Vista Gold Is Overvalued: Hedge a Short Position Using Midas Gold

| About: Vista Gold (VGZ)

Vista Gold's (NYSEMKT:VGZ) stock is up over 50% in the past year, closing recently at $3.14. The company reported a positive quarter after contributing assets in the Yellow Pine-Stibnite District of Idaho to Midas Gold (TSE: MAX). The positive results represent a mark to market increase in the assets and not real cash earnings. The company will not be able to convert MAX to cash until the lockup expires.

The company owns 30,402,615 shares of Midas Gold . Stripping out MAX and cash, the market is implying a value of the company's other assets of $1.22 per share.

Price VGZ $3.14
Shares outstanding VGZ 71,132,913
Shares of MAX owned 30,402,615
Value US$ @C$3.45 $ 103,850,516
Value per share $ 1.46
Cash $32,991,000
Cash per share $ 0.46
Cash + MAX $ 1.92
Implied market price of other assets $ 1.22

The company has two main projects: The Mt. Todd gold project in Northern Territory, Australia, and the Concordia gold project in Baja California Sur, Mexico. While $1.22 per share looks like a cheap price to pay for two interesting projects, the larger Concordia project is in an environmental sensitive area and is perceived to be detrimental to the extremely lucrative tourist trade in Baja California.

The open pit mine has been the subject of protests and judging by the news flow, I think that this project is not likely to move forward. The government refused to grant a permit for a desalination plant required to provide water to the mining operation. See a copyrighted comment on a blog about Baja CA reporting that the permit for the mine will expire in 2012 and will not be renewed. If the permit is not renewed, the company will face significant write downs and will have limited prospects. I think that the stock could trade down to $0.50 over the value of the MAX shares owned. Traders can hedge a short position in the stock by buying 0.427 shares of MAX per share of VGZ.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.