Tanzanian Royalty Commences Drilling: Stock Grossly Undervalued

Aug.23.11 | About: Tanzanian Royalty (TRX)
Tanzanian Royalty Exploration (NYSEMKT:TRX) is probably my favorite single stock gold mining company, as I’ve noted before. I’ve recently become more even bullish on the stock, for the following reasons:

1. Favorable Political Outlook. A major concern of mining companies is the threat of nationalization, as recent events in Venezuela and South Africa remind us. TRX is well-positioned for this risk; the firm operates in Tanzania, an economy with a long history of gold mining projects, and lists gold as one of its top exports. Moreover, since 1986, Tanzania has moved towards more free market policies (i.e. floating exchange rates, removal of price controls) that have lured the mining industry to return. Also of critical importance is that TRX has established a partnership with Stamico, a parastatal (aka quasi-governmental) mining company in Tanzania; establishing cooperative relationships with a parastatal entity in a welcoming jurisdiction helps ensure TRX is positioned favorably with regards to political/nationalization risk.

2. Lucrative Projects Underway. The firm's Buckreef project, a late-stage mining project, has made significant progress of late, as drilling has begun. TRX has a 55% interest in this project, which has 265,000 measured ounces (444,000 indicated and 826,000 inferred). If gold reaches $5,000/oz, an estimate I find to be very conservative, the measured worth alone would be 1,325 billion; take TRX's 55% interest, and that value is over $728 million. This exceeds TRX's market capitalization, which is at approximately $555 million. This is just one project in TRX's portfolio -- the company is set to launch new drilling projects through 2014 -- and is using a conservative price target for gold.

3. Healthy Balance Sheet. As a company still in the exploration phase and operating at a net loss, though, a key consideration is the financial solvency of the firm, as TRX must be able to maintain operations before mining profits can be realized. In this regard, the balance sheet is very healthy, boasting a current ratio of 18.11 according to its May 2011 financial statement.

4. ETF Inclusion. TRX has also recently been incorporated into the GDX ETF, albeit on a very small basis. Nonetheless, as the sector-wide boom in mining stocks grows, visibility via the GDX ETF will prove to be especially valuable, in my opinion, and will draw in speculative funds and greater name recognition.

5. Superior Leadership. Last but certainly not least is the firm's leadership under James Sinclair, whose track record in the gold industry has been outstanding. Quality management in a bullish sector is what I look for in single stock selection, which is the main reason I continue to accumulate TRX.

Disclosure: I am long TRX.