first majestic silver

A Peek at Smaller Golds

July 30, 1999

I'd like to offer a unique perspective (most remaining gold stock investors are focused only on big hedgers like Barrick Gold) on picking rewarding gold stocks for the next gold bull cycle.

My focus is based on the fact that worldwide gold exploration has dried up. In reality there now is a limited number of exploration projects that will work at $250 gold. At $300 gold more projects start to appear on the radar screen, but again there really aren't that many. The traditional project pipeline is severely contracting for the majors who must replace their reserves to survive. Therefore my approach is to seek "enterprise value" among companies that have legitimate advanced stage exploration projects. I disagree with the notion that this new gold will never be mined for the simple reason that I'm betting POG will go higher (perhaps much higher). The leverage in these companies to POG is HUGE! Further since most companies are not really making money mining unhedged $250 gold anyway, current production is not necessarily the key selection determinate. Indeed the market is still paying $100-200/oz for production, but only $1-5/oz for reserves. That spread is too wide. The best value is to buy reserves.

These companies are languishing for the following reasons. Most are hunkering now, new exploration drilling is limited given that it costs $10 to $20 (if the program is even successful) to find a new ounce of reserve and the stock market (as opposed to the private market, Argentina Gold was bought for $40/oz) then attaches an enterprise value of only $1 to $5 to that ounce. Traditionally exploration companies have traded around the excitement of drill programs. That play has not worked in this bear market, and investors have dumped even the successful explorers. To make matters worse the massive Bre-X scam has caused a whole generation of resource investors to swear off the sector. They appear to be moving on to another mania (the Internut) which will make Bre-X look like 'Sunday School Picnic' when it collapses completely (some '.com' companies are already down 50%).

What does my "enterprise value" approach entail?

  1. Find companies with advanced stage projects of at least one million oz. in countries with moderate risk. Moderate risk is debatable (Is it really less risky do deal with a regulator in Nevada versus Chile?) but arguably the following elephant hunt countries should qualify: Tanzania, Ghana, Burkana Faso, Mali in Africa and most of Latin America is acceptable, although Guinea Shield country is tough.
  2. Find companies that are geology driven, not promoter driven. Examine all statements issued in the past for hype level. Talk to the companies. I think you will find the people at most are very humbled and discouraged. I believe most of the scam artists have moved on to greener pastures. Integrity levels as of necessity is fairly high at surviving mining concerns in my opinion.
  3. Ideally, the candidates should have good liquidity and cash on hand, with most of their exploration behind them. We don't want much money being burned exploring right now. In fact there are a number of net-net (stock capitalization less than working capital) or near net-net plays out there.
  4. Look for strong ties to the majors (as shareholders or joint ventures). Look for area plays where the majors have already committed themselves and might be likely to cherry pick. Analyze the deals (favorable or unfavorable?) that they make. Do they give away the store in their private placements and Joint-venture partnerships?
  5. It's OK to buy one project companies, but diversify, don't put all your eggs in one basket.

Here are some candidates for what I call free calls on gold. I think they are all 25 baggers in the right climate. For more details go to company websites. I would invite any comments from the forum on these or others that fit my rough criteria. All ideas are given in the spirit that big boys and girls are reading, not widows and orphans: Pangea (PGD-Toronto): 20.6 m shares out at 1.75 Canadian (CDN)= $24 US market cap. $9 m cash US = net market cap of $15 million. Placer Dome (PGD) is loaded with prime properties (Tanzania, Peru) - it has made reasonable deals with majors (ASL, ANGLY, ABX) on Joint Ventures who are spending $11 million (PGD only $3 million) in 1999 defining various projects. Results have been very promising especially at Tulawaka.

St. Jude (SJD.V): 14.7 out at 65 cents CDN or 6.5 m US mkt cap. Has 8.5 mil cash. You get 2 mil cash for free and project in Ghana that is closing in on a million oz resource. Impressive drill results in spring but again no audience.

Birim (BGI.T): 21.3 out at 20 cents CDN or 2.9 m US mkt cap. Little low on cash (300K). But for 2.6 net, net you get two advanced stage projects at Mampon (owns 90%), high grade, near surface ore closing in on 1 million plus and Akrokeri being drilled by Dominion (which can buy for $2 million). Sleeper concession at Bui (with Newmont) that BGI will need to spend another million on to keep. Likely target for Ashanti and lots of potential at give away prices.

Nevsun (NSU.T): 24.5 out at 38 cents CDN or 6.2m us market cap. Has cash on hand of 3.7 mil so net net 2.5 mil buys you 1.4 m oz advanced stage at Tabakoto, Mali and another at Kubi, Ghana next door to ASL's big Obuasi mine. ASL has bought the surface rights to Kubi and NSU is entitled to a royalty of $15 an oz.(plus 20% of the uplift if gold goes over $325). NSU retained underground rights. Also has a valuable concession along the shear zone next to ANGLY's big Sadiola mine in Mali. 2.5 mil net mkt cap is basically a free call on gold.

Greystar (GSL.T) 47.5 out at 75 cents CDN or 24 mil US market cap. Plenty of cash on hand (7 mil)= net net of 17 mil. Kinross (Aust.) own 21% of stock. Has a late stage monster project called Angostura in Columbia. that in the final analysis seems open ended on reserves and resources: 7.4 m officially as of May, but GSL has reported some extraordinary results this month including a 400 meter interval of 1.7 g/t and 220m of 1.44g/t. Again no audience as stock hasn't budged. Political risk in Columbia is perceived as high right now (similar to Peru in the early 90's). The Government is conducting a big offensive (with 30 US supplied attack helicopters) against FARC guerillas. If this mine is as big as the results seem to indicate (20 million?), someone (Normandy/TVX, Kinross?) will provide the security to produce gold.

Golden Reserve (GLDR-Nasdaq) 22.7 out at 90 c US or 20.5 market cap. has 18 m cash on hand, so their 5.6 million oz gold (and also 659 million pounds of copper) Brisas project in Venezuela is almost free. Located next to PDG's La Cristinas project (now delayed) it doesn't take a rocket scientist's to see the long term outcome in a more favorable climate. Another free call on gold.

The list goes on ad nauseam: Arizona Star (AZS.V) 18 mil market cap with 5 mil cash for 33% owned Aldebaran (Chile) with PDG JV (consistent with worldwide mining trends is now probably on hold for development). $ 13 million net buys 7.2 mil oz gold resource and 1.8 billion lbs of copper. Bema (BGO): major shareholder of AZS, also 50% Refugio (producing), Lo Incredible (Venezuela). 12 mil oz of reserves and resources. Golden Star (GSR), Rio Narcea (RNG.T), TVX (at this price is actually a small cap which is kind of absurd), Randgold & Exploration (RANGY).

Speculative 100 bagger pick: Battlefield (BFM.V): @ 5 cents CDN, $1 million US market cap, running out of cash. Needs a new partner with cash, which will dilute the shares, but payoff potential is still huge. Owns Pickstone gold mine Zimbabwe (shut down) and various small reserves and concessions (yawn). But big play is ownership of option until 2003 (tick, tick, tick) of prime mineral rights to 13,500 hectares (20km reef basin margin in South Africa's Witwaterstrand located between Avgold's 90 million ounce Target/Sun and Oribi projects). If the gold climate improves this will come back on the radar screen in a hurry and be worth a heck of a lot more than $1 million.

Among the bigger name's Ashanti (ASL) is moving behind the scenes to line up some of the best projects in Africa . Not a 25 bagger because of large capitalization (700 million) but certainly a triple.

China has only 2% of its Total Foreign Reserves in gold.
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