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doctorate in communications; international business development for Sprint, DHL, SBC now ATT in the eighties; founded two successful int'l telecoms startups in the nineties; student of gold juniors throughout the "naughties"
  • Paramount Gold - a "junior" judged in context  2 comments
    Dec 16, 2009 12:00 PM | about stocks: PZG
    Most of what’s published about juniors isn’t serious or honest coverage. (Gold newsletters often extract stock or cash from the companies they cover). There’s no explanation of the context juniors operate in. To evaluate them, you need to understand juniors’ role in the gold industry.
    Senior gold producers are valued by investors on its revenue growth and margins from this year’s production, and also on its ability to replace (and hopefully grow) reserves expended in production. Perceived value of each “ounce in the ground” fluctuates with the spot gold price.
    A gold “junior” is more like a tech start-up than like a senior. Founders (often an exploration geologist and a financier) find “prospective land” and option it. The geologist's track record and the promoter's persuasiveness determine whether they  raise seed money to get started, and gradually to put in place the building blocks to:
    - sell their deposit(s) to a senior
    - attract a senior or mid-tier producer as a development partner
    - attract capital to build the mine on their own.
    The junior’s game is to  transform raw land into a profitable mine. The largest “bump” in this value chain comes when “inferred resources” are upgraded to “measured & indicated resources” or “proven & probable reserves”.
    A gold junior is more likely to find gold (than a tech startup is to find new technology the market will pay-up for) . But, is this gold will be sufficiently abundant, high-grade, and economic to recover at prevailing gold prices. If all questions aren’t answered affirmatively, there’s no value creation.
    Juniors now have a critical role in the global gold industry, because falling gold prices in the 80s and 90s led senior producers largely to shed their internal exploration talent (as did the oil majors). Also, not much new geological talent was developed during these lean years for resource industries.
    Prospecting talent is now scarce, and now resides largely in the juniors. Like oil, gold production has been falling since 2001. Average grade has fallen from 12 grams/ton of ore 20 years ago to 3 grams/ton today. Only 2 “elephant fields” containing 20M oz has been discovered in the last 20 years.
    Seniors must replace each year the reserves they have produced. Like oil, gold is increasingly to be found in developing countries, which have been less thoroughly explored (and with less application of current technology).
    Since the ’08-’09 crash, seniors have moved slowly in acquiring deposits from juniors. Capital is now harder for all-sized gold companies to raise. And, the longer the seniors wait, the higher gold prices move, and the cheaper acquisitions become among those juniors which lack the capital to survive.  
    With this background, I think you’ll be able to appreciate why I was impressed by the CEO of the junior with whom I met this week:
    For a founder & CEO of a junior gold explorer, Chris Crupi has a stand-out resume. For 5 years, he was special assistant to Canada’s Finance Minister. A chartered accountant, he then moved to Pricewaterhouse to restructure and run bankrupt TSX-listed companies. For a time, he ran the Ottawa NHL team and the Canadian Red Cross. No wonder he showed a keen sense of financial staying power -- of how to repair, develop and maintain it!
    Crupi learned from geologist Bill Reed of a deposit Reed had discovered, during his tenure with Hecla. Crupi founded Paramount and acquired the “San Miguel” gold/silver property. In Mexico’s western Sierra Madre, the Palmarejo District historically yielded 40M oz gold and 2B oz silver.
    The following deposits and miners are now arrayed in this District like a 170 km. geological chain of pearls:
    Dolores – 4.5M oz (Minefinders)
    Mulatos – 3M oz (Alamos)
    Ocampo – 2.4M oz (Gammon)
    Palmarejo – 3.8M oz. (Coeur D’Alene)
    San Miguel – 2.6M oz - inferred category (Paramount)
    El Sauzal – 2.5M oz (Goldcorp)
    Monteverde – 1.3M oz (Kimber)
    All the above, except Paramount’s San Miguel, are now producing mines. San Miguel is just 10 kms. away from Palmarejo, for which Coeur D’Alene paid $1.1B in late ’07. (some of whose ounces were already in the “proven & probable reserves” category).
