Argonaut Gold, Bear Creek Mining, And Blackham Resources: Quality Projects And Low Valuations

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Includes: ARNGF, BCEKF, BKHRF
by: Don Durrett

Summary

Opportunities abound from the recent drop in gold/silver prices.

Three stocks that stick out as being oversold.

Each has a different story. Decide which one is right for you.

If you are looking for a three-bagger, you can't go wrong with GDXJ. And if you are looking for a five-bagger, SILJ will do the trick. However, if you want a good risk/reward stock with 10-bagger potential, those are becoming harder to find. From the recent selloff in gold/silver miners, I have three for you.

Stock Name

Symbol (US)

Type

Risk

Share Price (US)

FD Shares

FD Mkt Cap (11/17/2016)

Argonaut Gold

OTCPK:ARNGF

Gold

Moderate

$1.70

164M

$280M

Bear Creek Mining

OTCPK:BCEKF

Silver

Moderate

$1.60

101M

$161M

Blackham Resources

OTCPK:BKHRF

Gold

Moderate

$0.39

319M

$125M

Click to enlarge

Only one of these stocks (Blackham Resources) is in what I call the sweet spot, with a fully diluted market cap between $50 million and $150 million. Once a stock reaches the $100 million level, the risk reduces, because investors have recognized its value. Conversely, once a stock exceeds $150 million, the upside potential begins to diminish.

This range of $100 to $150 million does not apply to all miners. Often a company displays extraordinary value well before it reaches $100 million and long after it exceeds $150 million. However, most companies are in the sweet spot from $100 to $150 million. That is usually the ideal time to buy them from a risk/reward viewpoint.

It would be nice to be able to buy Argonaut Gold or Bear Creek Mining below $150 million. That still might happen if the dollar keeps rising.

This sweet spot range is where you will find late-stage development projects, near-term producers, or mid-tier producers. What you are really investing in are emerging mid-tier producers. Most mid-tier producers are valued over $100 million, so buying in this range is catching an early mid-tier producer. These are the companies that can grow quickly. At this valuation, most of these companies will only have one producing mine, or their first mine under development. Thus, you are getting in early. Remember, you usually don't make your big money on the first mine, but their second and third.

Whereas the risk is substantial for junior gold and silver mining stocks, the upside is also substantial. My current focus is on both undervalued producers and companies with solid projects that are advancing toward production. My range is wider than $100 to $150 million market cap, but if a company falls into that sweet spot, I am more likely to buy it.

I consider all junior development companies as high-risk speculation stocks, because you can never know if they will make it into production. If they have trouble with financing, or if the geology is analyzed incorrectly, e.g. Rubicon Minerals (OTC:RBYCF), or if any number of issues arises, these stocks can drop like a rock. Also, management is crucial and can disappoint investors with poor decisions and bad execution. Lastly, quality projects tend to get taken out by larger companies, which generally do not have the upside potential that I am looking for.

I think now is a good time to look for undervalued companies with growth potential. If we are in another gold bull run that could see new highs above the 2011 level of $1,935(see historical prices), then it would be wise to spot the potential winners. The biggest winners are likely to be those that are currently valued under $150 million, and are either producing or sitting on development projects that have all of the factors needed to be successful.

My investing style is to focus on potential future cash flow in conjunction with higher gold prices. For instance, what is the future value of XYZ gold stock if they develop a 5 million oz project and produce 300,000 oz annually at $2,000 gold? If you just do a quick and dirty analysis using potential future cash flow, you get 300,000 oz x $500 (estimated cash flow per oz with all-in costs at $1500 per oz) = $150 million in annual cash flow. If you multiply that by 10, you get a $1.5 billion valuation.

Note that some companies were valued at 30x cash flow during the last mania in stocks in 1980, and a 10x cash flow valuation is quite common today for strong mining companies. A conservative method is to use 5x cash flow.

