For a look into my contrarian value style of investing, how I currently view overall market risks, why I am buying producing mining stocks instead of bullion going into the next gold cycle, see Part I.
From the few hundred gold and silver stocks I have been studying this year, with about 80% rejected quickly, each of my articles over the next several months will focus on a different group. The good news is that some miners did a great job. Skilled management with some timing luck is usually the difference; but these are just buzzwords and I still need the math to be there—show me the money!
I don't agree with analysts who favour the few remaining gold producers with positive earnings. I focus on vital cash flows, reserves and book value as earnings can be illusive after non-cash items like depreciation and heavy impairments recently which may get revalued again with higher gold prices. P/E positive miners may have fallen less but if their razor thin profit margins start to disappear they could suffer more—I'd rather wait until their downgrades as the dirty laundry gets fully aired out.
Short sellers know that some institutions and ETFs also sell if dividends get cut or shares fall below key $5, $2 or $1 technical levels as call/put optionability ends, some exchanges threaten to delist, or to avoid the stink of holding a penny stock which could raise questions at bonus time. As long as the fundamentals remain intact, contrarians recognize this buy-high sell-low attitude and the extra value it may represent as the stock returns above these key price levels with boosts as institutions buy again.
Until recently I couldn't find any penny gold stocks with leveraged tangible value. To me that means companies still building cash operating profitable mines at current gold prices, with little debt and world-class resources offering superior growth for many years. In other words the babies thrown out with the bathwater which probably would have been acquired by now in a better gold market.
I'm also starting with these very low priced stocks as their charts seem to have plateaued which is when I prefer to build positions over time. Other mining stocks I like are technically still sliding down the wrong side of the mountain and hopefully will also signal a bottom before I write about them.
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The company's Ivory Coast Tengrela project shows the Sissingue gold mine has 427Koz of P&P reserves at 2.4g/t plus 880Koz of M&I and 63Koz of Inferred at 1.7g/t. April's revised feasibility study confirms robust economics and July's news said mine construction would start in the September quarter with a first gold pour in 14 months. Nearby prospects include: Mbengue, Mahale and Napie.
Perseus also has a strategic alliance and owns 12% of Burey Gold, with a first right of refusal on the sale or farm-out of its Guinea, Democratic Republic of Congo and other African mineral interests.
Quote T.PRU at our website and then click the Financials tab which shows the real magic. As of the end of June Perseus had approximately: $100M cash, $39M receivables, $42M inventory and $6M prepaids or almost $208M in current assets versus current liabilities of less than $37M. Shareholder's equity is $550M which is over three times its current market capitalization of $175M, with no debt!
The 2015 financial year report on August 28 shows a record profit after tax of A$92.2M or 16.7 cents per share, up A$124.2M or 288% compared to FY2014 results. Highlights include: revenue +26%, expenses -10%, foreign exchange gain of $52.4M, cash +181% to A$103.7M or 19.7cps, cash and bullion +61% to A$127.3M or 24.2cps, working capital +157% to A$177.6M and no third party debt!
Edikan's gold production was +17% to 212Koz, AISC -32% to US$877/oz sold at US$1,324/oz on average. This 200Koz+ mid-tier should grow as its mines have low costs now and the pit shells can be adjusted to make money well below $1k gold. While other profitable low-cost producers are rewarded with premium share valuations, PRU now trades at a P/E of only 2.2—that's not a typo, not 22 but 2!
Perseus' October 21 activity report shows Edikan's quarterly production of 44,267oz meets guidance with unit mining costs -45% and processing costs -15%. All-in site costs were 4% below the bottom end of guidance at US$1,060/oz (including development and sustaining capital) sold at an average of US$1,291/oz. Open-pit development remains on schedule and under budget. At Sissingue a mining convention was signed with the Ivorian government and early works have started with a full-scale construction decision set for the December quarter pending satisfactory financing.
PRU's market cap is less than its A$191.2M debt-free working capital base after adjusting for the 7% lower Ausi dollar. As of September 30 Perseus' cash and bullion was A$131.8M, up A$4.5M for the quarter. Subtracting A$131.8M or ~C$123M from the C$175M market cap means the market values the rest of the company at only C$52M. Surely the plant and equipment alone are worth more than this, which means we can't value the 2.78Moz of proven and probable reserves, or 12Moz identified in all categories, as they are totally discounted—priced at less than zero! Still believe in efficient market theory? Please don't wake up private equity!
