Treasury Metals: Developing A Gold Mine In Ontario, Canada

Don Durrett profile picture
Don Durrett


  • Excellent entry price.
  • High upside potential.
  • Still needs permits and financing.
  • Exploration potential makes it a good risk/reward stock.

If you like to invest in high upside potential stocks, then Treasury Metals (OTCQX:TSRMF) is worth a look. They meet most of the criteria (discussed below) that I look for when analyzing a gold mining stock for large returns. There are several key criteria that I look at, although it usually comes down to risk/reward and upside potential. I especially focus on future cash flow potential versus their current market cap.

Stock Name

Symbol (US)



Share Price (US)

FD Shares

FD Mkt Cap 7/4/2017

Treasury Metals







Treasury Metals has a fully diluted market cap where I 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.

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.

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 (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 prefer.

Now is a good time to look for undervalued companies with growth potential. If we are at the beginning of another gold bull run that will see new highs above the 2011 level of $1,935 (see historical prices), then it would be wise to buy 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 3 million oz project and produces 200,000 oz annually at $2,000 gold? If you do a quick and dirty analysis using potential future cash flow, you get the following:

200,000 oz x $500 (estimated cash flow per oz using all-in costs of $1500 per oz) = $100 million in annual cash flow.

If you multiply that by 10, you get a $1 billion estimated 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. However, 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 at higher gold prices when it owns large profitable projects. There are many development stocks today with solid projects that are valued unbelievably cheap. 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 ones are going to get financing. Of course, the longer you wait, the higher your entry price will be, and many will no longer be available at low valuations.

The most ideal risk/reward stock is an undervalued producer, or near-term producer that is both permitted and financed to build its first project. Treasury Metals is neither of these, so that adds some risk. However, it should reach this criteria soon.

The only way you can understand the risk of a 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. However, 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 stocks with high risk, it seems like the data changes more frequently. Whereas a major or a strong mid-tier producer can survive a data change without much impact, a junior can drop in value a significant percentage on small changes. The volatility can be stunning, and sometimes juniors do not survive these changes.

Here are my two most important rules to limit your risk exposure:

1) Only invest in a company that has the goods. Make sure that your company has at least one very good project. In other words, do not chase drill results (and if you do, then do it rarely). Exploration should be the icing on the cake, and not the cake.

2) Do not invest more than 1% of your portfolio's cost-basis into a single 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 with mining stocks. If you think the stock is low risk, then you can triple this total to a maximum of 3%. For any single stock, except ETFs, I would not exceed 3%. Remember, this rule only applies to your costs basis. If a stock that you own increases in value, that does not apply to this rule.

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, mutual funds, and ETFs, you can go over the 3% limit.

The following analysis is based on data from my website (

Treasury Metals. (Analysis on 6/5/2017).

Treasury Metals has an advanced gold project (Goliath) in Ontario, Canada. It is an open pit (800,000 oz at 2.5 gpt) and underground (700,000 oz) mine. The PEA was updated in 2017 for a capex of $96 million to build the open pit and mill. It will require an additional $30 million to begin underground mining in year 2. The project has a 13 year mine life (88,000 oz annual production). It is economic with a 28% after-tax IRR at $1300 gold, with around $550 cash costs.

There has been some local environmental resistance to the project, because it is near a lake. However, there is also considerable support. A local group petitioned for a second provincial EIS (Environmental Impact Study), in addition to the required federal EIS, but was denied. Management is confident they will be able to permit the project before the end of 2019. The goal is to begin construction in 2019, but it might slip to 2020. In 2018, they will complete the feasibility study. In 2019, they will attempt to complete permitting, and finance the capex.

Goliath is a large property (12,000 acres) with exploration potential and the deposit is open at depth. I would expect them to extend the mine life to at least 15 years. The CEO is confident they will find at least 2 million oz and thinks the property could contain 3 or 4 million oz. The management team is optimistic that they will increase production from exploration success.

