Gold hit a 7.5 year high of US$1742.60/oz on June Comex futures on April 7.
Gold has definitely been one of the best performing asset classes during the COVID-19 financial scare. With QE Infiniti now in place to replenish the world economy, I see a strong future for gold.
Gold stocks, however, have definitely not kept up. That’s why I’m scouring the “comp” sheets—comparative tables of gold stock valuations—issued by the brokerage firm analysts–looking for high potential stocks thrown out with the bathwater.
I’m looking for companies with
- advanced stage, high quality assets with low valuations
- in the Americas
- with teams that can raise money
- have a low cost path to production or to increasing production near term
I started off with a list of 106 gold exploration companies with 191 assets all around the globe, and with deposits ranging from 200,000 oz all the way up to 63 million ounces (Seabridge SEA-TSX)!
Overall, these companies trade at US$34.95/oz in the ground on a “Measured and Indicated” basis. That means it’s a real deposit.
But that overall number masks many things. For sure, I wanted to separate out gold deposits in the Americas. They almost always get a much higher valuation than anywhere else in the world (except Australia). And if all these great gold stocks have been thrown out with the bathwater, I want to look for high quality that has been unduly punished.
I also wanted to find deposits with roughly 1 million ounces. You see, I’m looking for the best leverage at the lowest risk, and here’s my thinking—if the deposit is over 2 million ounces already, the majors and intermediates have been all over it. It will be MUCH more efficiently priced. Two million ounces is the threshold that juniors want to attain to get bought out.
You can sell your company/asset if it’s less, but at 2,000,000 oz it’s close to a no-brainer if it’s in the Americas.
So out of my list of 106 junior developer/explorers, there was only 13 on the list remaining after I applied those criteria—in the Americas, around 1 M oz give or take.
For that group, the average value per M&I oz in the ground was US$112.40—a HUGE difference from the overall valuation of the 106 companies.
So for me, I want to look at the lowest valuations there, and the one that stood out for me was Prime Mining—PRYM-TSXv, with 880,000 oz in new M&I resource. It’s oxide, heap-leachable gold at surface in northwest Mexico at a project called Los Reyes—valuation of just US$25.83/oz .
So I went and did a deeper dive at Prime—because it’s only 22% of the regular valuation. There’s also a quarter million ounces of inferred resource, taking the deposit to over 1.1 million ounces.
But even not counting that upside, Prime’s stock could go up almost 400%–putting it at $1.60 vs the current 46 cents—and just be at the AVERAGE valuation in that select peer group. If it wasn’t for COVID-19, I expect it would be a lot closer to that valuation.
The good news, Prime is a fresh story, just listed last fall. The Market doesn’t know much about Los Reyes and can’t yet “game” its potential. The bad news is, it’s a fresh story and investors don’t really know it.
But, Prime has a new resource calculation just out days ago. And it doesn’t hurt that CEO Andy Bowering—his last deal (Millenial Lithium-ML-TSXv) went from 15 cents to $4.
The art of investing in gold stocks is reading between the numbers—the numbers rarely tell the whole story. People count for so much.
Prime Board Chairman Dan Kunz is a mine-builder. He has built over 10 mines all over the world—Korea, Myanmar, the US, Fiji—that counts for a lot. They don’t need to hire an expensive outside mining contractor.
The other thing I really like about Prime is—it has optionality that few mine-builders do. With a simple oxide deposit, one option is to build a very cheap heap leach mine—for roughly US$30 million. The second option is build a higher end Carbon-In-Leach (CIL) plant for $70 – $100 million—that would recover a lot more gold.
How much more gold? Well, a heap leach mine has 75% recovery. If Los Reyes has 1 million ounces, that’s 750,000 oz recoverable.
A more expensive CIL plant however has 95% gold recovery—so 950,000 oz—a full 200K more! So a CIL might cost an extra $70 million, but if they can make $800/ounce profit that’s $160 million in extra potential cash flow—more than 2x the cost.
If Kunz and Bowering can find the magic 2 million ounces that the majors are looking for, it would mean 400,000 more oz of gold (+ silver!!!) based on a much higher recovery that CIL plants get over heap leach.
That optionality is great to have. Prime doesn’t need any more ounces to go into production and generate cash flow. They have said they could do a low cost heap leach mine as fast as they can get permits.
The point is…the numbers work here. It was a big survey with a lot of data, and I separated out my criteria, grinding the data down to what stocks I thought would give me the greatest upside. That means a great asset and cheap valuation in the right jurisdiction with a low-cost path to production.
End Result=Prime Mining PRYM-TSXv.
Having a good share structure and a team that has both stock market and technical success was just a bonus.
DISCLOSURE: Keith Schaefer owns shares in Prime Mining. In the past year, Prime has retained Keith Schaefer to help build investor awareness of their company.