While I prefer miners in safer jurisdictions and with a tighter than ~529M share structure, I have to give Perseus top marks in every other area. Whether by skill or luck they even locked in superior profit margins with futures starting when gold was around $1,500/oz—last month's report shows 149Koz sold forward at US$1,240/oz, worth A$26.5M. Non-US miners (with gold revenue priced in US dollars and costs paid in local money) can also act as a natural hedge against opposing USD/gold price swings as they can win even as gold falls as long as this is offset by lower local currencies.
Now you can see why Perseus Mining was recently added as the #1 stock on our Top 30 Small Caps. Can anyone show me another producing gold miner making money at C$0.33 per share with half of this in profits, more than two-third in cash and bullion, debt free and with world-class assets of 12M essentially free ounces to mine for decades? Here's an interesting CEO interview video made in 2014.
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Banro's second mine continues to ramp up with commercial production expected by the end of this year. The Namoya mine is 200km southwest of Twangiza and has 1.27Moz of P&P reserves at 1.92g/t, plus 1.74Moz of M&I at 1.88g/t and 330Koz of Inferred at 1.63g/t. Heap leaching oxide ore takes several months for full gold recovery with stacking levels now at 447K tons. Q3 production was 12,157oz +160% versus Q3-2014 and at full capacity Namoya should produce 9K-10Koz per month.
Banro's 2015 guidance is 175K-195Koz which may grow to 250Koz+ per year over the next year or so on these two mines alone. That's enough short to near-term production growth to catch my attention but there's so much more. In between these two operating mines are two more large mines to be developed. Lugushwa has 730Koz of Indicated oxides at 1.35g/t and 310Koz of Inferred at 1.56g/t, plus 3.22Moz of Inferred transition and fresh at 1.54g/t. Kamituga has 320Koz of Inferred surface ore at 2.40g/t and 600Koz of Inferred underground ore at 6.00g/t.
The scaleable potential of these world-class, high-grade, open-pit gold plays are what really excites me. Banro has 13 mining licenses over 2,616km2 of all the major historical gold producing areas of the Twangiza-Namoya belt where ~2.4Moz were previously mined. The company was also awarded 14 exploration permits covering 2,638km2 between its projects, with additional permits pending. Not just a series of properties or even a district usually measured in hectares, Banro is a first mover play on most of Africa's last-known undeveloped gold belt spanning over five thousand square kilometres!
After a decade of exploring only 5% of their claims, Banro has identified 15.9Moz of resources so far, broken down as 2.91Moz of P&P reserves at 2.11g/t for Twangiza and Namoya, plus 7.73Moz of M&I at 1.55g/t and 5.26Moz of Inferred at 1.67g/t over all four mines. The company's goal is to be a 500Koz+ per year very low cost gold producer that earns its motto, "the passion of a junior, the assets of a major." This Banro Corp. company video is informative but is a few years old.
BAA's August 12 Q2 shows record quarterly and half-year revenues of $42.6M +61% versus Q2 last year, and $83.6M +47% versus H1-2014. EBITDA of $34M +210% was also a record, versus H1-2014's $11M loss. Twangiza's H1-2015 cash costs were $558/oz -30% from $794/oz and AISC was $643/oz -29% from $902/oz in H1-2014. Twangiza's gold reserves even swelled +59% which extends the mine life back to 14-years utilizing the existing processing plant.
However, Banro's balance sheet is the main reason why BAA is only my second favourite gold stock—at least for now. As of June, current assets were ~$62M versus ~$112M in current liabilities, and with long-term debt of ~$166M. Debt is debt but this seems manageable with high-margin production ramping up nicely at both mines. Cash flow is building but has been needed to complete Namoya—see the Q2 mine under construction investment table which now is up to ~$396M.
Financing with debt or streaming to finish a producing mine is actually preferred over massive equity dilution at only pennies per share. With debt, and even after a ~$50M impairment charge, BAA still shows ~$450M in shareholder's equity, or ten times its current market value of $45M. Hopefully with Namoya nearly done, debt will be knocked out quickly to protect the common shareholders.
BAA's Q2 balance sheet shows ~$45M cash and inventory which is equal to its absurdly low $45M market cap. Why is BAA trading at cash with record revenues and EBITDA, huge high-grade gold resources at extremely high margins, tons of net equity to borrow against if needed, as its second mine ramps up production? The Sept 29 news that BAA's NYSE MKT listing may require higher share prices by the spring may upset some but doesn't affect intrinsic values. BAA may go higher by then, they could roll back and consolidate the share structure, or just trade on the TSX. What am I missing?
