Tony S's  Instablog

Recent History - Q2 Results

Great Basin Gold's stock price was decimated on August 15, 2012, falling to 0.26/share (from about 0.50/share on August 13, 2012), after management announced a lower than expected results from both of the company's mines (Hollister in Nevada, and Burnstone in South Africa), and the resignation of Ferdi Dippenaar as CEO, followed by the assumption of CEO duties by the former CFO Lou van Vuuren. In addition the company announced liquidity issues, and the initiation of a Strategic Review Process to preserve and enhance "shareholder value in light of the continuing financial challenges resulting from the operational challenges experienced particularly with the production ramp up at the Burnstone mine."

In Nevada, there was lower than expected ore grades (0.63 Au eq. oz / tone), and problems in the carbon circuit at the Esmeralda mill. This resulted in 14,688 Au eq. oz. recovered, and 14,857 sold from Nevada in Q2, 2012. In Q1, 20,459 Au eq. oz. were sold from Nevada, so this is a significant reduction in throughput.

In South Africa, there were issues with dirty water which caused Burnstone to miss it's target of 17,790 Au. Recovered Au oz. at Burnstone in Q2-2012 was 6,392 oz. In Q1, 6,671 Au oz were recovered and 5,610 Au oz sold from Burnstone.

September 4, 2012 - Operational Update

In Nevada, preliminary production results are averaging 6,500 Au eq. oz. sold per month (for July and August) vs 5,000 Au eq. oz. sold per month in Q2. If production and sales continue at the current pace, Hollister should be around 19,500 Au eq. oz. in Q3.

In South Africa, 4,280 oz Au were sold in July and August. That's about 2140 oz Au gold sold per month. If Burnstone continues at that rate, it should be producing and selling about 6,420 oz Au / month. According to management, "The head grade of material delivered to the plant remains impacted by the development/stoping ratio which is only expected to improve once stoping increases later on in 2012." Ore development in July and August have improved about 50% (888 meters / month vs 590 meters / month) since Q2.

(click to enlarge)

Combined, that's an estimated 25,920 Au eq. oz. that could be sold in Q3. Those numbers are better than Q1 and Q2 of 2012, as well as Q4 2011. In Q2 Great Basin Gold was trading between $0.49 and $0.74 per share. In Q1, the share price was between 1.28 and 0.63 per share. In 2012-Q4, the share price was between $1.64 and $0.89. In 2012-Q4, the price of gold ranged from almost $1800/oz to as low as $1540/oz. Currently the price of gold is about $1692.

The Wall Street Journal Discusses the Value Found in Precious Metal Mining Stocks

The Wall Street Journal recently published an article titled "Window of Opportunity In Gold" on September 2, 2012.

In this article, they discuss how a gap has formed between gold mining shares and gold itself. This represents a value opportunity, until the gap closes (and prices correct).

Some notable quotes from the article are :

"in most cases the market has significantly oversold gold equities and this has presented some attractive investment opportunities."

"small to mid-tier miners … may offer more attractive returns, … making them potential M&A targets."

"Out of 470 M&A deals, 160 were in gold"

"The valuation gap hasn't gone unnoticed. While retail stock investors may be apprehensive about jumping into gold equities, acquisitive mining companies have demonstrated interest in scooping up gold companies on the cheap."

Value of Hollister By Itself

Great Basin Gold updated its reserve estimates at Hollister on September 4, 2012. The proven and provable numbers for gold and silver are 455K oz Au, and 1470K oz Ag. The measured and indicated numbers are 706K oz Au, and 2864K oz Ag.

If we use a trial mining cost of $850/oz (Q1 numbers), and today's gold price of $1690/oz and a silver price of $32/oz, that means that we can expect to make between $429-$684 million from Hollister alone. That represents between $0.78-$1.24 per share (from Hollister alone).

Value of Burnstone

If we look at past production data, we see that the most that Burnstone has produced in a quarter is 7,058 oz Au. This is significantly less than Hollister. You would think this is a much smaller and almost inconsequential mine.

Taking a look at the satellite images of the two mines (thanks to Google maps) provides a very different outlook.

Here is a satellite image of Hollister, in Nevada.

