Chris Berry, founder of commodity-focused House Mountain Partners, praised Terraco Gold (CVE:TEN) on Tuesday for "weathering the current poor market environment for juniors", after the Canadian junior closed its third royalty transaction on the Spring Valley project in Nevada, increasing Terraco's royalty exposure on the Barrick (TSE:ABX)-led joint venture property to up to three per cent.
Together with the company's first two net smelter returns (NYSE:NSR) transactions on the project in 2011 and 2012, Terraco now has royalty coverage, either by direct ownership or option, of up to 3 per cent NSR on the developing project, which is expected to advance through scoping and into pre-feasibility status this year.
Berry makes the point that the company now has C$1.8 million in cash and marketable securities on its balance sheet, together with a low burn rate.
"It was encouraging to read TEN's latest press release. CEO Todd Hilditch announced the closing of the third royalty transaction on the Barrick / Midway Gold Spring Valley gold deposit," Berry wrote in his morning notes on Tuesday.
Spring Valley is a joint venture between Midway Gold (TSE:MDW) and Barrick, where Barrick recently earned into a 60 per cent position by spending $30 million and has exercised an option to spend another $8 million to earn 70 per cent before the end of 2014. Recent statements from Midway indicate that this will occur well in advance of the end of next year.
"Essentially, as Spring Valley grows in size vis-à-vis resource, so too, does the value of the royalty from which TEN shareholders benefit. TEN now has CAD $1,800,000 in cash and marketable securities on its balance sheet and while the company did issue 800,000 shares to the royalty holder, we view this as a small price to pay to bring in $1,000,000 in cash and enhance the royalty agreement, particularly in this market environment," noted Berry.
He cites several factors that could be positive for Terraco, including the belief that Spring Valley will grow in size, that the deposit will eventually achieve commercial production and that the price of gold will be higher in the future than it is today.
"Nobody knows the answers to these questions with certainty, but in the case of TEN, management's ability to arrange for largely non-dilutive financings in an environment hostile to junior financing leaves us with a sense of optimism for the future of the company," concluded Berry, who founded House Mountain Partners in 2010, which is focused on the commodity space and junior mining and resource stocks.
Spring Valley currently contains a NI 43-101 resource of 2.16 million ounces of gold in the Measured and Indicated categories and 1.97 million ounces of Inferred resource.
"This is a young and aggressive management team with very good sell-side institutional support. We are very large shareholders inTerraco Gold as we are in Pershing Gold a few miles down the trend."
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Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.