San Albino keeps trucking along, adding a successful operation at Moss will be put Mako another step toward mid-tier status. And maybe getting some respect.

POTENTIALLY A BIG REWARD

BUT NOT WITHOUT RISKS

Both these companies make for great stories. If the cards fall right, they could be very profitable companies, and the stocks could be great Investments—If the gold price holds up.

But they are not without risk. I can think of a few issues that could put the brakes on these stocks.

Issue #1 is ore. All mines need to find more economic ore. That applies double here.

For Heliostar, La Colorada and San Augustin both have limited reserves. San Augustin only has 165koz of oxide indicated resource, of which only 67koz is considered probable reserve.

La Colorada has more (368koz of probable reserves), but any expansion will require more discoveries.

The reserve issue is compounded by permitting requirements to get those reserves into production. San Augustin is waiting on permits to begin mining portions of the deposit. Mexico hasn’t been an easy place to get permits the last few years.

Heliostar has regional exploration programs underway at San Augustin and La Colorada, with targets defined at the latter. They announced drill results at La Colorada just last week that looked promising. There is another drill program underway at Ana Paula.

Funk took a gamble that Heliostar could find more gold. Last summer he told me that he saw big exploration upside and believes they can increase the mine-life at both assets by 5-10 years.

If that happens, these mines will go down as one of the great gold heists of all-time.

At Moss, the last technical report was in 2021. It put reserves at 184,000 ounces and a M&I resource of 490,000 ounces at that time.  Mako needs to find more ore.

The expansion potential may come from satellite puts. The Reynolds pit, which is only 1 km from the crusher, has had drilling and positive results.

Source: Elevation Gold Investor Presentation

In the months before bankruptcy, Elevation completed 33 drill holes into Reynolds. These returned long, low-grade intercepts. Encouragingly, the grade exceeded the current reserve grade by some margin.

Issue #2 is age and cost structure.

A generalization based on my 20+ years of watching mining stocks: things just go wrong at mines that are old and have high costs.

I don’t know why. Maybe they are pushed too hard. Maybe the flaws show themselves with age. All I know is that its true and you’d be surprised how fast $2,000 AISC can become $2,500 or $3,000.

Issue #3: let’s not kid ourselves, this is mainly about the gold price. These are mines that work at this point in the cycle.

If the price of gold corrects significantly, these mines are going to become much less profitable. Maybe even unprofitable.

But if gold prices stay high, it can cover up a lot of issues and these companies can generate a lot of cash.

Heliostar has a market cap of $320M. If they can hit their midpoint of guidance this year – 35Koz at an AISC of $2,025/oz, and gold stays $3,000+, they should generate free cash flow of over $30M. Not bad.

Mako has a market cap of $330M. San Albino generated $24M of free cash flow last year on lower gold prices. If Moss can get back to 30,000 ounces at its past cost structure, it could contribute another $25M at$3,000 gold.

Heliostar has the better positioned balance sheet with no debt and a cushion of C$38M of cash. Mako has a $6.4M loan with their biggest shareholder Wexford and has $12.1M of cash. Mako also has the profitable San Albino to help fund its start-up costs at Moss.

The upside is there. IT is risk and reward. Just like always. It is up to each of us to weigh it.

But for these businesses, they have helped themselves greatly from their starting point – by buying something really cheap on the cusp of a big price move in their commodity.

Disclaimer: I am long Heliostar, and 2 years ago I was paid to write a story on them.