It's amazing how valuable a mining company could become when it owns large profitable projects. There are many development stocks today with solid projects. Not all of them will be successful in building their mines, so it is a crapshoot picking the winners early. The smart play is to watch these stocks and see who is going to get financing. Of course, the longer you wait, the higher your entry price will be.

The most ideal stock is an undervalued company that is either financed to build its first project, or is an undervalued producer with growth prospects. The only way you can understand the risk of an undervalued stock is to do your own due diligence. Below, I will go step by step and show you what to look for when analyzing a mining stock. But even with this data in hand, you should do your own due diligence to confirm what I have written.

Even if you think you know a stock intimately, the data will change. If there is one constant in the story of a stock, it is change. And the higher the risk, it seems like the data changes more frequently. Whereas a major or a strong mid-tier producer can weather a data change, a junior can drop in value a significant percentage on small changes (refer to Orezone Gold's (OTCPK:ORZCF) recent news release). The volatility can be stunning (refer to Argonaut's recent 45% drop), and sometimes juniors do not survive these changes.

The two most important rules to follow to limit your risk exposure are: 1) Only invest in a company that has the goods. In other words, do not chase drill results (or do it rarely). Make sure that your company has at least one very good project. 2) Do not invest more than 1% of your portfolio cost-basis into a high-risk stock. Thus, if your total invested dollars is $100,000, then your max is $1,000 for a high-risk stock. You can break this 1% rule, but do it rarely.

This 1% rule may seem too low, but you have to stay humble and acknowledge the high risk. If you think the stock is low risk, then you can triple this total to a maximum of 3%. You may be thinking that you could end up with 50 or more stocks. Perhaps, but this won't happen if you buy bullion and/or ETFs as a foundation. With bullion and ETFs, you can go over the 3% limit.

Before we begin the analysis of these four stocks, I want to mention that we are currently in a serious gold/silver price correction. The HUI Index reached 285 in August and is now trading at 183 (see chart below). That is a 35% correction. There is still potential for the downtrend to continue. It would not be a bad idea to watch these four stocks until this trend reverses (although you might not get the entry price you want). Also, we are heading into December, which is tax selling season. Normally, the miners drop during December.

Click to enlarge

The following analysis is based on data from my website.

Argonaut Gold Resources (Analysis on 11/17/2016).

Argonaut Gold is a solid mid-tier producer. There is a lot to like about this company. Their production is forecasted to grow from 120,000 oz in 2016 to 400,000 by 2021. They have two producing mines in Mexico with all-in costs (free cash flow) around $1100. They have three more mines to build (two in Mexico and one in Canada) and all of them are similar. This is a very smart company that purchases economic projects with solid resources, low capex, and moderate cash costs. All 5 of their mines should produce 80,000 to 150,000 oz at low to moderate cash costs.

They have $50 million in cash and no debt. It's amazing that a growth company that has purchased 2 companies (Pediment Exploration and Prodigy Gold) and a large project (San Agustin), and built two mines, has no debt. They need to build 3 more mines over the next five years, so that will take some debt.

Anyone who analyzes gold mining stocks has to be impressed with this stock. They have executed like pro's. They now have 9 million oz of M&I and excellent exploration potential. The only question to ask is how big is this company going to get? My guess is that they will continue to buy projects and build mines. With a FD market cap of $280 million, the upside potential is significant. I don't know if they will be a 10 bagger at higher gold prices, but they should come close.

The 3 Ps

Properties

Do they have a flagship project? Yes, long life mine.

Do they have a pipeline of projects for growth? Yes, several projects.

Do they have the exploration potential to expand resources? Yes, several projects.

Is the grade and recovery rate satisfactory? Yes.

Is the location satisfactory? Good locations. Some risk of higher taxes in Mexico.

Do they own it? Yes, 100%.

People

Do you consider it a strong management team? Yes, excellent executers.

Is it an exploration or production team? Both.

Do they have experience? Yes, it is a highly experienced team.

Do they have a track record for building mines? Yes.

Is it investor friendly and not always diluting? Yes, dilution is still low.

