- I picked a slew of deep-value stocks from the energy and mining industries, which recently began to outperform growth stocks.
- In addition to 8 other deep value ideas, I present Revival Gold, a hidden-gem gold explorer that is advancing the extremely promising Beartrack-Arnett project in Idaho.
- Revival offers an asymmetrical risk-reward profile that I believe may richly reward investors in the next 3-5 years.
- I do much more than just articles at The Natural Resources Hub: Members get access to model portfolios, regular updates, a chat room, and more. Learn More »
Value and Growth
When it comes to teaching retail investors what is value, Cathie Wood may have done the investment community a disservice. Whether a stock is under-, fairly, or over-valued, and if it is deep value, is supposed to be determinable in a relatively objective way, according to value investing. Wood essentially argues just because her favorite picks are down 50-60% from the previous peak, "they are in deep value territory".
Benjamin Graham first developed the analytical framework of value investing. According to him, a stock has an intrinsic value. When the share price is below that intrinsic value, the stock is undervalued. An under-valued stock gives the investor a margin of safety. An investor should insist on getting an adequate margin of safety when purchasing a stock.
- Modern value investors believe three intrinsic values can be determined for a stock, namely, in decreasing accuracy, the asset value, the earnings power value, and the value of growth.
Wall Street came up with the idea of splitting stocks into value stocks and growth stocks, to better market investment products to retail investors. Wall Street uses a series of simplified metrics, e.g., P/E multiple and PEG ratio, to facilitate that subdivision. Growth stocks are considered to have the potential to outperform the overall market over time because of their future growth prospects, while value stocks are thought to be cheap relative to their peers.
However, as Warren Buffett famously quipped, growth and value investing are joined at the hip. We can do better than Wall Street's oversimplified characterization of a stock as either a growth stock or a value stock. In my understanding from the vantage of the principle of value investing, if the share price of a stock is substantially below its asset value, it is in deep value territory; if the share price is materially below its earnings power value, it is a value stock; if the share price is considerably higher than the earnings power value, it is a growth stock.
- In the latter case, an investor is using future growth to justify the purchase of the stock. If the share price is below the value of growth, he still has some margin of safety. The problem arises when he is willing to pay a share price much higher than the value of growth, in which case he completely forgoes the margin of safety.
Value Stocks In 2021
In 2021, growth stocks continued to outperform value stocks. From January 4 to December 30, 2021, iShares Russell 1000 Growth ETF (IWF) returned 29.19% while Vanguard Value ETF (VTV) returned 25.21% (Fig. 1).
However, a number of important observations emerge when we look under the hood of the general group of value stocks. I'd like to draw your attention to the two most pronounced value depressions in the value camp, i.e., the mining and energy industries as represented by SPDR S&P Metals and Mining ETF (XME) and SPDR S&P Oil & Gas Exploration & Production ETF (XOP), respectively.
- Mining stocks had been in the doldrums from April 2011 through March 2020 for nine long years;
- Oil and gas producers had been in a relentless bear market from late 2014 to March 2020, or close to six years;
- Since March 2020, both mining and energy stocks performed more or less on par with the growth stocks;
- Year to date, mining and energy stocks have actually outperformed the growth stocks by a large margin.
Fig. 1. A comparison of iShares Russell 1000 Growth ETF, Vanguard Value ETF, SPDR S&P Oil & Gas Exploration & Production ETF, and SPDR S&P Metals and Mining ETF for 2007 to date (upper), March 2020 to date (middle), and year to date (lower), modified from Barchart.
My interpretation of the above observations is this: Although deep value stocks - as represented by miners and oil-and-gas producers - had been on a losing streak to growth stocks, the tide has turned since the Covid-19 bottom in March 2020. I believe this change is just the beginning of a commodity super-cycle. Thanks to the protracted bear market prior to this turnaround, mining and energy stocks are still insanely cheap despite their recent strength.
Best Value Stocks for 2022
Based on the above line of thinking, I spent the last couple of years on picking the best value stocks in the energy and mining industries, using an investment approach as detailed in a recent interview. For 2021, I picked Firefinch Ltd. (FFX.ASX)(OTCPK:EEYMF), which delivered a 5-bagger in the year.
