One way for the average retail investor to make money in small stocks is to follow what successful fund managers are doing in their own portfolios. One such fund, Ashford Capital Management, with over $650M in assets, just tipped its hat Friday as to their interest in a company called Standard Metals Processing Inc. (OTCQB:SMPR). Late Friday, they filed a 13G representing their now current ownership of 9% of the company's stock, or 8,150,000 shares.
The Nevada based company in the process of developing a custom toll milling operations facility with state of the art equipment initially capable of processing 50 tons/day. Slated for launch in Q3 of 2014, the plant is anticipated to be upgradeable to a higher run rate and initial processing is expected to focus on gold, silver and strategic (platinum group) metals.
As many who follow the mining space know, Nevada has long played a historic role in American gold mining. Gold mining in Nevada is a major industry, and one of the largest sources of gold in the world. Nevada currently mines 79% of all the gold in the United States, which is equivalent to 5,640,000 troy ounces (175 t) in 2009. Total gold production from Nevada recorded from 1835 to 2008 totals 152,000,000 troy ounces (4,700 t), worth over US $200 billion at today's prices. Almost all the gold in Nevada comes from large open pit mining and cyanide heap leaching recovery. A number of major mining companies, such as Newmont Mining (NYSE:NEM), Goldcorp (NYSE:GG) and Barrick Gold Corporation (NYSE:ABX), operate gold mines in the state.
While Nevada has no shortage of minerals including gold, it now finds itself with another major problem and that's a lack of processing capacity. It's not only a lack of processing for Nevada's gold that is the problem, but a general lack of processing for a host of other minerals as well, not limited to certain rare earths. A recent article at Mineweb cited the following:
"During a U.S. Senate hearing Tuesday on S. 1600, the Critical Minerals Policy Act of 2013, Senate Energy and Natural Resources Committee Chairman Ron Wyden, D-Oregon, noted, "A crucial but too often neglected part of this [U.S. critical minerals] supply conversation is mineral processing."
"Although mining is an important part of the supply equation, and S. 1600 encourages federal agencies to expedite permitting for new critical minerals extraction, it is the lack of processing capacity-transforming the raw materials that we pull out of the ground into the high-purity compounds needed for manufacturing-it is that challenge that is my concern and the concern of many experts," he observed.
The current state of affairs clearly requires enhanced domestic sources of mineral processing.
Situated on 1183 acres in Esmeralda County, Nevada, Standard Metals Processing should see significant demand for its milling from miners in the US, Canada, Mexico and Central America. U.S. domestic custom milling capacity has been limited due to decades of de‐commissioning capacity, vertical integration, and long lead time/permitting hurdles that are required to build new milling facilities.
From an investment perspective, the company's business would appear to be strategically positioned for substantial growth and profitability due to its ability to seize on the obvious supply-demand imbalance for custom toll milling and processing services. They also have tailings that by utilizing their state of the art processing facility may be able to recover various metals such as gold and silver. The company uniquely addresses a gap in the marketplace and this niche opportunity may prove very lucrative.
Importantly, their business has significant barriers to entry because of the high regulatory and environmental barriers while the company's assets and pending water permits are not easily duplicated.
A couple of weeks ago, the company announced it had already secured its first processing commitment. This is very significant since it gives investors a first indication just how in demand the custom milling will be once their facility is put on-line in Q3 of this year.
Like all micro cap companies, the company is not without its fair share of risks that investors would be well served to note. The mining space over the last year has seen a decrease in overall production due to declining commodities prices, specifically gold where prices have fallen from roughly $2000 an ounce to $1300 an ounce although it has begun to see a fairly strong rebound in recent weeks. The company's plan calls for ore to be supplied predominantly by junior and micro minors, effected more so than the majors. While the company has already received and executed its first processing agreement, there can be no assurance others will follow, despite the compelling need in the marketplace.
The company is a developmental stage company yet to generate revenue. While management appears very qualified, there can be no assurance they will ultimately be successful in generating revenues and achieving cash flow positive. The company is also reliant on a government agency for the issuance of its water pollution control permit, while they have already made application and it should be issued, the company can't predict the timing of issuance.
The company's apparent strategy for funding it completion of its processing facility will be done through the exercising of warrants. While the warrants are deeply in the money, there can be no assurance that investors will exercise them. Should the company choose to increase its production capacity, it may require additional capital investment which could lead to further dilution.
That said, Standard Metals Processing stock has seen a surge of investor interest in recent months with what would appear to be some very large accumulation, perhaps not limited to that of just Ashford Capital Management. Technically the chart looks very bullish as well with the shares having recently traded at a new 52 week highs ($1.68)
Chart courtesy of stockcharts.com
I think the company's shares are one to keep an eye on as they offer a two prong strategy going forward. First they will be one of the few custom milling operations in the United States that offers multiple circuit options with a newly developed state of the art facility. Second they will offer significant mining upside by running their own materials. This is a very unique play that is well worth watching develop. It would appear they have the potential of filling a large void in the mining industry that could ultimately result in them having a highly scalable and potentially very profitable operation.
Last but not least, Ashford Capital Management filing a 13G last Friday indicates the company is no longer just on the radar of some large institutions, at least one, and possibly more to follow, have now demonstrated a desire to invest a sizeable amount of assets into the company. Currently Ashford's Capital Management's position in the company is valued at approximately $13M based on Friday's close. In light of this 13G being filed, I will be closely watching to see if others soon follow suit.