If you are looking for a three-bagger, you can't go wrong with VanEck Vectors Junior Gold Miners ETF (NYSEARCA:GDXJ). And if you are looking for a five-bagger, PureFunds ISE Junior Silver ETF (NYSEARCA:SILJ) will do the trick. However, if you want a good risk/reward stock with 5+ bagger potential, those are becoming harder to find. From the recent selloff in gold/silver miners, I have one for you.
Share Price (US)
FD Mkt Cap (2/14/2017)
GoldMining Inc. has a FD market cap a bit higher than I normally like to buy stocks. I prefer to get them in what I call the sweet spot, with a fully diluted market cap between $50 million and $150 million. Once a stock reaches the $50 million level, the risk reduces, because investors have recognized its value. Conversely, once a stock exceeds $150 million, the upside potential begins to diminish.
This range of $50 to $150 million does not apply to all miners. Sometimes, a company displays extraordinary value well before it reaches $50 million or long after it exceeds $150 million.
It would be nice to be able to buy GoldMining Inc. below $150 million. That might happen if the dollar keeps rising and gold crashes, and it might be smart to be patient. However, there is a lot of value with this stock at its current valuation.
This sweet spot range is where you will find late-stage development projects, near-term producers, or mid-tier producers. What you are really investing in are emerging mid-tier producers. Most mid-tier producers are valued over $100 million, so buying in this range is catching an early mid-tier producer. These are the companies that can grow quickly. At this valuation, most of these companies will only have one producing mine, or their first mine under development. Thus, you are getting in early, which is a smart. One thing I have learned is that you usually don't make your big money on a company's first mine, but its second and third.
Whereas the risk is substantial for junior gold and silver mining stocks, the upside is also substantial. My current focus is on both undervalued producers and companies with solid projects that are advancing toward production. My range is wider than $50 to $150 million market cap, but if a company falls into that sweet spot, I am more likely to buy it.
GoldMining Inc. is not currently a producer or aggressively advancing a mine to production. Thus, it is not usually what I am interested in buying. However, it has 4 solid projects and 18 million oz of gold. It is my expectation that the gold it owns will get revalued higher as gold prices rise.
I consider all junior development companies as high-risk speculation stocks, because you can never know if they will make it into production. If they have trouble with financing, or if the geology is analyzed incorrectly, e.g. Rubicon Minerals (OTCPK:RBYCF), or if any number of issues arises, these stocks can drop like a rock. Also, management is crucial and can disappoint investors with poor decisions and bad execution. Lastly, quality projects tend to get taken out by larger companies, which generally do not have the upside potential that I am looking for.
I think now is a good time to look for undervalued companies with growth potential. If we are in another gold bull run that could see new highs above the 2011 level of $1,935 (see historical prices), then it would be wise to spot the potential winners now.
My investing style is to focus on potential future cash flow in conjunction with higher gold prices. For instance, what is the future value of XYZ gold stock if it develops a 5 million oz project and produces 300,000 oz annually at $2,000 gold? If you just do a quick and dirty analysis using potential future cash flow, you get 300,000 oz x $500 (estimated cash flow per oz with all-in costs at $1500 per oz) = $150 million in annual cash flow. If you multiply that by 10, you get a $1.5 billion valuation.
Note that some companies were valued at 30x cash flow during the last mania in stocks in 1980 and a 10x cash flow valuation is quite common today for strong mining companies. A conservative method is to use 5x cash flow to value a company. My expectation is that we should see 10x cash flow valuations as gold prices rise and companies obtain much more healthy balance sheets.
It's amazing how valuable a mining company could become when it owns large profitable projects. There are many development stocks today with solid projects. Not all of them will be successful in building their mines, so it is a crapshoot picking the winners early. The smart play is to watch these stocks and see which is going to get financing. Of course, the longer you wait, the higher your entry price will be, and stocks like GoldMining Inc. will no longer be available at low valuations.
The most ideal stock is an undervalued company that is either financed to build its first project, or is an undervalued producer with growth prospects. The only way you can understand the risk of an undervalued stock is to do your own due diligence. Below, I will go step by step and show you what to look for when analyzing a mining stock. But even with this data in hand, you should do your own due diligence to confirm what I have written.
Even if you think you know a stock intimately, the data will change. If there is one constant in the story of a stock, it is change. And the higher the risk, it seems like the data changes more frequently. Whereas a major or a strong mid-tier producer can survive a data change, a junior can drop in value a significant percentage on small changes (refer to Orezone Gold's (OTCPK:ORZCF) recent news release). The volatility can be stunning (refer to Argonaut's (OTCPK:ARNGF) recent 45% drop), and sometimes juniors do not survive these changes.
The two most important rules to follow to limit your risk exposure are: 1) Only invest in a company that has the goods. In other words, do not chase drill results (or do it rarely). Make sure that your company has at least one very good project. 2) Do not invest more than 1% of your portfolio cost-basis into a high-risk stock. Thus, if your total invested dollars is $100,000, then your max is $1,000 for a high-risk stock. You can break this 1% rule, but do it rarely.
This 1% rule may seem too low, but you have to stay humble and acknowledge the high risk. If you think the stock is low risk, then you can triple this total to a maximum of 3%. You may be thinking that you could end up with 50 or more stocks. Perhaps, but this won't happen if you buy bullion and/or ETFs as a foundation. With bullion and ETFs, you can go over the 3% limit.
