This November 16-17th we attended the Hard Assets investment conference in San Francisco. We hope you can understand that our juiciest investment ideas can only be found in the full, premium “Best in Show” version of this post. Nevertheless there’s still plenty of insights below for resource investors, otherwise known in the current dismal retraction stage of the market as masochists. But of course the stubborn hope is that some day — the sooner the better — gold “goes to 11″ and the resource stocks with it.
One might look around and think identifying stocks with “11″ potential is easy business in such a battered market … after all, everything is so darn “cheap”. The reality is that many of these companies are having an extremely hard time raising funds on good terms in order to keep the drills turning and the hope alive. Dilution or even just the threat of it is going to severely limit the upside in many cases. What follows are the key takeaways from a variety of companies we met with during our busy stay in San Francisco:
SilverCrest Mines (TSX-V: SVL; AMEX: SVLC)
The main focus of our discussion was on the La Joya exploration project where simple back of napkin math suggests at least a doubling of last year’s initial silver-copper resource. Hopefully this is accompanied by a breakout of a higher grade “feeder zone” resource that SilverCrest could potentially develop on its own at a reasonable capital cost and time line. We also noted again how La Joya basically sticks out of the ground (the deposit is essentially a big hill) and this should reduce mining costs thus allowing lower-than-normal grades and cutoffs. As we mentioned previously, SilverCrest at $2.50 basically gives value only to the Santa Elena operation (especially since it was recently “de-hedged”) and that means potential upside exists as La Joya is moved toward development.
Western Pacific Resources (TSX-V: WRP; Pink Sheets: WRPSF)
Western Pacific’s new strategy in this brutal junior market with crappy valuations is to become a small-scale producer through reprocessing old tailings at the former Black Pine Mine in southern Idaho. It would still take a few years for the first gold pour if everything goes well and it’s neither particularly sexy nor without its risks but at the end of the day we’re looking at a well-managed company with a $3 million market cap and $2 million cash left in the kitty. This should be trading at double or triple the current price just for its management value but could remain dead money for a while longer before the plans start to coalesce. Not for the impatient.
Verde Potash (TSX: NPK; Pink Sheets: AMHPF)
Formerly called Amazon Mining when we initially got involved way back in early 2010, Verde Potash has treated us very well even considering the recent swoon in the share price. It has lingered on in our portfolio after heavy profit taking in early 2011 largely because we wished to maintain exposure, albeit indirectly, to the agriculture space via potash. For various reasons including a lack of near-term share price drivers we’ve decided that it’s probably time to move on. In particular we’re on the verge of a “Potash Switcheroo” into Company XYZ (for subscriber’s eyes only). We need to conduct a bit more research and analysis, but so far it’s hard to see why Company XYZ wouldn’t represent the better value in the near term considering that its project is relatively further advanced with more robust economics. Furthermore its project relies on conventional in-situ recovery of potash compared with Verde’s unconventional roasting method which could make financing significantly more difficult.
Timmins Gold (NYSE: TGD; TSX: TMM)
As most of you should be aware, we wrote about a low risk pairs trade going long Timmins Gold against a potential short of Argonaut Gold (TSX: AR; Pink Sheets: ARNGF). The risks to Argonaut’s major near-term San Antonio development project have continued to increase making this trade as relevant as ever despite what has already been better than 40% relative outperformance by Timmins since the pairs trade began as illustrated below:
Shore Gold (TSX: SGF; Pink Sheets: SHGDF)
Don’t let the name fool you, this is a diamond development story in Saskatchewan. We can’t get too excited given the project’s heavy CAPEX burden and reliance on high diamond prices, but it was nevertheless interesting talking with George Read, Senior VP of Exploration and Development, to get his take on the recent move by Harry Winston (NYSE: HWD: TSX: HW) to acquire all of BHP Billiton’s (NYSE: BHP) diamond assets for $500 million as well as reportedly being in talks to buy the remaining interest in Diavik from partner Rio Tinto (NYSE: RIO). We agreed with him that it looks like a great deal for Harry Winston, and George added that it’s sweeter still considering the likelihood of being able to improve the overall efficiency of the Ekati mining operation (i.e. lower costs). It’s certainly good to see a buyer emerge as the super majors exit, and assuming all goes smoothly it improves the odds of a Harry Winston eventually making a run at a company like Shore Gold or Stornoway Diamond Corp. (TSX: SWY; Pink Sheets: SWYDF).
Plata Latina Minerals (TSX-V: PLA; Pink Sheets)
Newly listed in April 2012, we will need to take a closer look in order to evaluate the robustness of its “ore horizon” exploration concept. Mike Clarke, President and CEO, is very excited to begin drilling at the Vaquerias project near the historic Guanajuato district where Endeavour Silver and Great Panther have major projects … and you can see why below in the idealized target concept (notice the size of existing workings in second slide):
Meanwhile the company continues to come up with high grade holes at Naranjillo. On the surface things look interesting and we’ll be looking under the covers to see if there is more than meets the eye here.