View Larger Map

Here is a satellite image of Burnstone in South Africa

View Larger Map

We see that Burnstone is significantly larger than Hollister. If we look at reserves, we see why Burnstone is so much bigger operationally than Hollister. There are 6.4 million Au oz in reserves (proven and provable), and 12.6 million ounces Au as measured and indicated resources.

That represents between $4.4 billion (using P&P numbers), and $8.7 billion (using M&I numbers), once they get the are able to reduce the cost of production down to about $1000/oz. Burnstone began mining in Q1 of 2011. There have been numerous problems at the plant, which have depressed the stock.

Debt, Cash Balance, Inventories

If we look at the debt burden for Great Basin Gold, we see that total liabilities are $403 million. There is $16.6 million of cash, and $31.7 million of precious metal in process. The company is looking to raise $60 million to relieve near and intermediate term liquidity concerns - through a combination of asset sales or new equity (according to the Q2-2012 MDA).

Short Interest

Looking at the short interest, tells an interesting tale. There was close to 14 million shares short last year around September 15, 2011. Currently there are about 6.2 million shares short. The shorts have been covering. But there's not much place for them for cover. The longs have been beaten up severely, but understand the value proposition, and are not selling (especially at these distressed levels). Volume has dried up, and it has now become a waiting game.

Conclusion - Life Cycle of a Junior Mining Stock

Interestingly enough, when you look at where Great Basin Gold is in the life cycle of a junior mining stock, everything makes sense.

Great Basin Gold has completed development of not one but two mines - Hollister and Burnstone. Burnstone has been having teething troubles as it starts up. As a result, relative value is very low, but soon, as Burnstone volumes ramp up, and Hollister's troubles are seen in the rear view mirror, Great Basin Gold will attain full relative value, and long term shareholders will be rewarded for their patience.

Disclosure: I am long GBG.

Q2 - 2012 Earnings

Financial Statements and Management's Discussion and Analysis can be found at the SEC website here.

Earnings Per Share : -0.04/share

This is disappointing to say the least. Not much more to be said here.

Burnstone

Burnstone is still having problems. There was a "delay in the completion of the vertical shaft and the associated permanent infrastructure". These "delays in completion of the associated shaft infrastructure impacted on service water supply, handling of excess water and the cleaning of spillage in the vertical shaft bottom which negatively impacted shaft availability. Water is required to clean, support and drill and the time lost in replacing burst plastic pipes from the temporary infrastructure and de-water the affected area severely impacted production goals."

The issue with the delay in the completion of the shaft and subsequent water issues were KNOWN to Management at the time of the June AGM. As far as I know, it was NOT MENTIONED. As a shareholder, I'm find this to be unconscionable. They should have talked about this during the AGM on June 6.

Consequences : Strategic Review Process

The Board of Directors are not amused. According to the MDA, they have "recently initiated a review process to consider a range of strategic alternatives with a view to preserving and enhancing shareholder value". Also, "Strategic alternatives are likely to include, but are not limited to, the sale of all or a portion of the Company's assets, a merger or other business combination transaction".

In addition, it appears that "Ferdi Dippenaar has resigned with immediate effect and Mr Lou van Vuuren is the new CEO." I view this development as a significant positive for the company.

The Board has basically now put EVERYTHING on the table, in order to release shareholder value. The company's market cap is now currently SIGNIFICANTLY below enterprise value.

Going Forward

I am very encouraged with the actions of the board. In particular, their "view to preserving and enhancing shareholder value". The company is currently selling at below enterprise value. Burnstone itself, in its current unfinished state could be worth $2/share.

One solution for the board is to sell Burnstone itself, take the cash, and distribute most of the proceeds to shareholders in the form of a special dividend. This would release a large amount of shareholder value. Given that the dividend itself could be 4 times the price of the stock, it's possible that we could see the stock price rise substantially at that point.

As a side note, there are about 6 million shares short (as of July 31, 2012), so these shorts would see that dividend as a severe liability (4x or more greater than any possible gain they might have from shorting the stock). This would result in a short squeeze, and further propel the price forward.

Conclusion

At this point, there are no more excuses, and I believe the board will do what needs to be done. As the stock is trading at below enterprise value, it still represents extreme value. The most that a current short seller could get is $0.45/share. If the board decides to sell Burnstone, and institute a dividend wit the proceeds, that means that shorts would have a liability of about $2/share. Things have just become very interesting.

