After peaking at the end of 2011, the weakness in gold (NYSEARCA:GLD) over the last two years finally provides investors with an opportunity to review the junior gold stocks (NYSEARCA:GDXJ). Back in 2010 and 2011, the commodity had seen a strong surge for a decade making the sector appear played out. Considering junior gold stocks typically get hit the hardest in a period of declining gold prices, the last thing an investor wanted was to invest in a junior minor at the top and watch the stock collapse. Now after the market has taken a pause and with global political issues on the rise due to Russia, one intriguing stock is Brazil Resources, Inc (OTCQX:BRIZF) that is quickly compiling a solid group of gold projects to develop.
Brazil Resources is a Canadian exploration company focused on acquiring, exploring, and developing a portfolio of advanced-stage gold projects during the current downturn in gold prices. The company has focused primarily on Brazil and has a surprisingly experienced management team.
The stock has rebounded strongly after a couple of positive moves by the company combined with a jump in gold prices.
With a micro cap, highly speculative exploration miner, the most important aspect of the company is the experience and background of the management team. Naturally the level of experience helps improve the performance of the company, but also it helps ensure that the efforts are all above board when investing in the speculative area of junior miners.
In the case of Brazil Resources, the company has executives with backgrounds from Uranium Energy Corp (NYSEMKT:UEC), BHP Billiton Limited (NYSE:BHP), Brasilinvest Group, and the Canadian Ministry of Natural Resources. Below is a slide from the recent investors presentation highlighting the key executives:
Outside of a seasoned management team, any miner won't make a good investment without access to resources to explore. In the case of Brazil Resources, the company has spent the last couple of years acquiring assets primarily in the Para State in Brazil. In fact, the company has four projects with NI 43-101 compliant gold resource estimates. The big benefit of these projects is the friendly corporate tax rate of only 15.25% in Para State compared to 34% in other states in Brazil. Another benefit is the decent road access of the projects with sufficient power and water to develop them.
Anybody wanting to understand the importance of access to roads, power, and water needs to look no further than one of the best miners in the world in Freeport-McMoRan Copper & Gold (NYSE:FCX). The copper and exploration expert continues to face issues at their project in the Democratic Republic of the Congo where recent power issues has required miners in the region to scale back any expansion plans.
As mentioned above, Brazil Resources has four projects in Para State with estimated gold resources. The projects include Sao Jorge, Cachoeira, Boa Vista, and Surubim. All of the projects other than Boa Vista have indicated and inferred gold resources of at least 500,000 ounces. In total, Brazil Resources has indicated resources of 1,501,737 ounces of gold and inferred resources of 2,437,400 ounces of gold. Even more interesting, the company has several other prospects detailed in the project list below:
The top two projects of Sao Jorge and Cachoeira account for over 3 million ounces of gold, or roughly 75% of the total reserve base. The encouraging aspect is that 90% of the Sao Jorge property hasn't been explored and the eastern structure of the Cachoeira project remains vastly unexplored.
The concerning part is that the company is burning cash exploring each of these projects.
As of the end of 2013, Brazil Resources had 72.4 million shares outstanding, 11.7 million warrants, and 1.9 million options giving the company a fully diluted share count of nearly 86 million. The corporate website lists management and insider ownership at approximately 25% and institutional ownership at around 30%.
Back on December 31, the company raised $6.4 million in an oversubscribed private placement, up from the initial amount of $5.0 million. The company sold 11,650,620 units at $0.55 per unit. Each unit consisted of one common share and one share purchase warrant. Each warrant entitles the holder to purchase one common share of the company at an exercise price of $0.75 at any time within 60 months from the closing date. The exercise of these warrants would provide the company an influx of $8 million in cash to fund exploration operations.
With the stock soaring to over $1, not only are the warrants in the money, but also the purchases of this private placement have made out well. Interestingly, the deal took place right as gold prices hit bottom at the end of 2013.
Gleaning investment decisions from analysts can be difficult in the micro-cap arena, but the information provided in research is nonetheless useful. The Gold Report has a solid summary of recent analysts opinions on Brazil Resources. Not surprisingly, the analysts are all generally bullish on the stock. The interesting point from the first couple of analysts was the advancement of the project resources at the top two projects and hidden exposure to uranium.
Vivien Diniz, Gold Investing News (3/3/14) "Brazil Resources Inc. has made strides on the Sao Jorge project, having advanced it from an Indicated resource of 343 Koz 2010 to the current 666 Koz (at a 0.5 g/t cutoff), or by 94%. Meanwhile, Cachoeira has seen its resource expand from an Indicated resource of 446 Koz in 2012 to 786,737 oz in 2013 (at a 0.35 g/t cutoff), or by 76%. . .but the most interesting feature about Brazil Resources is the gratuitous exposure that shareholders get to the uranium market."
Rob Chang, Cantor Fitzgerald (2/28/14) "Brazil Resources Inc. is an undervalued gold company with a quality flagship asset in Sao Jorge, a growing resource portfolio, backing by a respected investment group and free exposure to the hottest jurisdiction in a compelling uranium market. We are initiating coverage on Brazil Resources Inc. with a Buy recommendation."
H.C. Wainwright analyst Jeff Wright recently placed a C$2.25 price target on the stock providing solid upside from the current levels.
Price Of Gold
A big part of the investment gains in any gold stock is related to the price of gold. Regardless of how successful the excellent management team of Brazil Resource is able to expand reserves and start production on the current projects, the price of gold will drive the stock price to a great extent.
The chart below highlights the stock compared to the price of gold, the GLD, and the junior miners ETF. The stock generally followed the price of gold down until it collapsed at the end of 2013 whether due to funding concerns or other issues. The stock has soared since the capital raise at year-end and some excitement over increasing the resources on the top two projects.
While Brazil Resources is developing a strong list of gold projects, the company still isn't producing gold. In the short term, the stock will move based on the price of gold. Long term the company is setting up a solid list of projects and progress in producing gold and growing reserves will push the stock higher. The impressive management team and connections in Brazil makes this junior miner worth watching, especially with the actions of Russia likely to push gold prices higher.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within 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.
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