Recently, I wrote about a slew of deep value plays, including Brooge Energy Limited (BROG), an oil storage business at the strategic Hormuz chokepoint; Total Energy Services Inc. (OTCPK:TOTZF), a small-cap oilfield service provider; Surge Copper Corp. (OTCQX:SRGXF), an under-followed copper explorer in BC, Canada; Allegiant Gold Ltd. (OTCQX:AUXXF), a hidden-gem gold explorer in Nevada; GoGold Resources Inc. (OTCQX:GLGDF), a silver explorer/producer in Mexico; Altaley Mining Corporation (OTCPK:ATLYF), a turning around, quickly-growing base and precious metal producer in Mexico; Altiplano Metals Inc. (OTCPK:ALTPF), a little-known, emerging copper-gold producer in Chile; and Star Royalties Ltd. (OTCQX:STRFF), a new gold royalty firm, among others.
Below, I present yet another deep value gold explorer/developer, namely, Revival Gold Inc. (RVG.TSX-V) (OTCQX:RVLGF) that operates the Beartrack-Arnett project in Idaho.
Assembling the Beartrack-Arnett Project
The Beartrack-Arnett project is a combination of the Arnett project and the Beartrack project (Fig. 2).
- As a part of the effort to assemble the Arnett project, Revival - fka, Strata Minerals Inc. - acquired through four separate transactions 96 claims totaling 1,974 acres for US$707,500 in cash and 5.75 million Revival shares. These claims are subject to a 1.0-2.0% NSR royalty. Revival also staked an additional 195 unpatented lode claims surrounding the Arnett property, increasing the total acreage of the Arnett project to 5,874 acres. In June 2017, Revival consolidated these claims into the Arnett Creek gold project.
- In September 2017, Revival entered into an earn-in agreement with Yamana Gold (AUY) to purchase a 100% interest in the Beartrack gold project in 319 claims totaling 5,542 acres for US$250,000 in cash and 4 million Revival shares, and a commitment to spend US$10 million in four years on exploration and remediation. Revival will also be required to grant a 1% NSR royalty and pay the greater of US$6/oz Au in mineral resource or US$15/oz Au in mineral reserve on all ounces delineated over the next seven years. In addition, Revival has staked 240 unpatented lode claims surrounding the Beartrack property, thus increasing the total footprint of the Beartrack claims to 7,589 acres.
Fig. 2. The Beartrack and Arnett land map (upper left), shown with the location of the Beartrack-Arnett project in Idaho (lower right), modified from the 2020 preliminary economic assessment technical report and the December 2021 presentation, respectively.
The Brownfield Beartrack-Arnett Project
Placer gold was discovered in the Leesburg (or Mackinaw) mining district in 1867, with the first lode mine in the Beartrack area (Gold Flint) opening in 1880 followed by the Italian mine on Arnett Creek in 1892.
- Following preliminary exploration done at Beartrack by Canyon Resource Corp. in 1983, Meridian Minerals Corp. started to explore the area in 1994 and built Beartrack into an open-pit heap-leach operation, that produced ~600,000 oz of gold from 23 Mt of ore until 2002, when the mine was closed due to low gold prices (<US$400/oz gold). Yamana acquired the parent companies of Meridian in 2007, becoming the owner of the Beartrack gold project.
- Cyprus Mines Corp. first started exploring the Arnett Creek area in 1973. American Gold Resources Corp. leased claims in the area in 1985 and drilled near the Haidee mine with JV partner BP-Minerals American. American Gold was subsequently acquired by Ashanti Goldfields (AU), which sold the Arnett Creek project to Meridian, which relinquished the claims in 1998 after some drilling.
Cumulatively, there are 1,156 historical holes drilled prior to 2017, totaling 164,399m. Revival drilled 117 holes from 2017 to date, totaling 28,628m.
The Beartrack-Arnett project is, therefore, an advanced-stage, brownfield exploration project.
Styles of Mineralization
Two distinctive styles of mineralization were identified in the Beartrack-Arnett project (Fig. 3):
- The Beartrack trend is associated with a gold-arsenic-bearing hydrothermal system in the form of stockwork, veins, and breccia that occur over >5km of strike length. This style of mineralization can be characterized as mesothermal, orogenic, or lode gold, and is hosted and structurally controlled by the Panther Creek Shear Zone. Mind you, typically, mesothermal gold is known to be high-grade, occur in kilometer depths, and extend along great strike-length, thus forming large deposits, e.g., Canadian Malartic, Kittila, and Stibnite.
- The Arnett gold mineralization is associated with porphyry intrusions.
Fig. 3. Regional geological map of the Mackinaw mining district, from the 2020 preliminary economic assessment technical report.
The Joss Target
Revival already reported 2.794 Moz of gold resources from the Beartrack trend, including those amenable to heap leach (384 Koz Au) and milling (2,410 Koz Au), respectively, as detailed in Table 1 and Fig. 4.
