(Editors' Note: This article covers a micro-cap stock. Please be aware of the risks associated with these stocks.)
While there are plenty of bargains to be found in the gold (NYSEARCA:GLD) and silver (NYSEARCA:SLV) sector, perhaps no company presents a greater value proposition that St. Andrew Goldfields (OTCQX:STADF).
Right now, I am looking for contrarian opportunities in the gold and silver markets as I ultimately believe that precious metals will recover from their current three-year lows. Should I be right and the metals eventually recover, I am highly leveraged with several high quality mid-tier and junior mining companies in my portfolio (in addition to several long-dated warrants on quality gold producers).
I believe the best strategy in this market is to find producers who have high-grade deposits located in politically favorable mining jurisdictions. Management teams should also be focused on reducing all-in sustaining costs and maintaining a healthy balance sheet during this period of prolonged weakness in the metals.
One company which really stands out to me here is St. Andrew Goldfields, a Canadian based gold mining company which is targeting 100,000 ounces of gold production this year. This company has a very nice land package in the Timmins mining district in Ontario, Canada, which lies within the Abitibi greenstone belt. I feel the company is also significantly undervalued at current prices - one look at St. Andrew Gold's current valuation, and you would think that the company is operating in Ghana or Mali.
Here, I will make the case that shares of St. Andrew Goldfields present a compelling long-term buying opportunity. I feel that this junior gold miner has the balance sheet and the right plan to make it through this tough period for gold, and should the price remain at $1,220 an ounce, I feel this company will still be generating positive cash flow from operations. Not only that, I feel that the company will outperform its peers when gold eventually does rise.
Why St. Andrew Goldfields?
Shares of St. Andrew Goldfields currently trade at .20 cents and with 368.3 million shares outstanding, the company has a market cap of 74.54.
*Balance Sheet Overview
- As of Sept. 30, 2013, St. Andrew Goldfields had over $31 million in cash and equivalents and $19.5 million in working capital, so the company is sufficiently capitalized to continue operations, even if gold went lower.
(Note: interest rates vary depending on the Company's total debt ratio and ranges between 2.00% and 2.75% above prime, based on prime rate advances, or 3.00% and 3.75% above LIBOR, based on LIBOR advances.
The company must make semi-annual payments of $2million to reduce the term credit owing, and is currently in the process of renegotiating the terms. Source: Corporate Presentation).
- The company also has an additional cash resource in the form of an undrawn revolving credit facility of $10 million, should they need it.
- The company has long-term debt of $12.9 million, which is down from over $15 million last year.
The bottom line? I feel that the company has one of the most solid balance sheets and working capital positions among the junior gold miners, a major plus as we sit here at $1,220 gold.
Here is a chart of the company's projects and exploration focus:
- St. Andrew Goldfields has total proven and probable reserves of 735,000 ounces total g/t of 4.84. However, the company also has a measured resource of 281,000, 1.9 million in the indicated category and 1.02 million in inferred, for a total resource base of 3.93 million ounces.
Of those ounces, 1.12 million ounces is from the Aquarias project, which has low grades of 1.46 g/t. A technical review is in Progress on Aquarias and the timeline to production is 3-5 years out.
Since the Holt mine and the Taylor and Hislop project are the main focus of exploration, I will exclude the resource from Aquarias in conduction a valuation on St. Andrews Goldfields. If we subtract the 3.93 million ounce resource base from the 1.12 million ounces at Aquarias, we are still left with a significant resource base of 2.81 million ounces.
As mentioned previously, St. Andrew's has a current market cap of 74 million. To get the company's enterprise value you must minus cash reserves and add debt.
With $31 million cash and equivalents, plus $12.9 million debt, St. Andrew's has an enterprise value of just $55.9 million.
St. Andrew's has 2.81 million ounces (minus Aquarias), so the company's EV/AU is just $19.8 per ounce!
Since the gold producer average is in the $50-100 range, St. Andrew's is very undervalued based on their resource base:
- Barrick Gold (NYSE:ABX) has an EV/AU of $90 per ounce.
- Goldcorp (NYSE:GG) has an EV/AU of $124 an ounce.
- Yamana Gold (NYSE:AUY) has an EV/EU of $99 an ounce.
Here is a chart from GoldMinerPulse.com which shows the average EV/AU per ounce for some gold producers, which shows that St. Andrew's would fall on the lower end of this range:
St. Andrew Goldfields projects are located in one of the best, if not the best mining jurisdictions in the entire world.