Is the team large enough to build a mine? Yes.

Have you listened to a CEO interview? Yes, its CEO seems to be solid.

Is it cash focused? So far it has avoided debt.

How much stock does management own? I do not think there is high insider ownership.

Do the website and company presentation provide adequate guidance and details? Yes.

Projects

What are the resources? 10 million oz at .8 gpt.

Long life mine? Yes.

What are the current/estimated cash costs and all-in costs per oz? $800 per oz cash costs and about $1150 per oz all-in costs.

What documentation has been released for first mine (PEA, Pre-feasibility Study, Feasibility Study)? N/A.

What is the capex for their first mine? N/A.

What is the after-tax IRR for first mine? N/A.

Can their first mine be financed? N/A

How will their first mine be financed (debt, equity, streaming)? N/A.

Share Structure

Is it highly diluted? No, it has 164 million fully-diluted shares.

Timeline Risk (time frame until production)

N/A

Market Cap Size

$280 million. It's not in the sweet spot, but has excellent production growth potential.

Stock Chart

Is this a good entry point? Yes.

Balance Sheet

What is its cash/debt situation? $50 million in cash and zero debt.

Valuation

What is its potential future market cap growth rate at $2,000 gold? 1,000% at 400,000 oz (see below).

What is its potential future free cash flow at $2,000 gold? $230 million annually at 400,000 oz (400,000 x $800). (This assumes all-in costs are $1,200 per oz).

What is its future reserves valued at today? $28 per oz at 10 million oz ($280 million/10 million oz).

Future market cap growth:

Current Market Cap: $280 Million.

Future Market Cap: 400,000 oz x $800 = $320 million annual cash flow x 10 = $3.2 billion

Compare the two values and you get a 1,000% increase.

Is Argonaut Gold highly undervalued? Yes, with a potential increase of 1,000% and future reserves valued at $25, it is highly undervalued.

Note: You can check the data included in this analysis at Argonaut Gold's website and my own.

Bear Creek Mining (Analysis on 6/5/2016)

I loved Bear Creek Mining until June 25, 2011. That was the day the President of Peru did the highly unusual act of revoking the mining rights at their Santa Ana project. He did this because of political pressure from local resistance to the project in Southern Peru. They still have their huge flagship project at Corani (300 million oz at 50 gpt). Corani is on schedule for production around 2019, if they can finance the project ($625 million capex). The first 5 years of annual production will be 13 million oz of silver. Production will then drop to 8-12 million oz for the rest of the mine life (22 years). Currently they are seeking final permits.

Because of base metal offsets (4.5 billion lbs of lead and zinc), the cash costs at Corani are projected below $5, making it a cash cow at higher silver prices. In fact, for the first 5 years, cash costs are supposed to be negative. Even with low cash costs, the after-tax IRR is only 15% at $17 silver. This project needs $20 silver to get financing. In fact, they might have to scale back the size of the mine to get financing.

If they can get Santa Ana back (management thinks this could happen), this could be an exciting company with two large projects heading to production. Santa Ana will take 18 months and $70 million to begin production of 5 million oz annually, if they get their mining rights back. The cash costs at Santa Ana are projected to be about $8 per oz.

It's hard to predict the outcome of Santa Ana, but it really doesn't matter that much. If they are left with only Corani, this stock is a likely 10+ bagger if they get financing and silver prices rise. Also, there is a chance they could get compensation for Santa Ana, which could be used toward financing Corani. This stock has jumped from 48 cents a few months ago to $1.82. I would expect it to continue to follow the silver price up.

7/6/2016: Comments from the company to my questions.

Why did you do a financing?

