The retail investor needs to dig deep to find undervalued gold and silver stocks ahead of Wall Street. We look at the four catalysts for Paramount Gold & Silver (PZG) common stock in this economic environment:
- QE3 and the gold and silver prices
- PZG's exploration results prove 5.69 million measured and indicated Gold Equivalent ounces and 3.8 million inferred ounces
- PZG's current buyout valuation estimate by a well known Certified Financial Analyst Mr. Michael Murphy is $15/per share
- PZG synergies offer miners value and its a likely buyout target
We think the miners are an excellent value, but we like the miner's bliss better. Paramount is a miner's bliss because what we are about to tell you makes this explorer not only undervalued, but a buyout target. Wall Street is starting to discover PZG since the value advantage the explorer's stock has over a mining stocks is significant, especially given the outstanding exploration progress it has made over the past five years. There are 30 ETFs (GLDX, SLVP, GDXJ, IWC, EWRS, IWO,VTWG, VAW, UKK, SKK, VBK, IWM, VTWO, RWM, UWM, TWM,TZA, URTY, SRTY, SHVY, RTLA, RTSA, VB, TILT, IWV, VTHR, IWZ, UWC, and TWQ) with PZG as a component. 12.4% of all PZG shares outstanding (free float) are held in ETFs. Insiders have purchased PZG shares throughout the year. We expect the senior Gold producers such as Gold Corp (G)(G-TX), Barrick Gold (ABX), Newmont Mining (NEM-NYSE), Yamana Gold (YRI-TSX), Agnico-Eagle Mines (AEM-TSX), and Coeur d'Alene Mines Corporation (CDE), to be on the prowl to maintain current levels of production, fill gaps in growth, or take advantage of strong cash flow to augment already impressive profiles. Asset-hungry producers are set to feast on vulnerable junior explorers. Overall, gold and silver junior explorers are extremely undervalued and have come down to very attractive levels for producers to take a bite.
1. FDA QE3 AND THE GOLD & SILVER PRICES
First, let's look at how the economics of the market are playing out. Silver (SLV) is breaking out past $30 and the trend is moving higher. Fed Chairman Ben Bernanke signaled the Fed now pulled the trigger to boost the economy into the indefinite future by continuing to buy billions in mortgage backed securities monthly. Silver is regaining the 200-day moving average on a spectacular move. The equity markets (SPY) rallying higher during an economic contraction may be forecasting an inflationary turnaround. Usually a rising equity and bond market historically precedes an inflationary period.
We learned during QE2 that silver was a far more receptive commodity. Silver broke-out earlier last week and continues higher by breaking resistance and downtrends. Based upon silver's behavior during QE2 we should see an upside breakout above $30. A technical breakout is in progress and is very bullish. Given the recent surge in gold and gold stocks, it looks like many investors sold their precious metals and mining stocks in early 2012 hoping to get in at lower prices. Now investors appear to be frantically scrambling to buy back in at higher prices. We are witnessing a parabolic move in precious metals. Thus, the major miners (GDX) and the small explorers (GDXJ) are now starting to make a major breakout as well.
This current scenario is extremely bullish for precious metals, precocious metal explorers, and mining stocks in general. In a concert of action, adding fuel to precious metal prices, in Europe the European Central Bank announced last week it would implement a bond-purchase program of its own designed to stabilize Europe's sovereign debt crisis.
2. PZG's Exploration prove 5.69 million measured and indicated Gold Equivalent ounces and 3.8 million inferred Gold Equivalent ounces.
Paramount Gold and Silver Corporation is a stock with peculiar characteristics to benefit from these economic conditions. PZG is an exploration stage mining company with projects in northern Nevada and Chihuahua, Mexico. Paramount owns a 100% interest in its Mexico property known as "San Miguel." The San Miguel Project is located in southwestern Chihuahua in Northern Mexico. The project is about 20 kilometers north of the town of Temoris, adjacent to the village of Guazapares. It is in the Guazapares mining district, which is part of the Sierra Madre Occidental gold-silver belt. The San Miguel project consisted of 17 smaller concessions clustered near Guazapares, Chihuahua with a total area of 427 hectares, plus the much larger Andrea, Gissel and Isabel concessions. In early 2012 Paramount started a very aggressive drilling program by adding 33% more drilling capacity to its exploration activities. PZG reported almost weekly geological results from new core holes on its 100%-owned San Miguel Project in Mexico. In every instance Paramount new holes drilled continued to return excellent gold and silver mineralization.
PZG also owns 100% of the "Sleeper Gold Project" located off a main highway about 25 miles from the town of Winnemucca, Nevada. The Sleeper project is a high-grade open pit mine including lands now totaling 2,570 claims and covering about 47,500 acres which stretch south down trend to Newmont Mining Corporation`s (NEM) Sandman project. In the vicinity is Coeur D'Alene Mines' prolific Rochester silver mine. Paramount also owns 100% of the Mill Creek Property strategically located along the prolific Battle Mountain-Cortez-Eureka Mineral Belt, approximately 20 km northwest of the Pipeline/Cortez Mine Complex, 25 km southeast of Newmont's Phoenix mine and 35 km southeast of the Battle Mountain Mine. The Sleeper acquisition is consistent with the Company's strategy of district-scale exploration near infrastructure in established mining areas.