As you can see below, the company is literally surrounded by gold deposits, some of which are operated by large cap gold miners such as IAMGOLD (NYSE:IAG), Goldcorp, Agnico Eagle and Kirkland Lake Gold. This is a 180 million ounce gold belt of which St. Andrew's has a very large land package.
- Significant drill results have been reported from the Taylor Project. These results include high-grade drill intercepts of 16.2 m of 11.56 g/t, 27.7 m of 5.49 g/t and 18.3 m of 6.62 g/t. What this means is that the potential for a further resource expansion is very likely. Not only that, the resource is high grade which should allow the company to produce gold at lower than average cash costs.
- On Aug. 7, the company reported great exploration drill results from Hislop: the results included 3.06 g/t Au over 21.8m, including 5.30 g/t Au over 8.2m; and 7.01 g/t Au over 8.1m.
- On Dec. 10, 2012, the company reported even better results at Hislop:10.22 g/t Au over 24.0 metres including 11.91 g/t over 8.5 metres and including 23.22 g/t Au over 5.9 metres.
- Remember, Hislop only contains a resource base currently of 31,000 ounces proven and probably, plus 35,000 ounces measured and indicated. These drill results prove that significant exploration potential remains, and I expect a big increase in the resource ounce a new estimate is released. I also expect similar positive results at Taylor as the company continues to spend it exploration money wisely by focusing on drilling for high grade gold at its properties.
Drilling on the properties are expected to resume in early 2014 and these results will be included in the next resource update.
St. Andrew Goldfields reported great Q3 2013 results in my opinion.
- The company produced 25,434 ounces of gold from three operations (Holt, Holloway and Hislop) and is on track for year-end guidance of 95K to 105K.
- For Q3 2013, the Company began to report all-in sustaining cost per ounce of gold sold, and all-in costs came in at just $1,086 per ounce, which is below the mining industry average of $1,200 an ounce. This is also down significantly from last quarter's all-in costs of $1,220 an ounce.
- The company earned cash margin from mine operations of $13.4 million and operating cash flow of $8.9 million or $0.02 per share - despite a 19% decrease in the average realized price per ounce of gold sold.
- Averaged realized price of gold for the quarter was $1,329, so with gold at $1,220 currently, expect cash flow to be down next quarter. However, with all-in costs under $1,110, the company should still turn a small profit.
* Merger or Acquisition Opportunities
I believe that St. Andrew Goldfields is one of the most obvious takeover candidates out there as the company's projects are literally surrounded by mid-tier and major mining companies.
I feel that St. Andrew's makes a compelling investment on its own but I certainly wouldn't be surprised if a mining company came in and tried to buy them out. However, the premium would have to be big for shareholders to accept the deal.
What are the Risks?
While I feel St. Andrew Goldfields is a great buy here, that certainly doesn't mean that an investment in the company comes without any risks.
- First, the price of gold remains the single biggest risk for shares of St. Andrew Goldfields. All-in costs have come in under $1,200 an ounce which means that the company is currently profitable with gold in the $1,220-$1,250 range. However, if gold were to drop to $1,000 to $1,050 an ounce then the company's profitability would come into question.
- Out of the company's total resource base of 3.93 million ounces, a large part of the resource is in lower confidence categories of 1.9 million in the indicated category and 1.02 million in inferred. Therefore, a lot of the success of the company depends on management's success in "proving up" the reserves.
- Operational risk is a risk with any gold mining company but St. Andrew Goldfields operates three small mines, as opposed to a mid-tier or major miner which operates multiple mines, sometimes as many as 10 or more. So, if operational challenges occurred at any mine, it could pose a significant problem to the company.
- Next, shares of St. Andrew Goldfields are thinly traded. On the US exchange, average 3-month volume is just 38,609. Therefore I would recommend investors consider trading on the TSX exchange where shares have more liquidity with average 3-month volume of 191,322.
These are the main risks with investing in a small junior gold miner such as St. Andrew Goldfields. I recommend that investors conduct their own due diligence before making an investment decision.
Conclusion: St. Andrew's Looks Like a Can't Miss Opportunity
Despite the risk, I feel that shares of St. Andrew Goldfields present a great buying opportunity at present prices and I urge investors to consider some of the points mentioned in this article.
Only a few other junior mining companies have grabbed my attention like St. Andrew's has. If you are interested in hearing about my other top picks in the gold/silver mining sector, please comment below and follow me here on Seeking Alpha.
Disclosure: I have no positions in any stocks mentioned, but may initiate a long position in OTCQX:STADF, OTCPK:KGILF over the next 72 hours. 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.