Rebalancing, Part 2: Signs of life

Rebalancing, Part 1

Rebalancing, Part 2: Signs of life

In my last post, I detailed the positions that I’ve sold (Amerigo Resources, Sandstorm Gold/Metals & Energy) or dramatically reduced (Lumina Copper) in the past couple of months. This post takes a closer look at stocks I’ve purchased (NexGen Energy, Peregrine Diamonds, Pilot Gold, WesternOne Equity) and my rationale for adding them to the roster. NexGen and Peregrine have enjoyed a nice move today and gold’s rise this week has provided some much-needed lift to the junior market as a whole. The thaw feels good after a near-nuclear winter.

BOUGHT

NexGen Energy (NXE)

NexGen Energy went public in April and holds land adjacent to two of the hottest uranium properties in Saskatchewan’s Athabasca Basin, an area that Rick Rule has described as the “Persian Gulf of uranium” because of its rich grades.

Helicopter view of the uranium-rich Athabasca Basin. Photo: CEO.ca

The company’s Rook 1 property – acquired from Mega Uranium – is directly adjacent to the Patterson Lake South (PLS) area play, a joint venture between Alpha Minerals and Fission Uranium. How hot is PLS right now? A NexGen news release this morning announcing the start of a 3,000-metre drill program at Rook 1 sent the stock up by a third on multiples of its daily volume.

On Thursday, Alpha announced the discovery of a fourth mineralized zone along a 1-kilometre strike length at PLS (Hathor had a 350-metre strike length at Roughrider). The companies have nailed the drilling and shares have responded accordingly – Alpha (AMW) is up more than 300% YTD and Fission is up 150%.

NexGen’s other property – Radio – is directly adjacent to Hathor Exploration’s high-grade Roughrider project, which Rio Tinto bought in late 2011 for $642 million after a bidding war with Cameco. The same group that optioned Radio to NexGen also staked Hathor’s claims.

NexGen was on my radar but what caught my attention was an agreement, announced June 26, by the Radio optioners to take NexGen shares instead of cash to satisfy a $2.9-million payment under the Radio option agreement. They agreed to take the 26 million common shares at a price of 33 cents (and 4.4 million warrants at 50 cents).

The days following that announcement saw NexGen shares trading in the 25-cent range, so I decided to take a position. The stock has since doubled. NexGen just did a $5-million private placement at 35 cents a share, so it will be cashed up for its summer drilling program. Assay results at Radio are pending and drills are turning at Rook 1. Should be an interesting summer/fall for this one.

Hat tip to Tommy Humphreys at CEO.ca, where he has been covering the Athabasca Basin and its players since before Hathor was taken out.

Peregrine Diamonds (PGD)

This purchase has worked out well. I wrote up Peregrine on April 29 and the stock has since almost doubled.

Peregrine CEO Eric Friedland: Set to advance Chidliak, with or without DeBeers.

Peregrine’s CEO is Eric Friedland – brother of Robert Friedland, also a major shareholder – and its flagship project is Chidliak on Baffin Island. DeBeers has until the end of the year to enter into an earn-in joint venture that would give it 51% of Chidliak, but Peregrine is set to continue advancing the project with or without DeBeers. Eric’s diamond exploration vehicle has already collected – but not evaluated – a 500-tonne bulk sample of the CH-6 pipe. Grades anywhere near those of a smaller mini-bulk sample would put CH-6 among the highest-grade kimberlite pipes in the world. An opt-in by DeBeers could also be a catalyst for the stock.

Both Eric and Robert Friedland have subsequently added to their stakes by participating in a $3.5-million private placement at 35 cents a share. Eric Friedland owns more than 15% of outstanding shares and Robert owns in excess of 16%.

Fun side note: I went for coffee with another Vancouver junior resource blogger – a stand-up guy – shortly after writing up Peregrine, and discussion turned to the grim Venture landscape at the time. Upon hearing that my latest piece focused on a diamond exploration company, his comment was “Nobody’s interested in diamonds.”