Paramount's news release on September 13, 2011, revealed Sleeper is one of Nevada's largest new undeveloped gold projects, containing an in situ measured and indicated resource of 2.6 million ounces of gold and 25.3 million ounces of silver and an additional inferred resource of 1.1 million ounces of gold and 8.2 million ounces of silver. Paramount's CEO Christopher Crupi commented that "the Sleeper stands out as one of the very few Nevada producers to mine out its original reserve without adding to it. We believe that a major opportunity was missed to use the wealth of data from Sleeper and established technologies to find similar deposits in the area. We are very excited to begin drilling the targets on the Mimi claims. We have also started to follow up last year`s success around the Sleeper pit where we plan to drill the Bedrock Casino, recently-discovered PAD zone, South Sleeper and other new targets. Our initial program is for 7,000 meters (23,000 feet) using two rigs."
On July 30, 2012, Paramount announced the results of a Preliminary Economic Assessment ("PEA") for its 100%-owned Sleeper Gold and Silver project located in Humboldt County, Nevada. The PEA was done by Scott E. Wilson Consulting Inc., using resource and geologic information developed by SRK Consulting (Chile) S.A. The PEA confirms that the Sleeper project represents an excellent economic opportunity in the current gold price environment.
The complete "Sleeper Project" PEA was filed Thursday (9/13/12) with a revealing upside surprise:
"Subsequent to this release, SEWC has advised that, in its opinion, it is appropriate to report both oxide and sulphide resources using the same cut-off grade of 0.1 g/t of gold and the project`s global resource estimate has therefore been revised upward in the final PEA report (see table below). The effect of this restatement is to increase the measured and indicated global resource by 428,000 ounces of gold (a 14% increase) and the inferred resource by 592,000 ounces of gold (a 42% increase). Measured and indicated silver resources in this restatement have risen nearly 25% and inferred silver resources climbed by nearly 66%."
Paramount President and CEO Christopher Crupi stated about the Sleeper PEA that "we are delighted by the depth of experience the Scott E. Wilson consulting team has brought to this assignment, particularly their work on other similar brown field projects such as Allied Nevada`s restart of the Hycroft Mine. This PEA is an important step in the rebirth of what was once a very successful Nevada gold producer. The relatively low estimated start-up capital, unit operating costs and a 17-year life make Sleeper an attractive development option for many producers. As SEWC has confirmed, the exploration potential at Sleeper is highly favorable for expanding the resources available to the open pit operation envisioned in the PEA. We are now drilling these close-in targets to improve the project while also exploring for a second high grade Sleeper mine on our large land position." Paramount has the critical multi-project mass and liquidity producers look for in these market conditions. While other factors come into play when a company is evaluating an acquisition, clean balance sheet and favorable geography, PZG has this advantage to justify a premium typically paid for gold and silver acquisitions.
With regard to the Sleeper Project SEWC's preliminary economic assessment has concluded that the most attractive development scenario for Sleeper consists of a large-scale open pit mining operation with a heap leach processing plant handling both oxide and sulphide material, producing a gold-silver dore. A "heap leach only" base case scenario was developed for the project incorporating an 81,000 tonnes per day operation (approximately 30 million tonnes per year throughput), resulting in a projected 17-year operation with average annual production of 172,000 ounces of gold and 263,000 ounces of silver. The projected average cash operating costs for the life of mine are $767 per ounce of equivalent gold recovered. Start-up capital costs for this project scenario are estimated at US$346 million. Sustaining capital costs over the project's life are estimated at an additional $278 million. Total capital cost contingencies over the project life are estimated at an additional $64 million, bringing the total life of mine capital costs to $688 million. The total cost of equivalent gold production (including cash operating costs and total capital and contingency costs over the life of the mine) is estimated at $996 per ounce.
We know gold and silver are headed higher, but at a gold price of $1,384 per ounce and a silver price of $26.33 per ounce (the 3 year trailing average of gold and silver prices as at July 3, 2012), the base case has a $1.2 (US) billion pre-tax net cash flow, yields a $695 million net present value at a 5% discount rate and an internal rate of return of 26.8%. At $1,618 gold (the spot price on July 3, 2012), the total pre-tax net cash flow increases by 160% over the base case to $1.9 billion, the net present value at a 5% discount rate almost doubles to $1.2 billion and the internal rate of return improves to a robust 40%. We know from our analysis above of current market conditions this assessment is conservative because gold is trading at $1734 per ounce and going higher.
With regard to the spectacular San Miguel Mexico property, CEO Chris Crupi stated "the San Miguel Project is ideally situated near established, low cost production where the infrastructure already exists for early, cost-effective exploitation."
