Seeking Alpha
Gold & precious metals, macro, research analyst, deep value
Profile| Send Message|
( followers)  

Summary

  • Minco Silver announced that it bought 5% of Gold Road Resources--an Australian junior gold miner with exploration property and a 3.8 million oz. resource in Western Australia.
  • Given the company's capital position it can easily afford to do this, although the motivation behind it is questionable.
  • I had not anticipated this when I analyzed the company back in June.
  • While this is unusual it doesn't impact the investment thesis given that the company can still afford to finance its Fuwan Project given its cash and its line of credit.

Minco Silver (OTCQX:MISVF) surprised investors by announcing that it had taken a 5% stake in Gold Road Resources (OTC:ELKMF) (note that American pink sheets are extremely illiquid and haven't traded since May). The company has a market capitalization of A$173 million and it has been one of the best performing gold stocks as of late to my knowledge. The reason for this is the company's stunning recent announcement that its first resource estimate indicates that its Gruyere Project has 3.8 million ounces of gold. Given the size of the land package and the potential for finding new gold on the Yamana Gold Belt the company can potentially find much more, which is why it is valued so highly without a mine plan.

Frankly I'm not sure what to make of this. On the one hand Minco Silver can easily afford to make an $8 million investment while still having enough capital in cash/equivalents plus its credit line to develop its Fuwan Project. In fact with so much dormant cash such an investment can be justified, although a gold investment as opposed to a silver investment might raise some eyebrows. At the same time one has to wonder if the company is placing the Fuwan Project on the back burner since it hasn't made any significant developments there (other than progressing the permitting process) since 2009.

With these opposing points I'm taking a neutral stance with respect to this investment, which means I am maintaining my bullish stance put forth in June, which is that despite the fact that the company has had trouble moving the Fuwan Project forward the market is assuming that it is worse than dead since it trades at below cash: investors are assuming that management will be losing more money attempting to pursue a dead project, which means there is enormous upside should the project move forward. Given China's long-term need for raw materials such as silver for electronics and photovoltaic cells in particular I think it is premature to write this project off. The fact that the company is taking a position in another company may mean that we have to wait longer for Fuwan, but it does give the company additional exposure to the precious metal space.

Editor's Note: This article covers one or more stocks trading at less than $1 per share and/or with less than a $100 million market cap. Please be aware of the risks associated with these stocks.

Source: Update: Minco Silver Buys 5% Of Gold Road Resources