This is now my second Seeking Alpha installment on my personal never-ending evaluation of mining stocks. As I explained in the first article, I make my picks through the years by doing my homework and spending many hours going through companies, and then the following year, I do it all over again. I write down what I find to use as a resource of information to make investment decisions on which companies I want to own going forward and to help me remember why I was interested in them in the first place. As time passes and I feel the data may be obsolete, I rinse, repeat, and go through them all again, sometimes dropping certain ones or adding new issues to consider.
This writing is really a sharing of that work that I do. I use as many viable resources that I can find, and two of my favorites to use are corporate presentations and listening to CEO interviews. This study becomes for me a quick but very enlightening summary of gleaned information on those mining companies researched.
(Image source: Pixabay)
I try to pick companies that are typically gold and/or silver miners, in or near to being in production, and of a size that still gives them home run potential. Admittedly, I am not looking for gains of 10% a year; I am looking for situations that will double or more when the metal bull market commences. I have made picks for myself in the past that have moved over 20x in value by identifying a good company, timing my purchase near the start of a significant bull market move, and then just being patient and letting the move play out.
I believe we are near the onset of a large move higher in the metals, which makes for a real possibility to get into good mining stocks now, where the gains will be shocking for many. I am not looking to actively trade in and out of these positions typically; I am looking for stocks that I can buy now, hold for a year or two, possible longer, until the bull move in the underlying metal is exhausted. Even then, I will not try to pick an exact top, but will attempt to leg out as they head higher, or do what I call ratio trading. This is where I calculate that a stock I am in is overvalued, cash out of part of the position, and trade some of that into a different undervalued stock and ride that one higher. The ratio trading strategy is really another article in itself but is not important until after the bull market really gets going, so I will save that topic for a later date when it can be utilized.
In these articles, I am evaluating mostly stocks that I think will fit my criteria of at or near production, and with great leverage to higher metal prices. I will also mix in a few completely new companies to see if I may want to own either now, down the road, or maybe I will find I never want to own them. In the current situation I believe we are in, at the outset of a great bull move in metals after a 6-year correction, I feel no need to be in risky explorers with no measured resources, or in companies that are in unstable countries with great political risk.
A perfect example of the latter would be Tahoe Resources (NYSE:TAHO), which I owned at one point after it bought up one of my old favorites, Lake Shore Gold Corp. (NYSEMKT:LSG). As I studied Tahoe, I realized that the company's primary asset was a mine in Guatemala, and although one of the best silver mines in the world, it came with a political situation too risky for me. I sold out of Tahoe at almost triple what the current price is. This is because Guatemala recently suspended that flagship mine, making Tahoe's current valuation at best hard to predict. As the summer doldrums finally end, I believe the best-leveraged miners in safe jurisdictions are the place to be, and they will deliver stunning gains that will turn a silver and golden portfolio into a sea of green.
(Image source: Pixabay)
Here is the latest group of evaluations I am sharing in my ongoing study:
Detour Gold (OTCPK:DRGDF)
Detour Gold is a mid-sized gold producer that owns a world-class, large-scale, long-life, open pit mine located in mining-friendly northern Ontario, Canada. Detour's mine is coupled with a very large land package and has significant exploration potential. The company's near-term corporate targets are to reduce cash costs while ramping up to full production-level outputs, and it appears to be on track to do so.
Its 100%-owned Detour Lake Mine is one of the largest gold mining projects around with a huge 16 million ounce in gold reserves. The really exciting fact about those reserves is that they are currently replacing those ounces every year through exploration, so the life of mine just keeps extending itself. The company is at a current production output estimated in the 550,000-600,000 ounce range for this year, but is expecting increasing grades next year, and that output may near the 670,000 ounce mark in 2018.
Detour is also exploring the idea of something quite new for it - to add high grade underground mining to the current open pit production - so that may be another production booster down the road, if instituted. AISC are now at around 1100/oz gold, but projected to drop eventually to 758 with the better grades and as economies of scale kick in. The company has currently only hedged about 90,000 ounces, so this leaves it with nice leverage to higher gold prices.
