I am a buyer of Exeter Resources (NYSEMKT:XRA) up to $5.00 per share, because, as a value investor, I like to buy at a 20% discount to a conservative Intrinsic Value, which I put at $6.25.
Let me start by defining Intrinsic Value. Modern Finance tends to define “intrinsic value” as “book value” because it makes it easy for graduate students in finance to analyze a group of securities. Ben Graham’s Intrinsic Value was closer to today’s Private Market Value or the value that a buyer who is knowledgeable about the industry would place on the company.
In the case of Exeter Resources, a Junior Canadian Gold company with prospects in Argentina and Chile, a buyer would look to the Net Asset Value of the ore and make adjustments.
In the next few weeks, a 43-101 report by independent geologist will be completed and made pubic. The Net Asset Value of Don Sixto in the Mendoza Provence of Argentina will then be simple to calculate. The last 43-101, from two years ago, reported 330,000 oz of gold which (assuming extraction/smelting costs of $350 per oz and gold at $650 oz) for a NAV of $1.77 per share. Actually, the report read (.pdf) “the indicated resource is 3.5 million tonnes at a grade of 3.0 g/t gold for 330,000 ounces, and the inferred resource is 4.8 million tonnes at 2.2 g/t gold for 340,000 ounces.”
Six months ago, in the President’s Letter to Shareholders, the company speculated that rather than being a series of isolated zones, Don Sixto is a much larger gold system, and was likely to end up producing 80,000 to 100,000 oz per year. An extraction plant is usually designed to service 8% to 12% of the known ore per year. In addition, most mines end up producing more ore than was categorized as measured/indicated when the plant was built.
I met with Yale Simpson recently and he confirmed my interpretation. He reiterated his confidence that when the 43-101 was completed the measured/indicated resource for Don Sixto would be in the neighborhood of one million ounces.
One million ounces of gold, with a gross margin of $300 per ounce, divided by the 47.9 million fully diluted shares is $6.26/shr.
Now, I realize that the average junior gold company is trading at 127% of its NAV. And I like the news coming out of Cerro Moro and Caspiche. And I understand that a knowledgeable buyer would attach some value to the inferred resources at Don Sixto (another 300,000 oz? 500,000 oz? We’ll know in a few weeks.)
But my goal is to buy shares for less than they are worth. The only numbers I can get my hands on soon will be in the 43-101 which I await with eagerness. It is my belief that shortly after the 43-101 is published, executives in the gold mining industry will value Don Sixto’s gold reserves at $300 million dollars - even after taking into account the ups and downs of Argentinean politics. That is an Intrinsic Value of $6.26 per share with significant upside if Exeter’s prospects in Patagonia and Chile work out.
Hence, XRA is buy until $5.00.
Full disclosure: Author is long XRA at time of writing.