Our decision to raise money at this time was based on a number of factors. Primarily, we wanted to assure we had the financial wherewithal to get to the finish line on Corani and be in a position to put the project into development. A key component of securing the Construction Permit for Corani is the submission of detailed engineering plans, which are a relatively expensive undertaking, but will be necessary in order to move forward. There are other components of the Corani project that would also be strengthened or secured with a more robust treasury, as we briefly outline in our news release today. We have about 2-3 years of working capital in our treasury now, so were not under any pressure, but the engineering plans would have consumed a good portion of that. So, with recent improvements in the silver price and resulting significant improvements in our share price, a window of opportunity presented itself and we decided to take advantage of raising some money, at relatively low dilution, that will directly go toward meaningfully advancing Corani on the last leg to development.

I thought you only had permitting left?

We do only have permitting left. The engineering plans are a component of the Construction Permit and there is no further feasibility work to be done. I would roughly estimate that the engineering plans will take 8 months, give or take, so we hope receive the Construction Permit in mid-late 2017. On a side note, there are a multitude of permits required to construct and operate a mine - the Construction Permit is the largest one, but there will also be a Water Permit, the ESIA (already approved), a Mine Plan Permit (drawn from the feasibility study, so no new work required for that), and dozens of smaller, fairly inconsequential permits. They are being secured as we speak and will be over the coming months, all in preparation for the Construction Permit application anticipated for next year.

The 3 Ps

Properties

Do they have a flagship project? Yes, long life mine.

Do they have a pipeline of projects for growth? No, one potential project.

Do they have the exploration potential to expand resources? Unknown.

Is the grade and recovery rate satisfactory? Marginal grade (50 gpt), 72% recovery.

Is the location satisfactory? Good location. Some risk with Chile.

Do they own it? Yes, 100%.

People

Do you consider it a strong management team? Unknown, first mine.

Is it an exploration or production team? Both.

Do they have experience? First mine.

Do they have a track record for building mines? First mine.

Is it investor friendly and not always diluting? Yes, dilution is still low.

Is the team large enough to build a mine? Yes.

Have you listened to a CEO interview? Yes, its CEO seems to be solid.

Is it cash focused? So far it has avoided debt.

How much stock does management own? I do not think there is high insider ownership.

Do the website and company presentation provide adequate guidance and details? Yes.

Projects

What are the resources? 10 million oz at 50 gpt.

What are the current/estimated cash costs and all-in costs per oz? $5 per oz cash costs and about $15 per oz all-in costs.

Long life mine? Yes. 22 years.

What documentation has been released for first mine (PEA, Pre-feasibility Study, Feasibility Study)? Feasibility Study completed.

What is the capex for their first mine? $625 million.

What is the after-tax IRR for first mine? 15% at $17 silver.

Can their first mine be financed? Probably not until $20 silver.

How will their first mine be financed (debt, equity, streaming)? Likely a combination of all three.

Share Structure

Is it highly diluted? No, it has 101 million fully-diluted shares. Expect significant share dilution to finance the mine.

Timeline Risk(time frame until production)

Final permits are expected in 2017. Construction could begin in 2018.

Market Cap Size

$162 million. It's not in the sweet spot, but very close.

Stock Chart

Is this a good entry point? Yes.

Balance Sheet

What is its cash/debt situation? $15 million in cash and zero debt.

Valuation

What is its potential future market cap growth rate at $50 silver? 2,000% at 10 million oz (see below).

What is its potential future free cash flow at $50 silver? $350 million annually at 10 million oz (10,000,000 x $35). (This assumes all-in costs are $15 per oz).

What is its future reserves valued at today? 80 cents per oz at 200 million oz ($162 million/200 million oz).

Future market cap growth:

Current Market Cap: $162 Million.

Future Market Cap: 10,000,000 oz x $35 = $350 million annual cash flow x 10 = $3.5 billion

Compare the two values and you get a 2,000% increase.

Is Bear Creek Mining highly undervalued? Yes, with a potential increase of 2,000% and future reserves valued at 80 cents per oz, it is highly undervalued.

Note: I use $50 as my future silver price because I think it is a realistic expectation. We reached $49 in 2011, and the next economic crisis should push silver much higher. Many are projecting possible silver prices of $100 or higher. While I think $100 gold prices are possible, I think $50 is likely. My expectation is that this should occur within two to five years.

