First Nordic Metals (FNM): Underlying Base Case Value

This article will be focused on First Nordic Metals from a Margin of Safety perspective and why I think it is one of the most asymmetrical Alpha/Beta plays I know of in the junior gold space. Consider me biased since I am betting big on this junior and do your own due diligence. This is not investing advice.

Setting The Scene

My favorite cases tends to be the “Hybrids” who got both Alpha and Beta potential. First of all Risk tends to dictate my position size. If I see low risk (of overpaying) it simply means I think there is a low risk that I will end up owning a stock that has not gone up in price sooner or later. For early stage explorers the Risk is high simply because they tend not to have anything tangible yet that makes the Price I pay look cheap by default. And typically the chance of making a discovery, that will make today’s price look very cheap, is typically very low. If I can find something where I think the question is when/not if I will see a profit (Margin of Safety), together with material upside potential (like a pure explorer), I can sometimes take quite large positions. To me those bets are simply so asymmetrical that I think it makes sense to bet bigger.

Basically if I would categorize the plays:

• Pure Alpha: IF story; Low chance of very high returns
• Pure Beta: WHEN story; Good chance of making a good return
• Alpha/Beta: WHEN & IF story; Good chance of making a good return and “free” optionality of making a very good return

Most Beta plays are probably “Trading Sardines” since they have tangible value on paper (at least a resource but maybe also an economic study) yet are too marginal, remote or have other issues that will most likely mean they will never be built or acquired. Despite this they can trade in a range of lets say $15 to $80 per ounce in the ground depending on where we are in the sentiment cycle. Given that most are trading sardines that probably can’t increase value that much (mature projects) it means one has to involve some market timing because they will simply trade up AND down over time while also diluting. Well known, advanced, high quality projects tend to not be that cheap because they are deemed to be the least risky and the Market backs up these assumptions. And if they are mature, with limited growth potential beyond what is proven, it is quite rare that you will find a “super bargain”.

• High Quality Margin of Safety is rare
• High Quality Margin of Safety that is also cheap is even rarer

Why I like First Nordic so much right now and why I think it is cheap is due to several reasons. Firstly the Barsele project has sat almost dormant within Barsele Minerals for the last several years, due to Agnico focusing on the current regions, as well as Barsele looking a bit small for the (nowadays) $45 B behemoth. Then we of course have an overall depression on TSXV with some of the cheapest sector valuations that at least I have ever seen. Furthermore the Canadian centric investor probably has no reference whatsoever when it comes to investing in juniors operating in Sweden. Lastly, and perhaps more importantly, Agnico has never put out a public economic study on the current Barsele deposit so most people have no easy/obvious way to recognize potential undervaluation…

Well, an opportunity happens to be when one recognizes something that the market does not… At least not yet (Successful investing is having everyone agree with you………..later.”) . My gut already told me that First Nordic ought to be one of the cheapest juniors out there given the resource, the quality of the partner and the enormous land package but I really wanted to bring up my conviction when it came to the Risk side of things. Or in other words I wanted to be even surer that I am buying what is already known on the cheap, and that any exploration upside around the deposit and within the 100 km of strike, would come as a free option. Thus I decided to do some crude calculations on the potential value of what is already proven via Agnico’s drilling. The idea is, again, that if I can surmise that I am buying the “bird in the hand” at a discount then the obvious exploration potential has no Valuation Risk at face value.

Before I go into some numbers lets just first consider the context of the current resource:

• Assumed a $1,300 gold price (as in Agnico only included material that should work if the gold price was $1,300/oz)
• Assumed higher operating costs than I could find for other Swedish UG mines (Like some Boliden mines and Mandalay’s Björkdal mine)
• MSO stopes and conservative dilution assumptions
• Resource is “ultra conservative” and much closer to “Reserves” – Source

You will not find many resource estimates done by a junior at $1,300 gold. Nor will they be as conservative as Agnico when it comes to costs and dilution I reckon. In other words, if one likes conservatism and quality when considering a junior’s resource estimate, I don’t think it gets much better than an Agnico drilled resource with very conservative assumptions. Contrary to a run-of-the-mill junior resource I think one can literally take this one to the proverbial bank.

So what could a theoretical Value be for the CURRENT Barsele deposit only and by extension First Nordic’s stake in it be?…

Well I go through my numbers in the video below but I can say that my Personal Base Case Value aka “Margin of Safety” that I see in First Nordic is around C$365 M and that was based on a) Just the current ($1,300) conservative resource, b) 150 Koz of annual production, c) An 8% Discount Rate, d) Slightly higher UG operating costs than than in the Ikkari PEA, and e) only Underground mining etc:

Using a $1,800 gold price, but lowering the discount rate to 5% (like most juniors use), I get an NPV of above C$1 B on a 100% basis. Using 5% and a $2,300 gold price I get around C$1.9 B:

… Meanwhile the Fully Diluted MCAP of the company is C$74 M. I think it’s a very robust project and its selling for peanuts.

The Morale of The Story

If I can use an “ultra conservative” resource estimate done by Agnico Eagle, apply pretty conservative assumptions in a mining scenario, and have the theoretical Value come out multiples higher than I can buy the company for then I think I have a great set up. If it is probably significantly undervalued just based on the “bird in the hand” then I would say it ought to be extremely undervalued given that I think Barsele could double in size and that there could be more Barsele deposits within the 100 km of strike at for example Paubäcken and Storjuktan. Throw in the tier 1 jurisdiction and Extremely Good infrastructure and I am almost running out of things to wish for.

Barsele Minerals reached a Market Cap of ~$200 M back in 2017 already, and Gold  Line reached a Market Cap of ~$70 M a few years back after the discovery hole at Aida (Paubäcken), for a combined peak of ~$270 M. Now the assets of those companies are in a single asset and I dare say that Sweden as a jurisdiction, as well as the gold price, have improved a lot since then.

… With the above in mind I like my Base Case Value Estimate of C$365 M even more. If they find no additional ounce whatsoever I think the Barsele deposit alone is at least worth that much in its current form on paper. Thus my simple bet is that I should at least get a multi-bagger in First Nordic, and if Barsele can grow like I think it can and/or they make one or two discoveries on their 100% owned ground, then I can see a 10-20 bagger down the line.

As mentioned earlier in this article an opportunity is when one can figure out stuff before Mr Market. If I figure out that the project is worth a lot more than the current Market Cap, and it takes a PEA to have the market agree with me, then that could be a big thing to “front-run”. I would get paid in the future for simply acting on the fact that I think this is very undervalued at this price today.

The Margin of Safety – Visualized

Below is the asymmetrical bet just based on the current version of Barsele (2.4 Moz) as I see it. Some Blue Sky Scenarios would be quite a bit higher (3-8 Moz etc). Anyway, this is a multi-year case as I see it and I am either going to be down (max 100%), or up a lot… Or up a LOT in a few years I think. 10% swings around this level are rounding errors in my book as I think it’s simply atrociously undervalued here obviously.

Note: Consider me biased since I am betting big on this junior and do your own due diligence. This is not investing advice. I cannot guarantee the accuracy of the information in this article. This is not a buy or sell recommendation. Assume I may buy or sell shares at any time without notice. Do not invest money you cannot afford to lose. This is a risky business.

/THH