Disclosure: I am long GBG.

Chances are that you've never heard of SilverCrest Mines (OTC:STVZF). They are a small Canadian company which mines gold and silver in Mexico. First, let's get the basics out of the way.

Executive Summary

The company is only recently profitable. They completed development of their Santa Elena open pit mine (in Sonora, Mexico) and reached commercial production by July 13, 2011. As a result Q3 of 2011, had break-even earnings. By Q4, they were earning $0.11/share. By Q1, 2012, they retired their bank debt ahead of schedule, and earned $0.07/share.

Currently, their Santa Elena mine's production rate is about 9,500 oz Au and 130K-140K oz Ag per quarter. Q2's production dipped a bit to 8,585 oz Au, and 139,850 oz Ag. In Q2, we saw silver and gold prices decrease from Q1, so there will most likely be a drop in price when earnings are announced. That might be a good entry point.

The company is recently profitable, and funding expansion plans through current operations. Should the price of silver and gold up significantly from the current $30 and $1600 levels, then profits will soar. As a result, there is large upside potential, once the market becomes aware of Silvercrest mines.

Silvercrest Mining Strategy and Funding

As of 2012-Q1, Silvercrest derives 28% of it's revenue from silver sales, and the majority of revenue comes mostly from gold sales. In terms of reserves, the dollar value of silver reserves and gold reserves is about equal. This means they are mostly mining gold now, as well as some silver. This may seem odd from a company called Silvercrest mines, but it's actually quite ingenious.

Operating Mines - Gold and Silver

They basically financed and paid for the Santa Elena open-pit mine based on gold sales. But that is not the end of the story. Santa Elena is throwing off cash now (again mostly from gold sales). That cash is being plowed right back into an underground expansion plans, and a new CCD mill. As a result, the expansion can be paid for through current operations. They are expecting this expansion to be completed around 2013. By 2014, the underground expansion and new mill will double their production. At Santa Elena, Silvercrest expects peak production to occur by 2015, when it will be mining between 5-6 million Ag equivalent oz per year.

So, it would seem that Silvercrest management is mainly a gold play, and not silver. But the upshot of all this gold mining, while leaving silver mostly intact, is that there is a lot of silver left to be mined, with the equipment and plant paid for from gold sales. Also, if you believe that silver will outperform gold, that means that the silver to gold ratio will drop significantly in the future. At that time, Silvercrest will still have a considerable amount of silver underground to be mined. At that point, it would become a silver mine which also mines some gold.

Exploration Property - Silver and Copper

Silvercrest also has an exploration property called La Joya, in Durango, Mexico with silver, copper, lead, zinc, and possibly some gold. The inferred resource summary is about 51.3 million oz Ag, 333.4 K oz Au, 270 million oz copper. At current copper and silver prices, the silver and copper are worth about the same dollar value.

If earnings continue at the 0.07 / quarter for the rest of the year, that's 0.28/share in earnings. The S&P normally has a PE ratio of around 21. If we project this PE onto 0.28/share earnings, then we could see a stock price of $5.08. But Silvercrest is a growing company, and growth stocks typically have a PE of 35-40. In this case, we could see a price $8.90-$10.17. Currently the share price is around $2.05, so there is plenty of room for price appreciation.

By 2014, we should see production double, so revenues should also double (if silver and gold prices are higher, then revenues will more than double). If Silvercrest can manage to contain its costs, then earnings should explode, and the share price even more so.

This stock is undiscovered, which means that Wall Street doesn't know it exists, and it is undervalued. It also means that liquidity is fairly light, and the average daily volume is only 32,588 shares. Management is currently making presentations to institutional investors, so this situation might not last for long. Interestingly, this is a time when precious metals companies have been beaten down in price, so it's possible that institutions might not buy into Silvercrest until metals prices start going back up again.

Conclusion - Undiscovered Growth and Leverage to Metals Prices

Silvercrest is growing, and financing its growth through current operations. They should double production by 2014. In addition, they are also a leveraged play on the price of gold and silver from the current $1600 and $30 levels. If we see gold and silver go to prices of $2000 and $50, then Silvercrest's earnings will soar (their expenses remain largely fixed, while their revenue increases dramatically). The company is currently largely unknown, and the upside potential is huge.

Disclosure: I am long STVZF.PK.