    Paramount has assembled a large land package around San Miguel (currently over 1800 sq. kms.) which virtually encircles Palmarejo. The company plans major drill and study programs culminating in a preliminary economic evaluation by Q3/11. The aim is to prove up over 5M oz (the current “magic number” which attracts strong interest from senior producers).
    Paramount’s strategy is reminiscent of Seabridge Gold -- which gradually expanded and upgraded its massive KSM deposit to "proven reserves", while courting a buyer or partner to initiate mine development. In fact, Seabridge CEO Rudi Fronk sits on Paramount’s board. Over a recent ten year period, Seabridge was the best performing US-listed gold stock – without ever producing an ounce of gold !!!  
    Given the major infrastructure already present in the Palmarejo District, given Mexico’s growing popularity among mid-tier and senior producers, and given the strong outlook for precious metal prices, Paramount may be able to take this “Seabridge strategy” to full fruition relatively quickly.
    Success depends upon three questions: how quickly can Paramount find more ounces in its land? Can they move more ounces from the “inferred resource” category? How will investors respond to press releases on Paramount’s progress?
    An “ace in the hole” is Paramount's Delaware incorporation and trading volume on AMEX – most juniors are Canadian, and trade there. It’s easier to get noticed in the US (with 48 listed gold stocks) than in Canada (with 500).
    Past results from the Palmarejo district are very encouraging. They say the best place to look for gold is next to a gold mine. The San Miguel deposit is “in the neighborhood” of 6 gold and silver mines! But, of course, the “devil is in the details” of each deposit.
    What about country risk? Mexico’s regulations are 2nd best in Latin America. Calderon's gov't is mining-friendly. Does the drug war pose a threat? Crupi is the 3rd mining CEO working in Mexico who has told me flat-out that they have felt zero impact. (This was an urban drug “industry dispute”, now inflamed and broadened by Army intervention.)
    Is there financing risk? Long-time Seabridge financial backer Albert Friedberg has acccumulated 16% of Paramount. The company raised $9M in the March, 2009 depths of the financial crisis, and $23M in October. Friedberg is a deep-pocketed and patient investor. Having done extremely well with Seabridge and Arizona Star, Friedberg has chosen Paramount as his current gold play.
    Crupi himself is the 3rd largest shareholder with 4M shares. I like a CEO with so much skin in the game. There is an overhang of 15M in-the-money warrants with 3.7 years left. 12 million are held by Friedberg. Paramount has $20M cash, and expects to collect $15M from all the outstanding warrants.
    I asked Crupi whether mining's “sweet spot” hasn’t shifted from pure explorers and to emerging producers with financial cushion from cash flow, and with large exploration upside. He then mentioned plans to initiate small-scale production (at zero capital cost) partnering with one of the Palmarejo District miners. This would further increase their chances for success.
    Key to Crupi are staying financially strong, and using 1st class contractors to work methodically through an eventual partner’s or acquirer’s “checklist”. He states that Paramount can work 3 years on current funds. From someone who financed and restructured bankrupt companies for a living, his confidence means something.
    PZG’s current market cap is $107M. If they execute, and only command the price Coeur’s paid 2 years go -  $1.1B – then PZG would be a 10x gain from today. I want to be clear: I’m not promoting PZG, but using their example to help you understand how to identify a serious contender.
    Disclosure: no position or other financial ties to PZG 

    Disclosure: no position or other financial tie to Paramount Gold & Silver
    Stocks: PZG
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Comments (2)
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  • silveremmo
    , contributor
    Comment (1) | Send Message
    Very clever and accurate article.More on Pzg on this
    26 Dec 2009, 03:24 AM Reply Like
  • Michael Murphy, CFA
    , contributor
    Comments (317) | Send Message
    Did you mean "preliminary economic evaluation by Q3/10"? The company expects to have their five million ounces discovered by then.
    11 Jan 2010, 08:51 AM Reply Like
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