Recently I had the privilege of discussing an exciting junior gold mining company--Treasury Metals (OTC:TSRMF)--with the company's Chairman Marc Henderson.
About Marc Henderson
Marc Henderson is the Independent Chairman of the board of directors for Treasury Metals. He is also on the board of directors of Lydian International (OTCPK:LYDIF), which owns the Amulsar gold resource in Armenia. He is also the President and CEO of Laramide Resources (OTCPK:LMRXF), which owns several exploration and development stage uranium properties--most notably the Westmoreland resource in Australia. He was also the CEO and President of Aquiline Resources before it was taken over by Pan American Silver (NASDAQ:PAAS) back in 2009. Mr. Henderson has more than 20 years of experience as a leader of junior resource companies and he has an economics degree from the University of Colorado.
About Treasury Metals
Treasury Metals is a small junior gold mining company with properties in Ontario, the most valuable of which is the Goliath project. It has a valuation of C$26.5 million (amounts are in Canadian dollars unless otherwise indicated). While the company trades in the United States on the OTC market there is virtually no liquidity, and investors are encouraged to purchase shares on the TSE under the ticker (TSE: TML).
Interview with Marc Henderson
Ben: What is your outlook regarding the gold market? Why should investors buy shares in gold mining companies?
Marc: I am constructive on gold. I think we are in a corrective phase of the big bull market that started in the early 2000's and I think we'll see much higher prices before it's over, probably as a result of inflation finally kicking in as money velocity finally takes hold. The governments of the word seem determined to actually create inflation and I think they'll succeed. The argument for gold stocks of course is always that they are a more leveraged way to participate and I think that really applies if you start from a lower valuation baseline like we have now.
Ben: Can you give us an overview of Treasury Metals? Tell us about your properties and your longer term goals.
Marc: Treasury Metals is a development stage gold company with an almost production ready asset in Ontario, Canada. It's strength are its jurisdictional and physical location, its proximity to cash flow, and its local and regional exploration upside. We'll be building a modest sized plant (2,200-2,700 tpd) less than 5 minutes from the Tran-Canada Highway in area with no other process plants within a 2-3 hour drive. It's a woefully underexplored part of the Province of Ontario and has none of the infrastructure challenges of the better known (to non Canadians) Ring of Fire area.
Ben: What are the advantages/disadvantages of mining in Ontario?
Marc: Advantages are all those that apply in Rule of Law places (including reasonable regulatory consistency), access to skilled mining labour and services, locally knowledgeable capital market etc. Disadvantages would be relatively higher power costs than many Canadian provinces, plus some uncertainty around how the First Nation issues are addressed on a timely and consistent basis.
Ben: Tell us a little bit about the Goliath project. For instance: How big is the resource? What are the company's plans for bringing the mine into production? How much gold will the mine produce and how much will it cost to mine this gold? What are the company's plans for Goliath in the event of lower gold prices?
Marc: The resource is now 1.7 million ounces in all categories - up from 700,000 or so when Treasury started; it was a land consolidation play where we owned some of the key land. There is upside on the resource - especially to depth - but there is also enough to get up and running and we can develop, further develop or expand from cash flow. It's likely to be an operation sized at 75,000 ounces per annum (plus or minus 10,000 ounces). Definitive figures on this and the associated capital and operating costs are being worked on and will be the subject of third party studies that will be public domain knowledge later this year. We think gold prices are bumping along the bottom here but this is likely a go unless we see process below US$1200/oz along with a Candian dollar that stays at 90 cents or better. The Candian dollar price today is actually higher than we used in the Scoping Study that is public since gold declined (from US$1365/oz) but the dollar declined more (From 1.02 to 90 cents).
Ben: How much capital does Treasury Metals need to bring the Goliath project into production, that is, how much capital do you think that the company will need from now until you guys announce commercial production at Goliath? How do you guys plan to raise it?
Marc: We think the number will be around $100M but we'll know soon enough and then we don't have to speculate. There will be some debt in the mix, either project finance type debt from banks or a capital markets type issue done by TML. We think a 60/40 mix of debt/equity is very doable as the open pit component provides for a fast payback.
Ben: What is the biggest risk that Treasury Metals' investors face?
Marc: Unforeseen permitting delays or a lowball acquisition offer.
Ben: Can you explain why you think Treasury Metals is such a compelling investment? What sets it apart from other late-stage exploration gold mining companies?
Marc: Valuation: this would be a variation on the good company vs good stock argument because at less than 40 cents per share ($29 million market cap) TML is a great stock even though we may not own a great gold deposit; in the sense that nobody is going to say Goliath is world class asset (…at least not yet…). Simple back of the envelope numbers suggest a potential cash flow per annum of more than the market cap and the thing with most Canadian Shield gold deposits is that they inevitably have decent mine life as you usually mine out more than double whatever you start with. It's very low risk technically, has great metallurgy, and is in one of the best locations of any mine anywhere; it's the combination of these things which is why it works so well rather than say being very large or very high grade. It's a more subtle story and that is probably why it has gone largely unrecognized.
Ben: Is there any other gold mining company that you aren't affiliated with professionally that you think offers a compelling investment opportunity?
Marc: I am old fashioned and like to see the money come back to shareholders which is where I think most of the gold industry falls down. I own a lot of Pan American Silver (which I received when they bought us out in Aquiline in 2009) and it now pays an industry leading dividend, has a bullet proof balance sheet, and has a ton of free upside because the billion ounce Navidad silver asset in Argentina we sold them has been priced out of their valuation completely. The other one that caught my attention recently is Primero (NYSE:PPP) which (I think) made a very smart acquisition in Brigus. The asset they acquired in Ontario reminds me a bit of Goliath in that it got little respect for many years but they just drilled some tremendous deeper holes and if it stands up that is a Canadian mine that could be producing for a very long time. It should get revalued automatically simply because Primero brings diversification and a balance sheet to the table so some sort of multiple expansion seems likely there.
I think Marc makes a very compelling case for Treasury Metals and for the potential value of the company's Goliath project. I should note that as of late I have been particularly hesitant to recommend mining companies that have no cash-flow and capital needs that greatly exceed their valuations. The one exception--Avnel Gold Mining (OTC:AVNZF)--owns the Kalana mine, which has the lowest estimated production costs of any gold mine that I follow. While the Goliath project won't be a super-low cost producer the way that the Kalana mine will be we should keep in mind that the Goliath mine will cost less to develop and it is in a much better location (the Kalana project is in Mali). Also, Treasury Metals owns 100% of the project while Avnel Gold Mining only owns 80% of the Kalana Mine.
Given Mr. Henderson's remarks, I think more aggressive gold bulls can consider taking a position in Treasury Metals as a part of a diversified portfolio of gold miners. Risk-averse investors and retirees should probably stick to royalty companies and gold bullion.
Disclosure: I am long LMRXF. 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: I may initiate a position in Treasury Metals over the next several days.
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