Pilot Gold (PLG)

I’ve been watching this Mark O’Dea play for a while with an eye to taking a stake, and it seemed like a good time. Sure enough, PLG promptly dropped to sub-$1 territory but has since recovered.

O’Dea has showed a knack for fortuitous timing and creating shareholder value with previous projects. The Newfoundlander’s big break came in 2001 when he won second prize in Rob McEwen’s Goldcorp Challenge, in which the then-CEO published the geology of Goldcorp’s 55,000-acre Red Lake property online and challenged geologists to identify the next 6 million ounces. O’Dea picked up $80,000 for his troubles.

Fronteer Gold was a Venture shell company with $2 million when O’Dea took it over in 2001. In early 2010, Alamos Gold paid $40 million cash and 4 million Alamos shares for two Turkey gold projects that were joint ventures between Teck (60%) and Fronteer (40%). One of those, the Kirazli deposit, just received environmental approval from the government.

O’Dea sold Fronteer Gold, whose flagship property was the Long Canyon gold project in Nevada, to Newmont Mining for $2.3 billion in 2011 – before the junior market went off a cliff. Earlier, he had sold a Newfoundland uranium project that was part of Fronteer to Paladin Energy for $261 million – months before Fukushima cast a radioactive shadow over the uranium industry.

Pilot Gold has two remaining 60/40 joint ventures with Teck in Turkey, as well as its Kinsley Mountain, Nevada property. In Turkey, Pilot owns 40% of TV Tower (earning-in to 60%) and has released some very good drill results recently, including 15.3 g/t Au over 45.2 metres and 327 g/t silver over 14.5 metres.

Its other project in Turkey – the European continent’s top gold producer – is 40% owned Halilaga, which has a PEA in hand showing an after-tax NPV of $474 million, a 20% IRR and a 2.7-year payback. Those figures are at a conservative $1,200/oz gold and $2.90/lb copper. Pilot also recently began a 20,000-metre drill campaign at its 65% owned Kinsley Mountain project in Nevada, near Fronteer’s Long Canyon deposit. Pilot is the operator and their geologists, who are area experts, describe it as a Carlin-type gold trend.

Pilot Gold has 87 million shares outstanding, for a current market cap of about $104 million, and about $30 million in the bank as of June 30. Newmont Mining owns almost 16% of outstanding shares and insider buying by executives and Newmont has totalled more than $6.5 million in the past year, according to our friends at INK Research.

WesternOne Equity (WEQ)

I decided to mix things up and add a profitable company that pays a nice, sustainable dividend to the portfolio. Vancouver-based WesternOne Equity is a “pickaxe” company with exposure to construction, oil and gas, the film industry and large government infrastructure projects.

WesternOne has two main businesses – Britco, which manufactures and leases temporary and modular buildings, and WesternOne Rentals and Sales, an equipment rental business serving construction companies, film crews and shipbuilders. Late last year, the company announced a $207-million contract with Manitoba Hydro to build a 2,000-room workforce accomodation complex for a large power generating station. (WesternOne’s current market cap is about $185 million.)

WesternOne pays a 5-cent monthly dividend for a current yield of 7.8% (it rose above 8% recently on share price weakness). Q2 results were announced Wednesday, and they were impressive: revenue growth of 80% over a year ago, gross profit growth of 48% and adjusted EBITDA increased 24%. Cash flow rose to $12.4 million from $10.3 million.

About the only number that went down was the payout ratio, which dropped from 49.5% in Q2 2012 to 42.9%. The year-to-date payout percentage was a very sustainable 41.4%.

CEO Darren Latoski owns more than 8% of shares, which nicely aligns his interests with those of all shareholders.

Disclosure: I own shares in each of these companies. This is not financial or investment advice and investors should do their own due diligence, always. Please read my disclaimer.

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