Finding Deep Value in Mining
Precious metals prices are up substantially this year but many precious metals equities are still near multi-year lows. Some sub sectors such as explorers and developers are still extremely undervalued and there are many deep value bargains out there trading at big discounts to NAV.
Before we get too excited though I want to acknowledge that there is a good reason why these companies are undervalued. There is a real risk that many of them go bankrupt or have to sell their flagship assets at a fire sale if they can’t raise money. Additionally, if they continue developing their assets they will have to dilute shareholders in one way or another lowering the potential upside for investors.
But there are companies out there that have good management teams, projects and financial backers that can help them survive and build value in a tough market. In many cases, these companies are being thrown out with the bathwater creating a classic deep value opportunity for investors.
One challenge with investing in these companies is that even though gold and silver prices have shot up they haven’t received much investor interest suggesting that they might be perennially undervalued value traps.
But ultimately if gold and silver prices go up and the cost of producing them doesn’t go up to the same extent that leads to higher profits for producers. They can then buy new projects and companies or partner with other companies to build their projects. Some juniors can even build mines themselves with better financing options as a result of better project economics at current metals prices.
Ultimately, if the economics make sense and participants in the market believe metals prices will stay fairly elevated, the value of quality juniors and explorers can be unlocked and their discounts to NAV narrowed. I think there’s a good chance that the bottom is in and many of these companies are moving in the right direction to unlock value. To illustrate the kind of value that’s out there, I want to highlight two companies that I own.
The first one is Treasury Metals (TSX: TML). They have a good project located in Ontario, Canada that’s close to being permitted and a good management team. Their flagship asset has a PFS study done on it with NPV5 well over $500m at current gold prices. That compares to a market cap of around $40m now although it will be considerably higher with more shares out after the recent acquisition of Blackwolf Copper & Gold (TSXV: BWCG) and concurrent financing. The company is therefore trading at something like a 90% discount to NPV5.
I believe the primary reason why it is so cheap is because they don’t have a clear path to finance it and it’s tough with this low market cap. But with the recent acquisition of Blackwolf, I think the company took a step closer to that becoming a reality. Now they have Frank Giustra as a cornerstone investor and strategic advisor. His mining team has done the due diligence on this project and they can lean on his extensive network and track record in the mining industry. In my opinion, the company has been doing everything right to close the discount to NAV and the chance that they become a producer in the near term has gone up, but it’s still incredibly cheap.
Another company that I really like is U.S. Gold Corp (NASDAQ: USAU). They have a project in the U.S. state of Wyoming which is a great jurisdiction for mining. The management team is very good and their flagship project has solid economics. At $1825 gold and $3.65 copper it has NPV5 of around $384 according to the project’s PFS. With today's gold and copper prices the NPV5 is well north of $500.
The company recently got their mining permit and it has been rallying since but it’s still incredibly cheap. The current market cap is between $40m and $50m so it is also trading for something like a 90% discount to NPV5 at current metals prices.
These are just two examples and I have been building a portfolio of these companies over the last half a year or so. I’m still amazed how undervalued many of them still are given the movements in the underlying commodities. It’s not uncommon to find good companies like these with good management teams and a catalyst to unlock value selling at more than 90% discount to the NAV of their flagship asset. However, there’s also substantial risk and when investing in these companies, I am very cognisant of the risk involved and that I have to build a portfolio of high quality, high conviction names.
With that said, I’m a generalist investor and don’t have the expertise, the time or the network required to be a successful stock picker in mining equities. Therefore I try to follow and learn from other great investors in the space.
Two experts that I have learned a ton from personally and are really good at finding solid, undervalued precious metals stocks are John Feneck of Feneck Consulting and Don Durrett of Goldstockdata.com. I learned about both of the companies above from them in their Youtube interview series with management teams and by subscribing to John’s services.
These are great deep value investors in mining that have a knack for finding unbelievable value. They parse through a ton of stocks (Don follows around 900 companies) to select a few that have good management teams, projects and catalysts to unlock value. Just what someone like me, who doesn't have the experience, is looking for in today’s bargain rich junior mining market.
At Value Discovery Media we are thrilled to be collaborating with Don Durrett and John Feneck on an event titled “Investing in Gold and Silver Equities with Don Durrett and John Feneck”. I encourage you to read more and register for the event here. I hope this article was valuable and I'm looking forward to seeing you at the event with Don Durrett and John Feneck!
Disclaimer: This article is for informational purposes only and does not constitute investing advice. Please consult with a qualified financial advisor before making any investment decisions.