Detour Gold currently has around $130 million in cash and $450 million in debt. It has the leverage I like, exploration potential, large institutional ownership, is located in a great area for mining with necessary infrastructure, and has a 23-year life of mine - almost unheard of for a gold mine. That number is really kind of stunning. The risk in owning Detour, in my opinion, is the debt and getting non-dilutive financing objectives sewn up for that debt, plus in being just a one-property operation. I tend to like miners with a variety of projects and metal outputs in different locations which can give some margin of safety, still, Detour has a lot of great near- and long-term things going for it as mentioned.
Detour may not be the biggest gainer percentage-wise in a metals bull market of the stocks I am studying, as it is comparatively a much higher-priced miner to the others and kind of in a class all to itself, but will still do quite well, as it has a nice mix of institutional interest, high production output, and fairly low share count. Shares outstanding are at 174.57 million. I have owned shares in the past, but do not currently at the time of this writing.
First Majestic Silver Corp. (NYSE:AG)
First Majestic has a one metal, one country focus. It is the purest silver company in world with 70% in silver revenues and 6 producing mines and other exploration properties, all Mexican. It has been for a long time one of the favorite stocks for those looking to invest in silver, and even sells silver bullion products from the silver it mines that investors can purchase directly from the company. This is one of those seemingly rare miners I look for that actually believe in the product it produces.
First Majestic was the best-performing stock in first half of 2016 on the Toronto exchange, showing the potential it has to move very quickly. It currently has a huge short position set against it, the highest in the history of company, which will be another source of rocket fuel when those positions begin to unwind - which, of course, they will at some point, I think soon. When the very low prices of 2014 hit, it impacted all silver producers. First Majestic was quick to take defensive action by reducing production to only the most profitable areas to mine, plus it instituted some new technologies and automation processes which reduced costs, and those costs have been cut in half since that time. That reduced production could be brought on-line very quickly to put those ounces back in play when the silver prices warrant, but even without ramping up those mothballed areas, production is set to go up in 2018 and 2019. Cash flows continue to be stellar, and if silver prices head up as expected, this company will outperform most others.
Some other positives - the company has a great ongoing relationship with the skilled Mexican labor force, which is a real benefit to getting the best talent to run its operations. It expects to easily add more reserves to the current resource base in the next couple of years, which is a real struggle these days for many other mining companies. First Majestic is, for 2017, re-investing 124 million into the company but without drawing down any of the balance sheet to do so. This is very important point to understand, as this will greatly pay off in the future with no detriment to the present balance sheet.
That balance sheet is strong with $130 million cash and only $30 million in debt, but in my opinion, the company's best asset is one of the best managers in the business, Keith Neumeyer, who is shareholder-focused and understands what those shareholders are looking for. For now, First Majestic will be at 18 million silver equivalent production at 12-13 AISC, but with the ability to leverage the higher production capabilities quickly and benefit from higher silver prices down the road. If you are a believer in the silver story, this is a must-own stock, and I do own a few of the 165 million shares currently outstanding.
First Mining Finance Corporation (OTCQX:FFMGF)
First Mining Finance Corp. is a mineral bank which has acquired a large and diversified portfolio, including 25 projects with a combined gold resource base of 7 million ounces in the Measured and Indicated categories and 5 million ounces in the Inferred category, all 43-101 verified resources. Most of these resources are in mining-friendly Canada, and the company believes there is actually much more than those stated numbers yet to be verified. The long-term corporate plan is to retain a residual interest in those properties and return shareholder value with them through joint ventures, royalties, and/or streaming structures to eventually pay a dividend.
One of First Mining's best assets is that it has the same basic management as First Majestic with Keith Neumeyer, who founded this company with the same shareholder beneficial viewpoint. When the company began, it was trying to buy up undervalued properties, because at that time many properties were extremely cheap and available or distressed financially. The market has changed a bit since First Mining's inception, and property values have risen to a point where buying them has become quite hard to do. The company is now focused more on the properties it already has than looking for new ones, and will add value to those assets through drilling, metallurgical studies, infrastructure improvement, and economic studies.
