On Monday (Sept 16) Almaden Minerals (NYSEMKT:AAU) sold off 4.7% on over 480,000 shares, which is four times AAU's 90-day average daily volume. It was down as much as 9.4% during the day. As it turns out, the selling was triggered by junior mining stock newsletter promoter, Brent Cook, who issued a "sell" on AAU. In the absence of any fundamentally-driven news events that would affect the long term value of AAU, yesterday's sell-off in the stock is a golden opportunity to buy into a very high quality junior mining company which is led by a CEO with a considerable track record of mining industry success.
Almaden Minerals (company website link) is a junior mining exploration company modeled on the project generator strategy. It acquires potential mineral deposits by staking claims on land that has been previously unexplored. Currently its flagship property is in the Puebla State of Mexico, located in southeast Mexico between Mexico City and Veracruz. It also has a portfolio of over 30 properties in Mexico, Canada and the U.S. being held for future exploration. In addition it has net smelter royalty agreements on several properties which it previously owned and sold off to other companies. The company is led by chairman and founder Duane Poliquin, who has a successful track record of mining discoveries going back to 1972. His son, Morgan, is the President and CEO.
The Ixtaca Gold Zone
Almaden's flagship property is the Tuligtic Project. The company released a 43-101 resource estimate in January this year which showed as much as 2.5 million ozs of measured and indicated gold and 1.8 million ozs of inferred gold. In my conversation with the company today, Mr. Poliquin indicated that, based on step-out and in-fill drilling since the release of the 43-101, Almaden now has as much as 3 million ozs that can be classified as measured and indicated ozs of gold and that possibly as much as 90% of the inferred resource will have the potential to be reclassified as measured/indicated by the end of 2013.
More significantly, the metallurgy report also released in January showed potential average recovery rates of 88% for gold and 82% for silver, with economic viability down to a price/oz for gold as low as $700/oz. In other words, this property is already demonstrated to be a fairly large, higher-grade deposit with a substantial amount of property left to explore. For anyone interested here is a summary of the metallurgy report.
More On The Tuligtic Project
One of the compelling features about AAU as an investment is that all of its properties are founded from scratch by staking claims on unclaimed property in areas where they think there's potential for mineralization. In other words, its projects are very "clean" in that none of them have underlying attached royalty streams or title disputes which can dilute the cash flow generated from a successful project.
The Poliquins decided, based on their extensive knowledge and experience of how the major gold trends in California, Nevada and Utah were formed geologically, to undertake the long and arduous project of modeling and studying the eastern coast of Mexico, which had been largely ignored by most mining companies who were focused on the prolific mineralization of Mexico's existing mineral belts.
The Poliquins took extensive infra-red satellite imagery of Mexico's east coast, along with all existing geological studies and Government data that were available and started from the U.S. border and worked their way down to Guadalajara -both on the ground and from the air - to put together a thorough geological assessment of the entire region. In fact, the data they assembled is more comprehensive than even the geological data that the Mexican Government has of the area. Murray Poliquin is now considered a leading expert on the geology area. You can read his technical reports on the Ixtaca Gold Zone here: The Tuligtic Project.
The result of their efforts on the east coast of Mexico so far has produced not only the Tuligtic Project, but also three other projects that were sold to mining companies in exchange for stock and net smelter royalty agreements. In addition, AAU owns several other drill-ready projects in the region.
Value of the Stock
The Company has 65 million fully diluted shares outstanding. Based on Tuesday's (Sept 16) close of $1.44, the market cap is $92.6 million. This values the company's 4.3 million measured, indicated and inferred gold in the ground at approximately $21/oz.
Valuing a junior mining company with a proved resource can be quite subjective. There are several variables that vary widely from company to company, including whether or not an open pit is feasible, political risk of the jurisdiction and the metallurgy of the deposit.
In general, the easiest yardstick to apply is comparable transaction analysis and then to "fine tune" the estimate based on the variables just listed.
While there has not been any notable junior mining M&A activity since the price of gold was taken down in April, over the previous 24 months there were several transactions that occurred at an average of $112/oz of gold in the ground. The high profile takeover of Aurizon by Hecla in March was valued at roughly $100/oz.
During the course of the current 13-yr bull market in gold, $80/oz of gold in the ground has been - in general - the long run average acquisition price per oz in the ground for juniors. In the context of the current price of gold and silver, I thus think it's conservative to use $50/oz as a starting point. This would value AAU at $215 million. Almaden has several favorable variables which enhance its intrinsic value, including that Mexico is a very politically friendly mining jurisdiction and the high quality and grade of the deposit. Other intangibles include the high number of prospective projects that Almaden controls (over 30) and the likelihood that one or more of the net smelter royalty agreements will eventually throw off some meaningful cash flow.