The following analysis is based on data from my website (www.goldstockdata.com).
GoldMining Inc. (Analysis on 2/5/2016).
GoldMining Inc. (previously Brazil Resources) is a relatively new company trying to build its first mine. It has a good management team with influential people on the board. Its stated focus is to acquire advanced stage projects and bring them into production. In 2012, it acquired the Cachoeira project. After the initial drilling, the resource size increased from 750,000 oz to 1.3 million oz at 1.2 gpt. Since then it has not attempted to move it to production.
In 2013, the company acquired Brazil Gold and its 1.7 million oz Sao Jorge project. This may now become its first mine. It has a PEA to produce 100,000 oz at $650 cash costs. The after-tax IRR is 33% at $1300 gold, thus it is very economic. I'm waiting for it to give guidance that a feasibility study is under way. It has $16 million in cash and no debt.
In 2015, the company acquired the Whistler project in Alaska from Kiska Metals. It is a 6 million oz deposit (.5 gpt) with copper offsets. In 2016, it acquired the Titiribi project in Colombia from Nova Copper. It is a 9 million oz deposit (.5 gpt), with copper offsets. It acquired both projects very cheap.
It has several large properties in Brazil: Maua (25,000 acres), Pireneus (250,000 acres), Apa (500,000 acres) and Artulandia (12,000 acres). Once the company gets some cash flow, this will likely be a growth company. Its FD market cap has exploded from $36 million to $209 million.
I think this is a company with potential to become a very large company, once it decides to become a development company. It has 800,000 acres of exploration targets and an aggressive management team. I get the feeling that it is not for sale (insiders own 25%) and want to grow this company. My concern is that it appears to be more about deal making than mine building. I'm starting to think it is ironic that it renamed the company to GoldMining Inc. I'm not sure it wants to be a mining company. However, worst case, I think it will be a 5 bagger with its 4 solid projects and more on the way.
The 3 Ps
Does it have a flagship project? Yes, long life mine.
Does it have a pipeline of projects for growth? Yes, several projects.
Does it have the exploration potential to expand resources? Yes, several projects.
Is the grade and recovery rate satisfactory? Two gold projects in Brazil have satisfactory grade. The company's other two large gold projects currently rely on copper offsets and will require higher gold prices.
Is the location satisfactory? Good locations. Some risk with permitting and infrastructure issues in Alaska.
Does it own it? Yes, 100%.
Do you consider it a strong management team? A strong team, although it does not appear to have experience building mines. However, it is savvy and can hire qualified people.
Is it an exploration or production team? To be determined.
Does it have experience? A question mark.
Does it have a track record for building mines? No.
Is it investor friendly and not always diluting? Yes, dilution is still low.
Is the team large enough to build a mine? A question mark.
Have you listened to a CEO interview? Yes, its CEO seems to be solid.
Is it cash-focused? So far it has avoided debt.
How much stock does management own? 5%.
Do the website and company presentation provide adequate guidance and details? Yes.
What are the resources? 18 million oz of gold, plus significant copper.
Long life mine? Yes.
What are the current/estimated cash costs and all-in costs per oz? N/A.
What documentation has been released for first mine (PEA, Pre-feasibility Study, Feasibility Study)? N/A.
What is the capex for its first mine? N/A.
What is the after-tax IRR for first mine? N/A.
Can its first mine be financed? N/A
How will its first mine be financed (debt, equity, streaming)? N/A.
Is it highly diluted? No, it has 135 million fully-diluted shares.
Timeline Risk (time frame until production)
Yes, the company will not build a mine anytime soon.
Market Cap Size
$201 million. It's not in the sweet spot, but highly undervalued.
Is this a good entry point? Perhaps not a great entry point, but a potential 5+ bagger.
What is its cash/debt situation? $16 million in cash and zero debt.
What is its potential future market cap growth rate at $2,000 gold? 1,100% at 300,000 oz (see below).
What is its potential future free cash flow at $2,000 gold? $240 million annually at 300,000 oz (300,000 x $800). (This assumes all-in costs are $1,200 per oz).
What are its future reserves valued at today? $24 per oz at 10 million oz ($240 million/10 million oz).
Future market cap growth:
Current Market Cap: $201 Million.
Future Market Cap: 300,000 oz x $800 = $240 million annual cash flow x 10 = $2.4 billion
Compare the two values and you get a 1,000% increase.
Is GoldMining Inc. highly undervalued? Yes, with a potential increase of 1,100% and future reserves valued at $24, it is highly undervalued.
This valuation assumes its upside potential is producing 300,000 oz. I think that is actually conservative with 18 million oz of resources. This is a company that has purchased 4 projects in 4 years. It will likely buy additional projects. It clearly has the resources to produce more than 300,000 oz annually. However, it will take a long time to reach that level of production and it might not even attempt it. The current CEO does not appear to have a desire to build this company into a large gold mining company, regardless of its new name or new website's name (www.goldmining.com).
However, there is value in this company because of the gold in the ground it owns. And if it decides to build a mine, plus the gold price pops, the rest of its projects are going to get revalued higher. The potential for this stock is quite significant. The management team is savvy and it is not going to give away what it currently owns once gold prices start trending higher.
Note: You can check the data included in this analysis at GoldMining Inc. website and www.goldmining.com.
Disclosure: I am/we are long GLDLF.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
Editor's Note: This article discusses one or more securities that do not trade on a major U.S. exchange. Please be aware of the risks associated with these stocks.