“History does not repeat itself but it does rhyme.”
Mark Twain (or somebody else)
For resource speculators, “deals” abound as a result of the great junior mining shakedown of 2008-2013. And therein lies the danger: deals abound but value is elusive.
Most junior mining stocks are priced for the end of the world and for many of them, the price is right – for their world, anyway. But there is also money to be made and interesting – albeit risky – opportunities under such circumstances. That particularly holds true for juniors that are cashed up. Sometimes a look back can help separate the quality from the quicksand.
I usually “disclaim” at the end, but here it is: This is not investment advice and investors should do their own due diligence, always. And remember that past performance is no guarantee of future results, as the mutual fund disclaimer puts it. (But no expensive trailer fees or capital-munching MERs here either.)
Here are a couple of stock ideas that look interesting at these levels.
Revett mines silver and copper at its underground Troy mine in the northwestern mountains of Montana. The trouble is, the company hasn’t mined any since December, when Revett shut down operations because of “concerns with underground geotechnical conditions.” Translation: parts of the mine collapsed onto an access route to the ore.
At first it seemed like a temporary situation, but the more Revett investigated, the worse things seemed to get. Shareholders noticed, and the stock has lost two-thirds of its value in the past year. Shares bottomed at 66 cents in the summer and have since rallied to the $1.25 level, largely due to a Sept. 5 news release that announced mining could resume in the fourth quarter. Crews recently opened up a new access route to the mining beds.
So the production shutdown coincided with plummeting silver and copper prices and the junior resource plunge that took down resource stocks across the board. The decline has been fierce for current shareholders, but this particular roller-coaster has steep inclines as well. In late 2008, Revett shares traded as low as 30 cents, but the stock averaged above $4 throughout 2011.
In the third quarter of 2012, before boulders began to fall, Revett generated net income of $4.4 million on revenue of $19.4 million. Realized silver and copper prices for the quarter, however, were about $32/oz and $3.75/lb respectively – considerably higher than current prices – and cash costs were $19.77/oz and 2.27/lb.
There are alot of moving parts here and profitability looks tenuous at $21 silver and $3.25 copper but executives don’t seem too concerned. Both chairman Timothy Lindsey, who owns 2% of outstanding shares, and CEO John Shanahan (1.3%) have been recent buyers, according to Canadian Insider.
Revett’s real prize, however, is the Rock Creek silver deposit. At 300 million ounces of silver and 2.5 billion pounds copper (inferred), Rock Creek is one of North America’s largest undeveloped silver-copper deposits. It’s been tied up in court battles with opponents but received a favourable court ruling late last year and is now working with the U.S. Forest Service on environmental permitting. Here’s the legal background (keep in mind that the timelines was before the Troy troubles).
Rock Creek is undoubtedly why streamer Silver Wheaton owns 15% of outstanding shares and commodities trading giant Trafigura owns 10.6%. Revett has healthy insider ownership as well: officers and directors own 9% of shares, according to our friends at INK Research.
SHARES OUTSTANDING: 35 million
MARKET CAPITALIZATION: $44 million
CASH (as of June 30): $15 million
Disclosure: I own shares in Revett Minerals.
SABINA GOLD & SILVER
I’ve been tracking this stock since before the 2008 crash when it was “Sabina Silver.” Sabina, which explores for gold in remote Nunavut, has always been pretty cashed up thanks to savvy financings and some smart property deals.
When the bottom fell out of the market in 2008-09, Sabina the stock traded below the cash holdings of Sabina the company for several months.
Sabina incorporated the “gold” into its name and graduated to the TSX in the fall of 2009, when the stock was trading at just over a dollar a share. Shares subsequently ran up above $7 in the heady days of spring 2011 before the plummet back down. It’s now trading at about 90 cents.
Sabina sold its Hackett River polymetallic deposit to XStrata Zinc for $50 million cash and 22.5% of the first 190 million ounces of silver produced. A corporate presentation on Sabina’s website values the royalty at $300 million, citing “analyst consensus.” A prefeasibility study is being completed on Sabina’s high-grade Back River gold project, which has a measured and indicated resource of 24 million tonnes grading 6 g/t, for about 4.7 million ounces.
There is exploration upside at Back River and at its nearby Wishbone property. There are also unanswered questions and logistical hurdles. These include the inhospitable operating climate, financing of a proposed deep-sea port at Bathurst Inlet and a joint-venture all-weather road (although XStrata’s presence in the area could hasten the latter two projects). Not to mention a gold price below $1,350/oz.
In a case of bad news for planet Earth being good for northern resource investors, another factor that could accelerate the path to development is the melting of the ice in the Northwest Passage. A cargo ship recently travelled from Vancouver to Europe through that ocean route, which is bordered by mineral-rich lands.
One black mark against the company is chief financial officer Elaine Bennett’s dumping of shares, decreasing her already small stake in the company. Dundee, a 10% holder, has also been dumping (Sabina bought Back River from Dundee Precious Metals).
I do not own Sabina shares.
SHARES OUTSTANDING: 190 million
MARKET CAPITALIZATION: $170 million
CASH (as of June 30): $94 million