While putting a value on a junior mining company is a moving target, what I consider to be a conservative "intrinsic" value for the Company is 2.3x greater than the current market cap of the stock, which provides a lot of cushion for error. Duane Poliquin mentioned to me today that any serious bidder for the Company would have to offer at least twice the current market cap before he would consider to even begin negotiating a deal in the context of the current market price for gold and silver.
The reason for the high-volume sell-off in the stock Monday is that mining stock newsletter promoter Brent Cook, who publishes "Exploration Insights," put a "sell" on the stock. Mr. Cook is one of the few newsletter writers who covers junior mining stocks and because of that he commands a large retail account following. Typically his followers buy and sell at his command. I really don't like it when Brent Cook issues either a buy or sell recommendation on a stock I own or a stock held in the fund I manage because the buying or selling that is triggered is of very low quality, meaning that it is largely driven by momentum-chasing retail accounts and day traders. It's selling that is not necessarily motivated by fundamental factors or meaningful news triggers.
Having said that, I have found that I can always make money trading in the opposite direction of the Brent Cook "effect." When he issues a buy on a stock in my fund, I always sell into the big spike. Always. Usually at least 1/3 of the position - even if it's one of my favorite and largest holdings. I do this because I know I can always reload what I sold at a lower price once the Brent Cook "effect" fades and the retail stock jockeys are done selling. It typically doesn't take more than a week to sell and reload at a profit. Conversely, when he issues a sell on a company that I know well and own, I can always add to my position after the selling subsides and have always made money when the stock rebounds. This strategy takes longer to yield profits but it always does. Note: I don't know if this works for all of his recommendations but it has worked historically for the stocks I own and trade.
In the case of AAU, Mr. Cook's reasons for initiating the "sell" were not really based on any fundamental changes in the outlook for the Tuligtic Project or the company. In fact, his "sell" was really more like a "reduce the position over time depending on price" (to paraphrase). Not only that, he even states explicitly that AAU has "high exploration upside."
The good news is that Monday's close to 5% plunge in the stock has created an opportunity to buy into a quality junior mining stock at an even more undervalued level than before Mr. Cook's newsletter release. For short term traders, my near-term price target - assuming the price of gold moves sideways to higher, would be for AAU to bounce quickly back up to its 50 DMA ($1.68), which would yield a 16.7% short term gain. Longer term, my price target based on my valuation analysis of the stock above would be $3.30/share, which would equate with my $215 million value estimate. In fact, the 52-wk high (December 12, 2012) was $3.25/share. My target time frame for what would be more than a double in price from today's close (Sept 16, $1.44) would be the next 52 weeks.
Additional Fundamental Strengths
When I evaluate a junior mining stock for investing, the company has to have key attributes, all of which apply to AAU. First and foremost the company must have some form of demonstrable resource. For the most part the company must have a 43-101 resource report. I'm not a geologist and I have no earthly way of analyzing an evergreen property.
Second, the company must be located in a politically low risk jurisdiction. For me this means primarily the U.S., Canada, Mexico and selective Central/South American countries.
Third, the company must have at least 1 year of cash on the balance sheet based on historical cash burn rates plus management's anticipated spending plans. Nothing is worse about investing in juniors than buying a junior mining stock right before the company announces a big stock financing. AAU is set for a least the next 12 months.
Fourth, management needs to own a meaningful percentage of the equity. I'm not investing in what is essentially a venture capital project unless the insiders have skin in the game. AAU's management and insiders own 15% of the stock, including a large participation in a recent private placement of equity.
Finally, ideally there will be a strategic investor in the stock. This would mean a either a large cap mining company or a big investor capable of taking the company over. In AAU's case, a very wealthy Mexican businessman owns a little over 10% of the Company. In fact, it was at his behest that AAU issued the non-brokered private placement mentioned above, presumably so he could increase his ownership stake without moving the stock from having to buy a lot of shares in the open market.
To be sure, there are a lot more than just the standard mining-specific business risks involved with investing in junior mining stocks. Of course, this is why the return potential is many multiples higher it than it is for investing in the large market cap mining stocks.
The biggest risk right now is the near-term price of gold. Gold has been volatile and in a nasty two-year price correction phase. If the price of gold goes back to retest recent lows, AAU's stock will more than likely get hit in price. Based on my long term view for the price of gold, however, and given that I think the price correction in gold has largely run its course, I am confident that the risk of missing a big upside move is greater than the risk that AAU goes lower from here.
Given that AAU has already produced a solid resource report for the Tuligtic Project and has subsequently generated additional drilling results, most of the typical early-stage development risk has been significantly reduced. Now the task at hand for management is to continue advancing the already demonstrably successful Tuligtic project and make it even more attractive to a potential acquirer. That's a bet that I'm more than willing to make for myself and for the investors in my fund.
Disclosure: I am long AAU. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
Additional disclosure: The fund I manage is long AAU.