Massive Sell-Off In Tanzanian Royalty Exploration Creates Welcome Buying Opportunity

Nov.13.11 | About: Tanzanian Royalty (TRX)

Gold mining firm Tanzanian Royalty Exploration (NYSEMKT:TRX) experienced a massive selloff this past week, falling under $2 before bouncing back this Friday and closing the week at $2.86. All told, TRX has fallen significantly from its high this past summer of over $7.

This is a fantastic opportunity for those willing to hold this stock for a period of several years. TRX was grossly undervalued at $7 per share, and it remains even more overvalued now. The recent fall is likely due to one or more funds that felt the need to liquidate -- perhaps because they felt something was wrong with TRX, or perhaps because they needed to close out positions to raise capital for other needs (i.e. other investments, margin calls, their own internal troubles, etc).

I believe nothing really has changed for TRX, and so I welcome the opportunity to accumulate more at a significantly lower price.

To recap, here are the main points I'm keeping in mind regarding TRX:

  1. As an explorer mining company, TRX's primary challenge will be in launching operations and in sustaining cash flow until gold is realized and sold. The firm continues to make progress on its Buckreef venture in Tanzania; more importantly, though, is that its balance sheet is healthy: its Q3 financials report a current ratio in excess of 17.75, as well as cash on in hand in excess of $7 million. With a healthy balance sheet, I believe TRX's is well-positioned to raise capital if it needs to. This financing risk is the primary risk the company faces, in my opinion.
  2. The company's political strategy is at the heart of why I am so bullish on TRX. As the sovereign debt crisis grows, political risk -- or more specifically, risk of nationalization -- is the primary risk mining firms face, in my opinion. In this respect, few firms in the industry have the advantage that TRX does via its partnership with parastatial entity STAMICO -- basically a joint venture with the Tanzanian government to mine for gold. Having a mutually advantageous relationship with a government that welcomes the mining industry is vital, and TRX has it. As nationalization grows and market participants become more aware of this risk, I expect TRX to be a beneficiary.
  3. And of coure the recent pullback in gold only ensures the bull market will last longer, and that the parabolic grand finale is still not yet here. Unlike key trendlines, bullish sentiment has been destroyed for gold, which of course sets the stage for a run much higher. The higher gold goes and the more the bull market in gold has years to go, the more mining firms will benefit, in that they will have more time to realize gold and sell it at a higher price. Once profits from gold sales come in, shorts who are forced to cover dividends will be deterred. The CEO of TRX, James Sinclair, is well aware of this situation and thus can lead the company's financial strategy accordingly in this regard.

Prior to the selloff, my view of TRX was that I would need to hold it for 3-10 years with the goal of realizing a return of at least 10X my investment. This view remains unchanged, and the selloff is seen as a welcome opportunity to accumulate at a significant discount.

Disclosure: I am long TRX.