Now let's look at PZG's progress with the Sleeper and San Miguel properties. On September 5, 2012, Paramount released results from an update 43-101 compliant resource estimate that definitely increased the grade and quality of the new resources by . The mining Consulting firm integrated a total of 130 new core drill holes (including these seven) totaling 35,447 meters into the updated resource estimate.
Paramount's CEO Chris Crupi stated, "The nearest equivalent property from a geological perspective is the Palmarejo Mine right next door which is owned by Coeur d'Alene Mines. It is worth noting that when the decision was made to capitalize that mine, its resources looked very similar to the San Miguel of today."
The new San Miguel resource estimate reported will be incorporated into a Preliminary Economic Assessment (PEA) planned for completion by year-end 2012. The PEA will evaluate mining scenarios, mining rates, and process alternatives while defining a path to a Preliminary Feasibility Study, which would report reserves. The new San Miguel 43-101 estimate report showed 639,000 ounces of gold and 53.6 million ounces of silver in the indicated category. Using a silver-to-gold price ratio of 1:60, San Miguel holds 1.53 million indicated gold equivalent ounces. This is the key metric to value the property. San Miguel had another 830,000 ounces of inferred gold and 46.2 million ounces of inferred silver. That equates to 1.60 million inferred gold equivalent ounces. The total "measured" and "indicated" gold-equivalent ounces is 5.69 million ounces and "inferred" is 3.8 million ounces.
3. PZG's buyout valuation estimate by well known Certified Financial Analyst is $15/share.
Mr. Michael Murphy, CFA, of New World Investor, Inc., (NWI), a noted Certified Financial Analyst, recently made the following reasonable financial analysis using 3.13 million gold equivalent ounces:
"Gold is at $1700 … Companies don't pay half the value of the gold in the ground anymore, mostly because extraction costs have increased. But they do pay 33% of the value. Finally, PZG now has 147 million shares outstanding, and they also own Sleeper. So the math is pretty simple. 3.13 million ounces x $1500 x 0.33 = $1.55 billion / 147 million shares = $10.54 share. So PZG could sell San Miguel any day for $10+, give the cash to shareholders and still have Sleeper to develop. Or they could sell the whole company today for $15."
We can't argue with his math because gold and silver prices are rising in the current economic climate and PZG has been brutally beaten since the beginning of 2012.
4. PZG synergies offer miners value and its a guaranteed buyout target.
History tells us the stage is set for M&A in the gold and silver sector. The more obvious takeover candidates have already been acquired -- Aurelian Resources (ARU-TSX) acquired by Kinross Gold (K-TSZ) and Gold Eagle Mines (GEA-TSX) acquired by Gold Corp (G-TSX). All these were large projects, except in the case of Gold Eagle, which had huge potential. For example in April, 2011, Newmont Mining Corp acquired Vancouver-based Fronteer Gold for roughly $2.3 billion, expanding its development opportunities in Nevada. At the time Fronteer had 5.7 million ounces of measured, indicated and inferred resource.
Few people know that Paramount's San Miguel property completely envelops Coeur d'Alene Mines Corporation Palmarejo mine. Coeur's d'Alene's highest cash flow mine known as the "Palmarejo" mine. In fact some of the Coeur's mineral veins going into the Paramount San Miguel Project and vice versa. On September 5, 2012, Paramount announced an updated resource estimate confirming outstanding growth at their San Miguel Property in Mexico. The new San Miguel resource estimateproves to the investment world that Paramount now has the size and grade that can be financed into production. Coeur d'Alene is the most complimentary acquirer and its shareholders should be excited because CDE will save tens of millions by simply expanding its current mining operation to PZG's adjoining property because ordinarily set-up can take years and cost something in excess of $500 Million to build a new mining operation.
In addition to CDE, there are a number of other miners - Gold Corp Inc (GG), Barrick Gold, Newmont Mining Corporation`s , Yamana Gold Inc (AUY), and Silver Wheaton Corp (SLW) - with operating mines in the same vicinity as Paramount who are potential suitors for Paramount's Mexico Property. The one that stands out like a sore thumb is Coeur d'Alene's because Paramount's San Miguel Project envelops the miner's mining operation. Coeur d'Alene's "Palmarejo" mine is expected to run dry by 2014. In the coming months a miner's rising stock price is prudently used as currency to buy undervalued developed explorer resources. In this classic case, CDE buying PZG's high resource property is a no brainer. Miners often use their stock price as currency to purchase a junior explorer by trading stock for stock.
Paramount is breaking through resistance at $2.75 on strong accumulation. The current market capitalization of $408 Million does not even account for the current value of the Sleeper project. The recent retracement is almost certainly due to institutional shorting due to the huge open interest in September $2.50 calls, and as a consequence the present price level will be a very temporary buying opportunity.
PZG's stock price of $2.75 per share clearly shows the market is currently only starting to value the Sleeper project. Paramount's huge upside is in the San Miguel project which present's a value buy in the short-term. PZG is great to diversify a portfolio, and offers a sound investment from a fundamentals basis aside from it being a potential take over target. PZG is a takeover target north of $10.00 per share.
Disclosure: I am long PZG.