As an example of First Mining's business model, it bought the Springpole project for $15 million, when the previous company had spent $80 million developing it, so inherent value has already been gained. When metal prices head up, this value will be magnified, and the company would be able at that time to divest Springpole for a streaming agreement, for example, and pay a dividend. It has mostly gold-focused properties, all of which are thought to be profitable even at current metal prices, so the company should be able to execute its plans easily to extract their values when metal prices rise.
Some other items of note. First Mining has recently been added to the TSX, Canada's premier exchange, which will give it more exposure to institutional investors. This stock, in my opinion, is a fairly conservative one that is now in the sub-dollar range but with three negatives as follows: it can no longer add new properties easily, its plan to pay a dividend is probably going to be quite some time before fruition, and it has a high share count. Even so, it is priced cheaply enough currently to make it attractive to new investors, has several promising properties on hand, $29 million in cash, and very little debt. The company has 623 million shares outstanding, and I currently own shares.
Alexco Resource (NYSEMKT:AXU)
Alexco owns Keno Hill Silver in the Yukon Territory, one of the world's premier silver districts. It was in production with its holdings from 2011 to 2013 at a rate of two million ounces of silver and more than 20 million pounds of lead and zinc concentrate per year when it stopped due to low metal prices. Since that time, the company has made extremely significant discoveries in the district with the Flame & Moth and Bermingham deposits, which add more than 20 million ounces of silver. Enhanced by these new additions and better financing and metal prices, it is currently working on plans to bring the area back to production.
A very important improvement to the company's business model is that it has renegotiated its financing with the former Silver Wheaton, now Wheaton Precious Metals (NYSE:WPM). The previous terrible deal from Alexco's standpoint to be successful, had Wheaton getting 25% of the production. This was an important contributor to keeping the company out of production for the last few years. They have re-written the former agreement to much more favorable terms which will be beneficial to both parties going forward. The agreement has been completed by issuing shares to Wheaton, making it a strategic partner in Alexco's future success. This agreement is now dependent on the grade of mined material plus the spot price of silver, and will allow the company to get back into production safely without having to high-grade its mine. This is a very important fact to understand, as it will help allow for long-term future success.
The return to production with better metal prices on the way, better financing, and the same assets it had before would be exciting enough, but add onto this two new high grade deposits. This puts Alexco in the top tier of potential silver-focused mining opportunities with high leverage, in my opinion. These new properties are amazingly rich and could be measured in pounds per ton silver when put into production. They are also open at strike, and it is unknown how many more ounces will be added from the promising exploration activities. Exploration has already added recent game-changing discoveries of 23 million ounces for a total of 68 million indicated and close to 100 inferred total to its holdings, and it appears more is yet to come. Current production projections are already at 8 years and growing, with a 3.5 million ounces per year average. Production will also produce very clean concentrates, which makes for a desirable product and adds to profitability.
AISC for the silver output has all costs, including the SLW stream, to be at $13.5 per ounce. It will take 27 million capex to get its whole district back into full production, and is planned to commence in 2018 with additional enablers of a mill in the district and all necessary infrastructure necessary to do so. The current cash position for Alexco is at around $23.5 million in working capital.
With all this excitement in the silver part of Alexco, it is easy to forget the company also operates an environmental services division. This operation provides mine-related environmental services, remediation technologies, and reclamation and mine closure services to both government and industrial clients. This has been a nice steady cash generator for the company. Currently, this part of Alexco has a $100 million backlog, $11.4 million yearly revenue at a 25% margin, and those numbers are growing.
Alexco is currently priced on the lower end of its recent trading range, providing a nice opportunity for a silver investor to get lots of leverage to silver and base metals as both a very exciting and proven exploration asset and soon to be a producer again as well. It has only 113 million shares out fully diluted, and I do own shares.
Mundoro Capital Inc. (OTC:MUNMF)
Mundoro is focused in exploration for copper and gold in eastern Europe's Serbia and Bulgaria in the Tethyan belt. This well-known area of mineral potential, which is the current focus of the company, has only been minimally explored with modern methods. It additionally has exploration properties in China and Mexico. The company's plan is to unlock value in properties it believes can generate future cash flow for its shareholders.
