When Eric Sprott Is Buying You Should Care

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Includes: EXLLF, MEAOF, NMKTF
by: Simple Digressions

Summary

Most recently Eric Sprott, a resource sector guru, purchased shares of three miners: Newmarket Gold, Excellon Resources and Metanor Resources.

In my opinion, these purchases confirm that it is still possible to find deeply undervalued, interesting companies in the precious metals sector.

The most important lesson coming from Mr. Sprott acquisitions is that he invested in the prospective companies operating in safe jurisdictions.

In the mineral industry Eric Sprott is perceived as a guru. When he speaks the others listen to him, when he buys or sells a stock, the others try to replicate his actions. Simply put, he is sort of a Warren Buffett personality in the mineral industry.

Most recently Mr. Sprott acquired substantial stakes in three gold or silver mining companies, namely Newmarket Gold (OTCQX:NMKTF), Excellon Resources (OTCPK:EXLLF) and Metanor Resources (OTCPK:MEAOF). In my opinion, these acquisitions support the thesis that, despite the latest impressive rally in gold, silver and gold/silver related stocks, the current market valuations are still very attractive. In this article I am trying to give a short description of the latest acquisitions made by Eric Sprott.

Newmarket Gold

Newmarket Gold is a gold miner running three operations in Australia. In 2015 its flagship property, Fosterville, delivered 123.1 thousand ounces of gold (all three mines delivered 222.7 thousand ounces of gold in total). Although the company does not plan to increase its gold production in 2016, its strength lies mainly in the efficient cost-cutting programs, which enabled to decrease production costs significantly. For example, at the Fosterville mine the all-in sustaining costs went down from $1,266 in 2013 to $837 per ounce of gold in 2015 (a decrease of 33.9%). What is more - Newmarket Gold has an excellent geological team. Taking Fosterville as an example, this team was able to replenish Fosterville's mineral reserves, despite substantial depletion, from 365 thousand ounces of gold at the end of 2012 to 388 thousand ounces at the end of 2015. Last but not least - not only reserves went up but the ore grades increased strongly as well - please, look at the chart below:

Click to enlarge

Source: Simple Digressions and the company's reports

In my opinion, if gold prices continue their march up, Newmarket Gold should be delivering excellent results in the coming years.

Despite these positives, the company's shares are still deeply undervalued against its peers. For example, a multiple of enterprise value to EBITDA stands at 2.90 (assuming the current market price of $1.87 a share). It looks like the vast majority of investors do not perceive this company as an interesting investment target. Contrary to them, Mr. Sprott thinks differently and, according to the statement, released on April 4, 2016, he acquired 10 million shares of Newmarket Gold at a price of C$2.25 a share (US$1.71). The shares were acquired from the biggest company's shareholder, Luxor Capital Partners. What is more, together with his prior shareholdings in Newmarket Gold, now he controls 15.2 million shares in the company. Lastly, Luxor granted Mr. Sprott a right of first refusal to purchase up to an additional 16.2 million shares of Newmarket Gold (this right expires at the end of this year).

At the end of this part of the article, let me cite Mr. Sprott:

"Newmarket has a strong management team and Board of Directors. I am impressed with the progress that Newmarket has made with record gold production in 2015, the very positive outlook for production growth and operating cost reductions and its strong balance sheet with essentially no debt. I look forward to being a supportive shareholder and participating in the growth of the Company."

Shortly after the announcement, after just two sessions, the company's share prices stand strongly higher (an increase of 12%). Well, when Eric Sprott buys something the others follow him….

Excellon Resources

Excellon is a small silver / base metals producer. The company runs one mine, called La Platosa, located in the State of Durango, Mexico. To be honest, Excellon is far from being a decent miner. As the chart shows, silver production and ore grades are currently in their medium-term down trends:

Click to enlarge

Source: Simple Digressions and the company's reports

What is more, the company has been stating for many years that it had been encountering severe water issues at La Platosa. According to the company:

"In 2007, as mine workings extended below the local water table, the Company began an intensive program of reactive grouting and pumping to control and prevent water inflows. This program has been effective in managing inflows, but has been time, labor and cost intensive, which has historically limited production to less than 200 tons per day"

These "time, labor and cost" issues were responsible for high costs of production and low throughput. To halt these unfavorable developments, Excellon is going to introduce the so-called "Platosa Optimization Plan". Through investing around $10 million the company "aims to maintain and increase a localized the so-called cone of depression of the water table below mine workings". The successful implementation of this plan should result in an increase of the annual silver production to 1.6 million ounces in the coming years (an increase of 100%, compared to 2015). The all-in sustaining cost of production should go down from $22.58 in 2015 to $12.37 per ounce of silver (a decrease of 45.2%).

