Being smart about junior resource investing

The annual Vancouver Resource Investment Conference goes Sunday and Monday at Vancouver Convention Centre West. If you’re prospecting for investment ideas and kicking tires on potential stock picks, read the Vancouver Sun article I wrote about the Cambridge show a year ago. The piece is dated but not much has changed (except for a little tech stock role reversal with Apple’s recent fall from grace and Research in Motion showing signs of life): 

Junior miners: Worth the investment?

BY JAMES KWANTES, VANCOUVER SUN FEBRUARY 3, 2012 

The replica bull on the floor at the Vancouver Resource Investment Conference last week symbolized the type of market that suffering resource investors hope is about to break out. The imposing animal’s lack of motion was also apt – the TSX Venture Exchange has plummeted almost 30 per cent in the last year and a staggering 50 per cent from highs reached in March 2007. WoM update: The Venture dropped another 20% in 2012.

Read the rest at VancouverSun.com

I plan to visit the Cambridge House show on Monday morning and drop by the booths of a few companies whose stock I own and a few others that I’m watching for possible investment. I’ll write about it here at World of Mining and may do some live-tweeting as well @jameskwantes.

Due to other commitments, I’m going to miss Sunday, which is a shame as the marquee event of the conference takes place Sunday at 2 p.m. in Speaker Hall West. That’s where Pilot Gold chairman Mark O’Dea is hosting a panel discussion with Sandstorm Gold CEO Nolan Watson and Sabina Gold and Silver CEO Rob Pease, called Building Value: Tomorrow’s Trends from Today’s Trailblazers. (For those able to be in two places at once, Rick Rule is in Speaker Hall East at 2 p.m.)

Pilot Gold chairman Mark O’Dea

In a relatively short time, Mark O’Dea has built an impressive track record of creating value in the junior mining space. This St. John’s Telegram feature contains some nice background on the geologist-turned-executive.

O’Dea’s Fronteer Gold and its Long Canyon project in Nevada was acquired by Newmont Mining in 2011 for $2.3 billion. Before that, O’Dea had sold Fronteer’s Labrador uranium assets (Aurora Energy Resources) to Paladin Energy for $260 million (about 1/4 of Paladin’s current market cap).

When he sold Fronteer Gold to Newmont, O’Dea spun out a new company called Pilot Gold (PLG), which has 2 gold projects in Turkey and 1 in Nevada. Pilot owns 40% of each Turkey project, TV Tower and Halilaga (Teck owns 60% of each), and Pilot is earning-in to a 60% interest in TV Tower. The latter is home to some stellar drill results, including 6.6 g/t gold over 34 metres announced Jan. 15 and 193 g/t gold over 12 metres on Dec. 3.

Pilot Gold shares have been on a tear, rising from the dollar level in early September to the current $2.17, for a market cap of about $185 million. The company had cash and equivalents of $43 million as of Nov. 1. I do not currently own Pilot Gold shares.

Sandstorm CEO Nolan Watson (CEO.ca photo)

For World of Mining readers, Nolan Watson needs no introduction. I launched World of Mining in August with a writeup on Watson’s streaming companies, Sandstorm Gold (SSL) and Sandstorm Metals & Energy (SND), with updates here and here. Shares of the two companies have risen 30% and 72% respectively since my first piece.

Watson was one of Silver Wheaton’s first employees and the company’s CFO when the silver streamer launched on the New York Stock Exchange (he was 26). The streaming business model – upfront cash for a percentage of gold/commodity production at fixed costs, for example $400-$500/oz gold – is bullet-proof in a market like this where financing options have dried up. Especially because the Sandstorm team limits deals to countries that are geopolitically friendly, including Canada, the U.S., Mexico and Brazil.

Sandstorm Gold’s current market cap is about $1.1 billion and Metals & Energy, $160 million. I expect both of those numbers to grow considerably in the coming years under Watson’s leadership. I own shares of both Sandstorm companies.

I know less about Rob Pease, CEO of Sabina Gold and Silver (SBB) – except that he’s also on the Pilot Gold board and owns a relatively paltry 78,250 SBB shares. However, I am familiar with Sabina as a former shareholder.

Predecessor Sabina Silver was one of those companies that traded below its cash value during the dog days of the financial crisis, which may have been the greatest junior mining sale of my lifetime.

Sabina Gold and Silver is another junior that has done an impressive job of building value, even if the current share price may not reflect that value. Previously focused on the Hackett River silver-zinc deposit in Nunavut, Sabina sold that deposit to Xstrata in 2011 but retains a royalty of 22.5% of the first 190 million ounces of silver and 12.5% of the rest, at no cost.

The flagship project is now Back River, a series of high-grade gold deposits that had a PEA released in May showing an after-tax NPV (5% discount) of $650 million – based on $1,250 Au – and an IRR of 25%. The area is now undergoing engineering and environmental studies, as well as further exploration.

Sabina has a market cap of about $500 million and $116 million of that is cash. I used to own Sabina shares and sold my entire stake (above current levels). I do not currently own any stock.

I highlight these three companies because they are examples of junior mining companies that fit the criteria outlined in my Vancouver Sun article. Each is cashed-up, has a track record of creating shareholder value, a strong management team and quality projects in mining-friendly jurisdictions.

Most of the junior mining companies exhibiting at the Cambridge show do not fit this profile. The smart speculator’s challenge is to identify those that do.

Disclosure: This is not investment advice, and each investor should do their own due diligence. Of the companies mentioned, I own shares in Sandstorm Gold and Sandstorm Metals & Energy. Please read my disclaimer.

This entry was posted in Energy, Exploration, Ideas, Mining, Stories and tagged , , , , , , , . Bookmark the permalink.