Many investors consider Africa unstable and the DRC especially risky. While I agree, everywhere has risks and I believe the DRC needs Banro as much as the reverse. Banro has employed thousands, built 500km+ of public roads and 90 bridges and supports many businesses. Its charity has completed 70+ social developments including 10 new schools plus 2 rehabs, a university women's residence, 4 health facilities, a marketplace, 4 water systems for 33K people, 2 basketball courts, sustainable farming etc. Future projects include a hydroelectric dam to benefit all while lowering Banro's energy costs around $100/oz! Banro received Best Employer in May and on October 19 won Best Performer in Social Investment with its founder nominated for Lifetime Achievement at the DRC Mining Awards.
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Timmins plans to grow its annual production profile to 220koz+ by developing its recently acquired Caballo Blanco 7.5-year project in Vera Cruz with ~688Koz-Au + ~1.3Moz-Ag recoverable at an $85M capex and $784/oz cash costs, and to 320Koz+ with its advanced Ana Paula 8.2-year project in the Guerrero gold belt. Ana Paula was acquired through the Newstrike Capital merger in May and looks more likely to be developed first with higher values of 1.86Moz-Au + 7.1Moz-Ag of M&I at a gold equivalent of 1.47g/t and 68Koz-Au + 664Koz-Ag of Inferred at 1.23g/t-AuEq.
TGD's December FY2014 balance sheet first caught my eye which shows approximately: $27M cash, $15M receivables, $47M inventory and $1M prepaids or almost $90M in current assets versus current liabilities of less than $38M which includes $14M in short-term debt. Shareholder's equity is $214M which is almost four times its current market cap of $57M, with no long-term debt. After the Newstrike merger the July 30 Q2 report now shows $81M in current assets versus $41M in current liabilities. Although these current amounts moved about 10% the wrong way, total assets grew 22% or $68M from $312M to $380M as total liabilities rose less than 2% or $2M from $98M to $100M.
Subtracting $40M in working capital from TGD's $57M market cap values the rest of the company at only $17M. Again the plant and equipment alone should exceed this, which means the gold at their operating mine plus the two mines acquired this year for around $125M have been totally discounted. The market is saying that Timmins' 1.6Moz of reserves plus over 2.6Moz in other categories, plus exploration potential from various claims on 200K+ hecatres of mineral rights in Northern Sonora, 45K+ha north of Zacatecas, 47K+ha south of Nayarit plus others areas are all worth nothing—wrong!
I thought TGD was undervalued even at this year's $1.27 high in January but I remained on the sideline as gold stocks were still sliding and were especially punished after making acquisitions. Short sellers lean even more on stocks that ETFs might unload if their market caps fall below arbitrary minimum levels and I knew (
The GDXJ rebalances on the third Friday of each quarter and on September 18, with TGD's market cap below $75M, I had stink bids in hoping for an end-of-day avalanche. TGD/TMM daily volume was around 1M but traded over 24M shares that day. The GDXJ's 35M+ share hoard of Perseus was dumped then as well and its 25M+ shares of Banro were jettisoned September 19, 2014 near its low.
With the cloud of GDXJ selling now out of the way, TGD may have finally formed a bottom base. After the market close on that eventful Friday, Timmins announced the acquisition of a process plant for C$8M that will save US$40-60M in Ana Paula capex costs with (
However, I didn't like TGD's July 30 Q2 report with 2015 guidance lowering production by 15Koz at $875-$925/oz cash costs. Another concern was the October 6 leadership change news which also said their Q3 will provide an updated mine plan with a significant asset impairment charge. I can only guess if this is from low share prices and low gold, to position the company for financing or a buyout to appease some large shareholders, or something more serious. More should be known tomorrow after its Q3 operating and financial results. I found this Timmins Gold stock valuation video helpful.
My calculations and observations are as an individual investor and are not recommendations. Data comes from financial reports, news releases, company websites and other public sources that may not be accurate, complete or up to date. There may be conflicts of interest as I own stock in some of these companies. I share these ideas in hopes that readers will comment on them and on other company stock boards at our website with their own insights, opinions and anything I may have missed. I mentioned the above three gold stocks in an interview with Palasade Radio, posted yesterday.
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