The red flags for this stock are a lack of a pipeline, some local resistance to the mine, and they are a takeover candidate by a mid-tier producer. Also, they don't yet have 2 million oz, which is my comfort level for a flagship project. However, I think they will achieve this level and grow production to 100,000 oz. They have $6 million in cash, which is enough to complete the feasibility study and permitting. They might raise more money before funding the capex, but it won't cause much dilution.

The 3 Ps


Do they have a flagship project? Very close at 1.5 million oz.

Do they have a pipeline of projects for growth? Not really. They have three additional exploration projects, but no significant discoveries.

Do they have the exploration potential to expand resources? Yes, Goliath is on 12,000 acres and as significant potential. They are expecting to find 2+ million oz.

Is the grade and recovery rate satisfactory? Yes, open pit is about 1.2 gpt. Underground is about 4.5 gpt. Recoveries should be over 90%.

Is the location satisfactory? Excellent location in Ontario, Canada.

Do they own it? Yes, 100%.


Do you consider it a strong management team? The CEO is very strong. He has a lot of operational experience. He was the VP in charge of operations for Kirkland Lake, which is a very solid company. This is his first stint as a CEO. I think he will do an exemplary job.

Is it an exploration or production team? Both.

Do they have experience? Yes. Substantial.

Do they have a track record for building mines? First mine for Treasury Metals.

Are they investor friendly and not always diluting? Yes, they have done a good job containing share dilution.

Is the team large enough to build a mine? Yes.

Have you listened to a CEO interview? No, he has been on the job less than a year.

Are they cash-focused? So far they have kept debt low.

How much stock does management own? 10%.

Do the website and company presentation provide adequate guidance and details? Yes.


What are the resources? 1.5 million oz of gold at 2.5 gpt.

Long life mine? Yes. 13 years. Likely to be extended.

What are the current/estimated cash costs and all-in costs per oz? From the PEA: $550 cash costs per oz. My estimated all-in cost (break-even/free cash flow) is $900 per oz.

What documentation has been released for first mine (Preliminary Economic Assessment, Pre-feasibility Study, Feasibility Study)? PEA.

What is the capex for its first mine? $100 million.

What is the after-tax IRR for first mine? 28% at $1300 gold.

Can its first mine be financed? Should not be a problem at $1300 gold. Won't be as easy at $1200 gold.

How will its first mine be financed (debt, equity, streaming)?

To be determined. Perhaps half debt and half equity.

Share Structure

Is it highly diluted? No, it has 137 million fully-diluted shares.

Timeline Risk (time frame until production)

Production scheduled for Q4 2020. This is mostly why it is so cheap.

Market Cap Size

$66 million. In the sweet spot, and undervalued.

Stock Chart

Is this a good entry point? Yes, likely 5+ bagger.

Balance Sheet

What is its cash/debt situation? They have $6 million in cash and $4.5 million in debt. They have enough cash to complete their feasibility study and permitting. They may need to do one more private placement before financing the capex, but it won't impact their share dilution very much. There debt is not an issue and they will not add any until financing the capex.


What is its potential future market cap growth rate at $2,000 gold? 1,200% at 90,000 oz (see below).

What is its potential future free cash flow at $2,000 gold? $99 million annually at 90,000 oz (90,000 x $1000). (This assumes all-in costs are $1000 per oz).

What are its future reserves valued at today? $45 per oz at 1.5 million oz ($66 million/1.5 million oz).

Future market cap growth calculation

Current Market Cap: $66 Million.

Potential Future Market Cap: 90,000 oz x $1000 = $90 million annual cash flow x 10 = $900 million

Compare the two values and you get a 1,200% increase.

Is Treasury Metals highly undervalued? Yes, with a potential increase of 1,200% and future reserves valued at $45, it is highly undervalued.

This valuation assumes they will reach 90,000 oz of annual production, all-in costs will be $1000, and future gold prices will reach $2000.

Editor's Note: This article covers one or more microcap stocks. Please be aware of the risks associated with these stocks.

This article was written by

Don Durrett profile picture
Author of How to Invest in Gold & Silver: A Complete Guide with a Focus on Mining Stocks. Expert on gold and silver mining stocks. Website:

Disclosure: I am/we are long TSRMF. 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.

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