Out with the old, and a new position

I recently pulled the plug on two stocks because the stories didn’t unfold how I’d anticipated and because I saw better opportunities elsewhere. The first, WesternOne (WEQ), is a high-yielding “pickaxe company” with exposure to the construction, oil and gas, and film industries, and a fairly recent buy. The other, Newstrike Capital, was a longer-term hold that I first wrote up back on Sept. 20, 2012 under the heading “A golden takeover target?”

WesternOne (WEQ)
WesternOne runs Britco, a temporary/modular home builder, and WesternOne Rentals and Sales, an equipment rental company. I first wrote it up here back in August when it was trading at about the same price it is now.

The Vancouver-based company is profitable, well-run and expanding – a year ago it bought 80% of a leading Australian modular homebuilding company. It yields a sustainable 7.8%, with a payout ratio under 50%. I like management and the space it’s operating in. And if B.C. manages to build up its LNG industry in the northwest, there’s a good chance WesternOne would benefit (the company figured in the B.C. Liberal re-election campaign and Stockwell Day sits on the board).

The stock, however, can’t seem to get any traction and there seems to be a lot of selling pressure at the moment. Management has stated on conference calls that a dividend hike is not anticipated in the near term while the company is in growth mode. This one is a good RRSP pick and stays on my watch list.

Newstrike Capital (NES)
I had high hopes for Newstrike, one of the first stocks I wrote up here at World of Mining.

The company has a nice gold deposit at Ana Paula, cash in the bank, and prudent management, not to mention a major shareholder named Lukas Lundin. But the stock has been pummelled in the past year, even more than the junior market – which is saying something. Shares are down 63% in the past year alone. More alarmingly, Newstrike stock hasn’t bounced off the bottom in the past couple of months the way other quality gold juniors have. Shares of World of Mining holding Pilot Gold (PLG), for example, are up more than 60% from their 52-week low. Newstrike stock has rebounded a relatively meagre 37%.

Newstrike also isn’t the only gold junior in its Guerrero Gold Belt neighbourhood, and the market says its neighbours have better prospects. Shares of Guerrero-focused Cayden Resources (CYD), for example, are down only about 26% in the past year. Torex Gold (TXG) is advancing its Morelos project on both the development and financing fronts, having just announced a $125-million bought deal financing.

The landscape has also shifted. Goldcorp has been seen as a natural suitor for Newstrike’s Ana Paula, particularly due to the proximity of its Los Filos open-pit gold mine, which produced 340,400 ounces in 2012. But if and when Goldcorp completes its takeover of Osisko, the gold giant will inherit about a million hectares of Osisko exploration territory (staked since late 2011, but kept under wraps). That might make the world’s No. 1 gold miner by market cap less inclined to buy an earlier-stage deposit such as Ana Paula, despite Los Filos synergies – especially if the gold price stays stalled under $1,300.

NEW POSITION: Probe Mines
I decided to buy a gold junior with some momentum: Ontario-focused Probe Mines (PRB). The company was on my radar ahead of the Cambridge House show on the weekend, so it was a pleasant surprise to see they had a booth. I spoke to Patrick Langlois, VP of corporate development, at some length to find out about the company’s projects, and later, John Kaiser had good things to say about it.

Probe has a chromite project in northern Ontario that used to be its flagship, but I bought in because of its high-grade Borden gold deposit in an underexplored area southwest of Timmins. A year ago Probe put out an NI 43-101 resource of 4.3 million ounces – most of it in the indicated category – at an average grade of just over 1 g/t, using a .5 g/t cut-off.

But then it began hitting high-grade on the eastern part of the deposit, and some of the intercepts have been outstanding, including 51 metres of 10.3 g/t gold and 26 metres of 8.5 g/t. Drills are turning and the mining funk of late has even worked in Probe’s favour, reducing costs for drilling and assays. The company has a compelling story and a catalyst in the form of the drill bit.

Probe has a tight share structure, with just 75 million shares out, and healthy levels of insider ownership. It’s cashed up, with $33 million in the coffers as of Oct. 31, and Agnico Eagle owns 10% of outstanding shares.

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