The Tethyan belt is an area well known for metal resources and has quite a bit of renewed interest of late. This is due to laws passed in 2010 and 2011 that are conducive to mining exploration and has unlocked investor interest in this area, including the attention of some majors. With a current share price of around $0.13, a market cap less than $10 million, and $4 million cash on hand, Mundoro is quite low in comparison with other similar explorers, and it believes it is due for a re-rating at some point.
The company has some positives I would like to point out. With the cash it has, no short-term financing will be needed for at least 2 years, which should keep dilution down. It has a huge, 800 square kilometer land package in eastern Europe in a very promising area the company is quite excited about. The management team has local experience in this area and has been together for 5 years, which is a real benefit in going forward in this area for Mundoro.
My own philosophy tends to lead me away from all explorers, including this one, in the current mining scenario. I just feel there are too many opportunities, like others mentioned in this article and in the previous one that I wrote, so the added risk of a tiny explorer is just unnecessary at this point in time. The established miners with low share counts and resources already delineated and producing profitably now have more than enough beta factor, so when the metals make a significant move higher, they will not just go up as the metals do, but will multiply. They also tend to lead the move higher in the sector as a whole, while often the small juniors may lag for a while before taking off. It is then that I will start to consider some of the better explorers to invest in, but not at this time for myself. Still, I wanted to bank this information on Mundoro and others I will look at in future articles to use when I feel the time is right for explorers and to see what progress has been made. This is not to say this one cannot just explode without me on board at any moment. Some juniors are just a discovery away from such price movements, and this one certainly has that sort of potential. The company has 59.5 million shares outstanding fully diluted, and I do not currently own shares.
Premier Gold Mines (OTCPK:PIRGF)
Premier is a gold producer with multiple gold projects located in the heart of world-class mining districts, coupled with a very experienced management team. The company's main projects are in the Superior Geological Sub-Province of Ontario, Nevada's Carlin and Battle Mountain-Eureka Trends, and in the Sonora State of Mexico. It believes any one of these areas has the potential to significantly impact and grow the company with new discoveries.
Premier currently has over $110 million in cash, and that number is growing, plus over 22,000 ounces of gold and 55,000 ounces of silver in inventory! I love to hear of miners that show some faith in their own product by actually holding it. 2017 production guidance is at around 130,000 ounces of gold at under 700 AISC and near 350,000 ounces of silver into the mix as well with 2 producing mines and 8 projects in the US, Canada, and Mexico. Some of those currently non-producing projects are quite advanced and could be put into production fairly quickly, and they include some open pit opportunities. Most are located in great areas near other major mines, which can be a good indication of potential. The company is currently generating a high by comparison to peers $0.10/share of free cash flow, which is a nice testament for it to sell to potential investors.
I believe this company is well managed with a fairly conservative spending approach keeping debt low, and is also undervalued when compared to peers. The risk is really the same one most miners have - the ability to replace reserves and to keep production levels consistent and profitable for now to fund exploration activities. At some point, it needs a game changer to really grow the company, and it does have the properties in its fold that may have the ability to do so. Premier has been able to sustain a nice exploration program to date, which makes that all possible, and when the metal prices cooperate, even at current production levels, I believe the stock will appreciate nicely. I do not currently own shares, as for me Premier falls into one of those "cannot own them all" categories, but this is one I am seriously considering to buy into. Maybe you can beat me to the punch!
I hope you enjoy the article and find it valuable resource, a sort of library you can reference back to. This is how I use this information for myself. I will start immediately on the next group of companies to investigate and will continue to share that information on Seeking Alpha if the response is positive. Your comments are greatly valued and a tool for me to understand how this info is being received, and I usually try to respond to many of them. I also may write more in-depth articles on individual companies and other subjects such as cryptocurrencies in the future.
Disclosure: I am/we are long AXU, AG, FFMGF.
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.
Additional disclosure: The above references are an opinion and for information purposes only. It is not intended to be investment advice. Seek a duly licensed professional for investment advice.
Editor's Note: This article covers one or more stocks trading at less than $1 per share and/or with less than a $100 million market cap. Please be aware of the risks associated with these stocks.