Note: You can check the data included in this analysis at Bear Creek Mining's website and my own.

Blackham Resources (Analysis on 10/1/2016)

Blackham Resources is a near-term producer in Australia. They have an 800,000 oz open pit project (Matilda) that will begin production in 2016. They will produce 100,000 oz at about $1100 all-in costs for 6 to 8 years (likely to get extended). Plus, they have a 3.3 million oz deposit (Wiluna) that is both an open pit and underground project. They still need to finance Wiluna, but they are expecting to begin production in 2018 at Wiluna. The plan is to expand production to 230,000 oz.

Blackham Resources is not super cheap with a FD market cap of $215 million. It would have been better to get in before it reached $150 million, but it still has 5 bagger potential. And if they add a 3rd mine, the upside could be significantly higher. They have a good management team, and I expect them to be successful. Also, they have 180,000 acres for exploration.

The 3 Ps

Properties

Do they have a flagship project? Yes, long life mine.

Do they have a pipeline of projects for growth? Yes, Wiluna is a 3 million oz project coming in 2018 or 2019.

Do they have the exploration potential to expand resources? Yes, 180,000 acres for exploration.

Is the grade and recovery rate satisfactory? Yes, 3 gpt open pit and 90% recovery.

Is the location satisfactory? Excellent locations in Australia.

Do they own it? Yes, 100%.

People

Do you consider it a strong management team? Yes, appears to be strong.

Is it an exploration or production team? Both.

Do they have experience? Yes, it is a highly experienced team.

Do they have a track record for building mines? First mine.

Is it investor friendly and not always diluting? Australian companies are known for high dilution.

Is the team large enough to build a mine? Yes.

Have you listened to a CEO interview? Yes, its CEO seems to be very good.

Is it cash focused? Only $21 million in debt.

How much stock does management own? I do not think there is high insider ownership.

Do the website and company presentation provide adequate guidance and details? Yes.

Projects

What are the resources? 5 million oz at 3 gpt.

Long life mine? Yes.

What are the current/estimated cash costs and all-in costs per oz? $700 per oz cash costs and about $1100 per oz all-in costs.

What documentation has been released for first mine (PEA, Pre-feasibility Study, Feasibility Study)? Resuming production at an existing mine.

What is the capex for their first mine? $25 million to resume production at 100,000 oz annually.

What is the after-tax IRR for first mine? Unknown, but low all-in costs and low capex.

Can their first mine be financed? Yes.

How will their first mine be financed (debt, equity, streaming)? Debt.

Share Structure

Is it highly diluted? Yes, it has 317 million fully-diluted shares.

Timeline Risk(time frame until production)

Production began in 2016 Q4.

Market Cap Size

$125 million. In the sweet spot.

Stock Chart

Is this a good entry point? Yes.

Balance Sheet

What is its cash/debt situation? $23 million in cash and $21 debt.

Valuation

What is its potential future market cap growth rate at $2,000 gold? 1,500% at 220,000 oz (see below).

What is its potential future free cash flow at $2,000 gold? $200 million annually at 220,000 oz (220,000 x $900). (This assumes all-in costs are $1,100 per oz).

What is its future reserves valued at today? $31 per oz at 4 million oz ($125 million/4 million oz).

Future market cap growth:

Current Market Cap: $125 Million.

Future Market Cap: 220,000 oz x $900 = $200 million annual cash flow x 10 = $2 billion

Compare the two values and you get a 1,500% increase.

Is Blackham Resources highly undervalued? Yes, with a potential increase of 1,000% and future reserves valued at $31, it is highly undervalued.

Note: You can check the data included in this analysis at Blackham Resources' website and my own.

Disclosure: I am/we are long ORZCF, BKHRF, ARNGF.

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.

Editor's Note: This article discusses one or more securities that do not trade on a major U.S. exchange. Please be aware of the risks associated with these stocks.