In my opinion, if the company is successful in implementing its optimization plan it may regain the investors' trust. Currently, with market capitalization of around $26 million, it is an unpopular small cap company. However, investors should note that La Platosa is generally quite a decent mineral deposit, holding measured and indicated resources of 428 thousand tons of ore grading 760 grams of silver per ton of ore (which is equal to 10.5 million ounces of silver). I think that the grade of 760 grams of silver per ton of ore is an excellent grade, one of the highest in the industry (for example, the Fresnillo mine, one of the largest world's silver mines, has silver reserves grading 220 grams per ton of ore).

It seems that Mr. Sprott trusts the company's management. According to the last announcement, he acquired 6.7 million shares at a price of C$0.45 per unit. Each unit consists of one common share and one half-share purchase warrant. In other words, Mr. Sprott now holds 6.7 million shares (a stake of 10.8% in the company) and has the right to purchase additional 3.3 million shares at a price of C$0.65 per share for a period of two years from today. The proceeds in the amount of C$3 million will be used to implement the optimization plan.

Summarizing - in my opinion, through purchasing a stake of 10% in the company, Mr. Sprott expressed his confidence in the current Excellon management. Only time will tell whether the other investors share his confidence but since the initial announcement (March 31, 2016) Excellon shares went up 18.8%.

Note: investors interested in Excellon should be aware of the fact that this company has no mineral reserves established; it should be perceived as a risk factor.

Metanor Resources

Metanor is another small cap gold producer. Currently the company runs only one mine, called Bachelor and located within the Abitibi Greenstone Belt in the Province of Quebec, Canada. In my opinion, Metanor is a sort of a bet on future. Although it has been producing gold since December 1, 2013, the best is ahead of the company. Shortly speaking, Metanor is currently very busy in exploring two of its properties: Bachelor and Moroy (located just 925 meters from Bachelor). While the exploration works on Bachelor are an ongoing process, the Moroy property was discovered only last year and in 2016 Metanor plans to continue its exploration program through drilling 60 thousand meters at this property.

According to the company, both properties are prospective but for an average investor it is quite a hard task to evaluate these prospects (the last mineral reserve estimate for Bachelor was published in 2011; no such data is available for Moroy). However for such an experienced resource investor as Mr. Sprott it should not be any problem so:

on March 1, 2016 he acquired 7 million shares of Metanor between March 17 and March 23, 2016 he purchased additional 8.7 million shares of the company

As a result, together with previously purchased shares, Mr. Sprott currently owns 38.7 million shares and 20 million common share purchase warrants of the company. It means that he controls a 9.2% stake in Metanor, calculated on a non-diluted basis.

Similarly to Newmarket Gold and Excellon Resources, Metanor share prices went substantially higher (43%) since the first announcement (March 11, 2016). What is more, the daily volume followed prices.

Summary

The last acquisitions, made by Eric Sprott, a notable resource investor, lifted the market values of three precious metals miners: Newmarket Gold, Excellon Resources and Metanor Resources. Simply put, investors rushed to replicate Mr. Sprott's purchases. In my opinion, it is a similar pattern visible when Warren Buffett reports Berkshire Hathaway's acquisitions - for some time after such an announcement share prices of the purchased companies go strongly up.

However, in my opinion, it is much more important what and when Mr. Sprott had bought. He bought shares of a few mining companies operating in the so-called safe jurisdictions (Canada and Australia). What is more, he bought these companies during a bear market in gold or, who knows, in the beginning of the next leg up in gold. It means that he bought these miners at very depressed prices (for example, even taking into account the last rally in gold, Newmarket Gold is deeply undervalued against its peers). This is a lesson, which should be remembered by other precious metals investors.

Disclosure: I am/we are long NMKTF.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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