Update: Chesapeake Gold's Q2 Earnings

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 |  About: Chesapeake Gold Corp. (CHPGF)
by: Ben Kramer-Miller

Summary

Chesapeake Gold reported a Q2 loss of $1 million.

The company purchased a 1.5% royalty on its Metates Project, which it subsequently sold to Silver Wheaton.

Management is evaluating the potential to construct a smaller than expected mine at Metates in order to bring the enormous $4 billion initial capex expense down.

This is a positive development that I hadn't anticipated in my article on Chesapeake Gold.

The appeal in the shares is largely in its gold optionality: investors looking for cash-flow and dividends should look elsewhere.

Chesapeake Gold (OTCPK:CHPGF) just released its second quarter earnings results. For an exploration and development company such as Chesapeake Gold the actual earnings figure isn't so important although it does shed light on the company's efficiency. However, we are more interested in the company's developments.

The company lost $1 million for the quarter, which means it is doing a good job of conserving capital. Given its large cash position - $22 million at the end of the quarter but $32 million as of the filing of the report - investors don't have to worry about shareholder dilution. During the second quarter the company bought back a 1.5% NSR royalty on its Metates Project for $9 million, although it subsequently sold it to Silver Wheaton (NYSE:SLW) for the same amount.

The most important development was that the company revealed that it is exploring the possibility of releasing a smaller mine plan, as the current one requires $4 billion in capital and doesn't have robust economics until we see much higher gold prices. A smaller project would lower the company's initial capital needs which in turn would generate interest from a wider selection of JV partners (not many can supply $4 billion). Such a development could also mean that the company can focus on higher grade ore at the beginning of the mine's life, which is good for those investors anticipating near term weakness in the gold price before we see a rise later on.

As I argued last June this is a highly speculative stock, as it will be difficult for the company to get the financing it needs. I like the idea that the company is going to work towards a smaller mine plan for the reasons cited above. I think it can generate investor enthusiasm which is lacking in this name due to the enormous capital requirement for constructing Metates. However, until something concrete is put forward, this is not an investment thesis, and Chesapeake Gold shares currently function as options on the gold and silver market.

Disclosure: The author is long SLW.

The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.

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