Developers & up And Coming Producers: Forcing Value

Setting The Scene

Up and coming producers are perhaps some of the most exciting stories to be a part of because that’s when the rubber hits the road and theory can become reality. An ounce in the ground is only as valuable as it is profitable to recover from said ground. However, trying to turn this theoretic value into real value (profit) is never easy and opens up a company for many additional risks that were not in play when the company was still just an explorer with little costs in terms of upkeep and typically no debt. It’s like a double-edged sword. If a junior can transition into a profitable producer with exploration potential then it has the potential to turn into a self funded growth story like K92 Mining for example. Three years ago K92 Mining was trading at $1.15/share and today it is trading at $7.32/share. That is a very impressive return. Especially when accounting for the fact that the sector is currently at a sentiment low and many juniors are down 50% or more for little to no fundamental reasons. On the other hand many things can go wrong during this transition into a producer and when debt is involved any one problem can compound for the worse and companies do face the risk of bankruptcy.

Up and coming producers can also be a breath of fresh air in a poor sentiment environment. Why? Because most juniors are about potential, and even though they might be brain dead cheap relative to the price of gold, it is hard to “force” the market to appreciate the value of said potential. An early stage exploration junior with world class potential could theoretically trade at $10 M with gold at $2,000. A junior which goes into production with gold at $2,000 will be much harder to under-appreciate assuming there is decent cash flow…

A pre exploration junior can be priced like gold is at $1,400 while it is at $2,000 because there are few value “forcers”. A newly minted junior producer will have a “harder time” being priced like gold is at $1,400, when it is actually at $2,000, given that the margins will reflect the reality of $2,000 gold in real time. In this case a frustrated investor will get immediate monetary benefit in case the junior sector continues to be dirt cheap. If I own a new producer which “should” be trading for $150 M, and it trades for $50 M instead, my investment will likely have a very low PE and high yield.

In short:

1. It’s easier for the market to ignore the reality of where gold is trading and therefore the implied value of a gold exploration junior based on potential.
2. Meanwhile the reality of where gold is trading gets automatically translated into the bottom line of a producing junior.

In light of the above what would be some important factors when evaluating the Risk/Reward for a developer or a freshly minted producer?

• People involved
• Quality of project (Potential margins)
• Access to capital
• Runway for self funded growth

These are some of the juniors that have either just starter production or are moving towards production:

1. Galantas Gold (GAL.V)
   • MCAP: C$43.5
   • High-grade gold in Ireland
   • Planned to shortly be in production
2. White Rock Minerals (WRM.AX)
   •  MCAP: A$31.5 M before current financing
   • High-grade gold in Australia
   • Operational mill put on care and maintenance while the company drills up a larger resource
3. Gold Mountain Mining (GMTN.V)
   1. MCAP: C$108.7 M
   2. High-grade gold in BC
   3. Just started production
4. Lion One Metals (LIO.V)
   1.  MCAP: C$197 M
   2. Very high-grade gold in Fiji
   3. Planning to be in production next year
5. Kuya Silver (KUYA.CN)
   1.  MCAP: C$53 M
   2. High-grade silver in Peru
   3. Working towards production
6. Maritime Resources(MAE.V)
   1. MCAP: C$48 M 
   2. Gold in Newfoundland, Canada
   3. Working towards production
7. Monarch Mining  (GBAR.TO)
   1. MCAP: C$55.9 M
   2. High-grade gold in Canada
   3. Planned to shortly go into production

Musings:

If one owned an equal amount, portfolio size wise, one could say one owns an entity with:

• A combined Market Cap of roughly C$550 M…
• For #1 operating mine + #6 potential mines within say 1-2 years + organic growth
• Considerable jurisdictional diversification

I think this thought experiment puts things into perspective in terms of how cheap even the advanced junior developers are.

Note: This is not investing advice. I own shares of all companies mentioned and Galantas, White Rock and Lion One are banner sponsors. Therefore consider me biased and do your own due diligence. Juniors are risky and volatile.

Best regards,

The Hedgeless Horseman