Table 1. The 2020 Beartrack-Arnett mineral resources, with the breakeven gold cut-off grade being 0.52 g/t Au for resources amenable to the 20,000 tpd mill option and open pit mining and 0.17 g/t Au for the mineral resources amenable to the leach option and open pit mining at Beartrack; 1.26 g/t Au for the underground mining, 3,000 tpd mill option at Beartrack; and 0.19 g/t Au for the leach option and open pit mining at Arnett, under gold price of US$1,400/oz, from the December 2021 presentation.
The respectable width of high-grade (13.7m at up to 12 g/t Au) mineralization within a broad low-grade (1-4 g/t Au) halo, as revealed by a recent drill hole (BT21-240D) that intersected 12 g/t gold over 13.7m and 8.8 g/t gold over 11.8m within 110.6m grading 4.34 g/t gold, proves Revival's claim of the massive potential of deep-seated, high-grade gold mineralization along a >5km strike length, and confirms the possibility of long-life mining of high-grade gold resources along the Beartrack trend. The sub-vertical orientation of the mineralized zone and continuity along strike are favorable attributes for productivity under the possible underground mining scheme to be assessed in future technical studies (Fig. 4).
Encouraged by the drilling results, Revival plans to resume drilling in 2022 so as to further extend the Beartrack trend toward the SSW and the depths.
- Historical drill holes average only 142m in measured depths, while recent drill holes by Revival average 245m in measured depths, with some drill holes such as BT18-213D and BT21-240D reaching ~500m in measured depths. Since this is a mesothermal gold system, deep drilling is anticipated to continue to intersect high-grade mineralization.
Fig. 4. The Beartrack trend, showing a longitudinal section (upper), a map of the Joss target (lower left) and a longitudinal section of the Joss target (lower right), all from the December 2021 presentation.
At the current share price of C$0.61 as of December 30, 2021, and on a diluted basis, the market value and enterprise value of Revival Gold are estimated to be US$39-43 million and US$42-54 million, respectively.
- From the global (indicated and inferred) mineral resources of 2.99 Moz Au, Revival is valued at an EV/MRE multiple of US$14-18/oz Au, which is significantly below what pre-development gold explorers typically captured (US$50-60/oz Au). `
- Even if only 848 Koz of open-pittable and heap leachable gold resources - out of the 2.99 Moz global resources - are considered, as is the case in the preliminary economic assessment (or PEA, see Table 1), Revival is still priced at a low P/NAV multiple of 0.50-0.51X.
It is worth noting the management of Revival believes the Beartrack trend may have a potential of >5 Moz gold. Thanks to the US$5/oz Au discovery cost, further drilling is value adding even at the current, rock-bottom valuation metric of US$14-18/oz Au before any potential revaluation takes place; that, of course, means management will continue to drill aggressively (Fig. 5).
- The enterprise value of Revival is a product of the valuation metric and in-the-ground gold resources, i.e., EV = [EV/MRE] X MRE. Supposing the stock is revalued to the level of the peer average, and assuming Beartrack contains 5 Moz Au, Revival should capture an enterprise value of US$275 million, implying a >5-bagger upside.
Fig. 5. Evolution of the Beartrack block model, from the December 2021 presentation.
Revival plans to assess the option of underground mining of the global resources (2.99 Moz Au, with possible future resource expansion) with a view to potentially produce >200,000 ozpa in a 15-20 year mine life, which may considerably enlarge the NAV of the project (Fig. 6).
Fig. 6. A timeline of Revival Gold, from the December 2021 presentation.
The 848 Moz gold resources used in the PEA are mostly near-surface, oxide gold that is amenable to open-pit mining and heap-leach recovery, a development option that is low-cost (AISC of US$1,057/oz Au), low-risk, and fast-track.
Due to the existing infrastructure (roads, power, gold processing facility), Phase 1 development requires only US$99 million of pre-production capital. Phase 1 is projected to produce 72,288 ozpa of gold in a 7-year mine life, generating an after-tax NPV-5 of US$88 million at an IRR of 25%, under US$1,550 gold price (Table 1).
Table 1. A summary of the 2020 PEA, from the 2020 preliminary economic assessment technical report.
- Under US$1,750 gold price, the NPV-5 is estimated to increase to US$150 million at an IRR of 38%, generating US$50 million per year of free cash flow. That implies the stock is currently valued at 0.79-0.85X of 2024 free cash flow.
- The US$50 million of annual FCF is said to be deployed to resource expansion and Phase 2 advancement, thus sparing existing shareholders of equity dilution.
