Novo: Question From a Reader
Question:
“Can you please answer this question.
Why is Quinton trading Novo shares for any other companies shares? If he belives Novo is another witswatersrand then your trading a much more valuable company for ownership in an inferior company. This is analogous to Warren Buffet trading Birkshire stock for another comanies stock he has done it Once, and it was a major mistake… ”
My take:
As you know the valuations of mining companies are absurdly low. As you also might know, there are almost no big discoveries happening in the gold space and the large miners need to find large deposits just to tread water. Kirkland Lake is for example expected to run out of the bonanza gold at Fosterville in just a few years…
With Quinton being one of the foremost experts on Epizonial Gold Systems (Fosterville is such a system) it makes sense to me that he would want to be able to pick up 75% of potentially another Fosterville type of mine for a few million bucks. I mean Fosterville is only one deposit and it’s still worth billions. That whole area in Bendigo is red hot right now simply because of the success of Fosterville, and it was none other than Quinton who recognized what Fosterville would become early on.
Furthermore, it is much easier (and faster) to drill and confirm lode gold as compared to our nuggety “beds” in Pilbara. With Novo having three different stakes in companies who have Epizonial Gold systems, they all could revalue quickly just by hitting on a few holes. Imagine if KZR, New Found Gold and GBM would confirm three Fosterville type deposits with a couple of good hits. That would revalue each venture a lot in, quickly. Then Novo could decide if they want to sell it to the likes of Kirkland Lake (who will need more ore sooner rather than later) or potentially build it themselves from Cash Flow that will hopefully come out of Pilbara.
The thing with Pilbara is that the near surface systems might require very little in terms of CAPEX or OPEX. That especially goes for Egina I would say. I mean a continuous miner and a few ore sorters is peanuts and if it works well, each “unit” could pay itself off and cover the expenses for a few additional units within 12 months. The same goes for the outcropping conglomerate beds… So then the question would be what to do with the rest of the cash flow? Banks pay close to nothing so in order to compound the returns, after the necessary investment costs are covered, Novo would need to invest it somewhere. Any project with an expected positive Return On Investment (ROI) would be worth investing in.
If you have one of the best exploration geologists in the world then the best value creation you can get out of that is for said person to look for projects around the world that looks incredibly prospective. IF, and that’s still a big if, GBM’s ground ends up hosting a world class Epizonial Gold System under all those historic workings and placer deposits then said system could be worth billions. In turn, 75% of that would belong to Novo. There is literally a chance that within 12-24 months, any of the three projects might be intrinsically worth more than the current market cap of Novo.
If you got a guy that is one of the best exploration geologists in the world, the most rational thing to do is to give that guy infinite tools to seek out the most prospective projects in the world. You mentioned Warren Buffet which is a perfect example. What does Warren Buffet do best? He is one of the best value investors in the world. He buys something that he thinks is currently cheap relative to what it will be worth in the long run. Thus, letting Warren Buffet invest your money by buying shares of Berkshire Hathaway makes perfect sense if you are looking for good returns on your investment. Compare that to Quinton who is one of the best in the world in terms of figuring out if an early stage exploration asset has the potential to become something that is worth a lot. Naturally you would want to give him your money if you are interested in having the best returns when it comes to gold exploration. And that is basically what he is doing. He is spending small fraction of shareholders money, including his own, to invest in early stage exploration projects which have a real shot of becoming something significantly more valuable over time. Personally I am all for it since I think that any project worth his time has a better than average shot of becoming a world class deposit and it currently costs us very little to partake since the sector is in the crapper.
Eric Sprott made a fortune thanks to Quinton’s brilliant insights. Thankfully for us he is now using those brilliant insights for the sake of Novo shareholders at the moment. There is a reason why so many exploration companies wants him on board. I have personally seen first hand how Quinton can come up with insights that no one had thought about after just spending a day or two at a project. Underestimating the value creation potential of his knowledge is a big mistake in my opinion. The best thing for Novo shareholders is to see Quinton do what few if any in the world can do better… To recognize something that could be worth a lot in the future, early.
… In contrast, if you give me $5 M dollars to pick projects you can be assured that the Expected Value is ZERO on your investment.
Added bonuses:
- Novo becomes more diversified
- News flow will be be jacked up
Best regards.
The Hedgeless Horseman
Great analysis. Makes me (holder of Novo) a smarter investor.
Maybe he wants to sell them to KL in return for shares (and therefore indenpendance) of novo? I guess most KL shareholders would gladly swap the stake of KL (+extra cash maybe) for another Fosterville? Also, if novo is/remains undervalued due to not being able to quantify their amount of gold in the industry-standard ways (knowing what the management of novo knows), this would allow novo to buy do profitable share buybacks (with cashflow from production) without KL automatically getting a larger and larger stake of the company.
I get what your saying above and it makes sense. Where I’m having a hard time is when I think about what NOVO could be worth when it begins producing gold in 12 months and the market revalues it much higher and so the equity that Q is trading for these other companies seems to be not such a great trade. If Q were buying these stakes in other companies that he likes but using free cash flow from opperations I would love it, I’m just not happy about the equity trade.
Again as an anlogy Warren could trade 1M shares of Brk for 10M shares of Tesla which he thinks has revolutionary potential is it a good trade? Brk is a granteeed great buisness and Tesla could go either way so trading equity is a great move for the risker company not such a great move for a great company.
Thanks for your reply by the way.
Daniel:
I hear you and I somewhat feel the same. What I think is going on is that even though I think shares of Novo are undervalued and I would like there to be as little dilution as possible, it might also be that especially KZR and GBM are even more undervalued, at least in the short to medium term, while having an easier time to potentially revalue quickly. I also don’t know how many eyes might be watching the Bendigo/Fosterville area and what will happen once the tenements released by the state of Victoria find new owners. If not us, then some other entity would probably finance any of these juniors.
Thus I think it was deemed worth it simply due to timing. I think that KZR has one of the best prospective brown field exploration potential that I know of (hence why I also own KZR directly on top of indirectly through Novo). Novo will take time to really flourish and I expect it to get exponentially better in bankable value as exploration, delineation, permitting and processing gets increasingly figured out.
NFG, KZR and/or GBM might have a Fosterville type deposit at the end of the day and it will be known long before Novo turns into a Major gold company. In other words: Especially KZR and GBM could outrun Novo and then be monetized (if appropriate) and then be re-invested into Novo for example.
Lets say KZR/GBM hit something really good within 12 months that will get better and better in a hurry. By this time, Fosterville will be another year closer to becoming a “regular” mine again, all else equal. Thus, Kirkland Lake’s willingness to pay up for a tier 1 asset near their flagship asset will just be going up, all else equal. If KZR/GBM would become lets say a ten bagger before Novo, and it gets sold, then those proceeds could theoretically be used to buyback stock in Novo in a manner that would have benefited shareholders, assuming Novo doesn’t outrun these companies.
What makes this scenario more likely is the fact that the market is very much unwilling to take anything for granted with Novo, unlike easily understandable and conventional high grade lode gold.
Take De Grey for example. If Novo would have owned a stake in DEG before they started hitting their best holes yet, then such an investment would have already revalued many 100%. Thus, theoretically, Novo could have sold shares of DEG with a big and quick profit and bought back stock.
To sum up: Any dilutive investment(s) will have been net positive as long as the investment(s) outrun our stock on average. DEG has shown how fast a conventional junior can run after announcing above average intercepts with the drill bit.