Northern Freegold Resources (TSX-V: NFR; Pink Sheets: NFRGF)
There’s no denying this one is cheap valued on an EV/oz basis (a common but faulty way to measure the value assigned by the market to gold ounces “in the ground”), but we’re talking about a low grade, pre-PEA gold deposit in the Yukon albeit with much better infrastructure than most others in the region save Golden Predator (TSX: GPD; Pink Sheets: GPRXF). Realistically it will be at least 5 years before this has a chance of being in production with plenty more drilling work to be done … which means lots more money to be raised and spent. In this market it’s hard to see how moving the project forward doesn’t lead to very significant shareholder dilution.
Stans Energy (TSX-V: HRE; Pink Sheets: HREEF)
After speaking with David Vinokurov, VP Corporate Development, we’re thinking twice about Stans and its potential role as a supplier of refined rare earths products from its mining project in Kyrgyzstan so we’ll be having another look. That’s not to say we don’t still have our concerns (see also here and here). Furthermore, given that Stans is now quite pricey compared with many of its peers it’d take something special for us to make room for it in our Collective2 Diversified Rare Earths Basket or any of our portfolios.
Renaissance Gold (TSX: REN; Pink Sheets: RNSGF)
Given that shares of Liberty Silver (TSX: LSL; OTCBB: LBSV) are probably unavailable for short sale a trade that goes long Renaissance and short Liberty is unfortunately impossible. It’s a real shame because it would make for a beautiful trade given how Renaissance is CLEARLY the best way to play the Trinity silver project as explained here. Even after falling 50% since October Liberty is still absurdly valued, no doubt in part because of enthusiastic promotion by several letter writers including James West and David Bond. The question remains, why weren’t they pounding the table to buy Renaissance Gold instead if they thought the Trinity silver project was so hot?
Inca One Resources (TSX-V: IO)
We’ll keep an eye on this one, but given all the other rock bottom value opportunities in this market a company low on cash with an early-stage exploration project in the troubled Cajamarca region (Peru) just doesn’t cut it.
Callinex Mines (TSX-V: CNX; Pink Sheets: CLLXF)
Trading near cash value as it struggles to permit projects due to new community involvement requirements that are proving difficult to meet.
U3O8 Corp. (TSX: UWE)
We met with Dr. Keith Barron over breakfast. You may recall the name from back in the good ol’ days of Aurelian Resources in Ecuador. Namely, Keith co-founded Aurelian and discovered the world-class Fruta del Norte gold deposit in 2006. He then made a cool $100 million or so when Kinross Gold (NYSE: KGC; TSX: K) acquired the project for $1.2 billion in 2008 while also retaining an NSR on any eventual production. Keith then semi-retired to Switzerland. Although the thrust of our conversation involved a soon-to-IPO company with an unusual project portfolio focused on gold and uranium exploration in Keith’s new home in the land of cuckoo clocks, we did take a look at U3O8 Corp. after some positive comments from Keith (he is a co-founder of that company as well). Alas we don’t find U3O8 particularly compelling at this stage — at least not enough to warrant an immediate switch out of our long-suffering position in fellow south American uranium explorer who shall remain unnamed — but the Swiss venture does pique our interest and we may follow the pre-IPO/IPO. We’re not saying more about the company for now but you can probably figure it out on your own and then do a search on Sedar for more info.
Carlin Gold Corporation (TSX-V: CGD)
We spoke at some length to the nice guys of Carlin Gold including Robert Thomas, VP Exploration, about the emerging south Cortez play where Barrick has recently made some exciting multi-million ounce gold discoveries including Red Hill and Goldrush. Carlin Gold has a property to the north/east of these discoveries and there is potential for the Red Hill-Goldrush trend (assuming it is one) to extend unto this land. Carlin Gold’s drilling to date has been “encouraging” but as with other “on trend” Carlin-style prospects the exploration is akin to finding a needle in a haystack. This applies to south Cortez neighbors Rye Path Gold (TSX-V: RPM; Pink Sheets: RPMGF) and NuLegacy Gold (TSX-V: NUG; Pink Sheets: NULGF) as well. The odds of making a blind discovery are pretty low and that means don’t hold your breath. On the other hand, sometimes drill results can provide an early indication that a gold discovery may be close by (for example, because decalcified silty limestone has been found near a high angle fault) and thus it behooves the junior exploration speculator to keep close tabs on any company actively drilling a Carlin-style system.
Disclaimer: We don’t currently own shares in any of the above companies with the exception of Verde Potash, Western Pacific Resources and Golden Predator. We do not receive compensation for our commentaries from any party and we have not received compensation from any of the companies mentioned. This is not investment advice, which you should seek from a licensed investment professional.