From late 2017 to date, Revival's stock has been mostly range-bound, in spite of a 37% appreciation in the gold price, even as the company kept making progress in exploration (Fig. 7). The stock is obviously under-followed, the main reason being the project is in an awkward stage on the Lassonde curve with an unproven scale.
How much longer will Revival remain undervalued? Going forward, the company has the following catalysts (Fig. 6):
- A mineral resource update is expected in the 1Q2022, which will be followed by a prefeasibility study by the end of 2022;
- Any progress in the re-permitting process, including the completion of the supplementary baseline data expected by the end of 2022;
- A decision on Phase 1 development at end-2022, build the mine in 2024, and restart production possibly at the end of 2024 or in early 2025;
- Revival is expected to launch an aggressive drilling program in 2022, most definitely along the Beartrack trend and possibly at Hardee as well (Fig. 2); and
- Technical studies of Phase 2 development of the resources amenable to underground mining and milling.
Fig. 7. Stock chart of Revival Gold in C$, from Barchart.
Beartrack-Arnett is a past-producing project with existing infrastructure in a top-ranked mining jurisdiction in the world, which substantially lowers the above-ground risk.
The Beartrack-Arnett land package has a richly-endowed gold system. Historically, gold was being found at a low cost of US$5/oz, suggestive of a relatively low risk in exploration. The open-pit, heap-leach Phase 1 development materially reduced the development risk. The Phase 1 PEA yields robust economics at a rather low assumed gold price. The existing infrastructure, including roads, a hydro powerline to site, and an ADR gold processing facility, materially lowers the capital need.
Revival is conducting additional metallurgical tests beyond the stage 1 and stage 2 metallurgical test work to fully understand the behavior of transitional and sulfide ores when mixed with readily leachable oxide materials, with the leachability yet to be determined. Baseline environmental data collection and planning is to be completed, no favorable result being assured.
The management team is led by CEO Hugh Agro (mining engineer, ex-Kinross Gold), who is supported by the VP-Exploration Steve Priesmeyer (El Rayo silver deposit), and general manager Pete Blakeley (ex-Rio Tinto, ex-Phelps Dodge) who used to run the Beartrack mine and lives locally at Salmon, Idaho. The board of directors includes Wayne Hubert (a long-time employee at Meridian; ex-CEO of Andean Resources, which was sold to Goldcorp for US$3.4 billion; now executive chairman of Austral Gold), Don Birak (ex-Coeur Mining and AngloGold), Rob Chausse (CFO, New Gold), Maura Lendon (lawyer), Mike Mansfield (venture capitalist), and Carmelo Marelli (accountant), besides Agro. The management has so far shepherded the project forward with appreciable technical competence. It appears to be leery of equity dilution, judging from its vision of a phased development scheme.
- The insiders own 11% of the shares, giving them substantial skin in the game.
- The CEO bought the stock as recently as July 2021 at a price slightly above the current level, whose cost base is around the current price level.
To get Phase 1 through prefeasibility study to a final investment decision and to expand the global mineral resources to >5 Moz Au, Revival may need at least US$20 million. So, management needs to properly finance the Beartrack-Arnett project. The company has C$3 million in the coffer, and the next private placement may be in the 2Q2022.
To that end, Revival has a tight capital structure without a disproportionate number of warrants and options. Institutional investors, including Orion, Konwave, US Global, Adrian Day Asset Management, and Delbrook, own 39% of the shares. The institutional investors, particularly cornerstone investor Orion, are expected to help fund Revival through Phase 1 and beyond. Retail investors account for only 21% of the outstanding shares.
The stock mainly trades on TSX-V, with an average daily volume of ~37,000 shares, and on OTCQX since April 2021, with a relatively thin average daily volume of ~39,000 shares, both being thin due to the low retail shareholding.
I believe the Beartrack-Arnett project checks a lot of boxes, with substantial exploration upside at moderate risk. The exciting result of drill hole BT21-240D further confirms the exploration upside of the Beartrack trend of mesothermal gold mineralization. The management team seems to be technically competent and pragmatic, and has skin in the game. The stock is currently deeply-undervalued relative to the in-the-ground gold resources and to the asset value.
Revival Gold thus represents an asymmetrical risk-reward profile for patient investors who are willing to wait for 3-5 years for the company to advance the project either to production or monetization via merger and acquisition.
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This article was written by
Analyst’s Disclosure: I/we have a beneficial long position in the shares of RVLGF, ATLYF, TOTZF, SRGXF, AUXXF, BROG, ALTPF, STRFF, GLGDF either through stock ownership, options, or other derivatives. 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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