An optionality play is a company that has a large amount of gold/silver in the ground that has never been developed into a mine. Ideally, you want to find large deposits that are highly undervalued compared to a company’s FD (fully diluted) market cap.
To avoid confusion, my list uses AUEQ (gold equivalent). I am using the current spot price and the number of AUEQ ounces a company has in the ground (Note that I have made AUEQ estimates for some companies, and I could be wrong). Then I compare that value to their FD market cap.
I am also estimating the in-situ value. In-situ is another term for how much AUEQ they have in the ground. For in-situ, I am using 10% of the deposit’s AUEQ value. Plus, I am using $100 AUEQ per oz for a second valuation.
There are many factors that skew the valuations of companies, so this is only meant to be a starting point for you to do your own DD. For instance, my AUEQ estimates can be off and will change in the future. The location of the projects and the quality of the management teams impact the value. And there are many other factors that come into play to value a company. One huge one is the ability to finance a project. If a company can’t finance the capex, then its valuation can languish.
I’ve always liked to find good optionality plays, especially for companies that could find more gold/silver through additional exploration. If you can buy AUEQ ounces in the ground for low valuations, then there is a good chance those ounces could be worth more in the future if gold/silver prices rise. Plus, as a company de-risks a project using a PEA, PFS, DFS, and permitting, the value of a company tends to rise.
While I like finding undervalued optionality plays, the risk level is quite high. In fact, you have to treat these as speculation bets and expect to lose money. In fact, I am underwater on quite a few of the stocks on this list. They might do well in the long term if gold/silver prices rise, but I might end up losing money on most of my optionality plays. That said, the potential for big returns is real. If gold/silver prices take off, there are not that many undeveloped projects with large resources. Demand for them should be significant.
(Sorted by Upside at $100 AUEQ Per oz.) (Click on the image for better detail).
The Cat column is for the category. J-LS stands for Late Stage Development. JS-NP stands for near-term producer. These are companies that are building their first mine. A near-term producer is within one year of production. The Risk column is somewhat of a misnomer. There are no moderate risk mining stocks. Consider High to mean very high and Moderate to be somewhat high.
FD Mkt Cap (MM) stands for fully diluted market cap in the millions of dollars.
My Estimated AUEQ (MM oz) is my estimated gold equivalent in millions of ounces.
My Estimated Mkt Cap per oz is a calculation of the current FD market cap divided by the AUEQ ounces.
10% In-situ value (MM) at $1750 gold is a calculated value of the number of AUEQ ounces multiplied by $1750. This column is 10% of that total.
Value (MM) at $100 AUEQ per oz is a calculation using the number of AUEQ ounces and multiplying that by $100.
Upside at 10% In-situ is a calculation that compares the FD market cap to the 10% In-situ value.
Upside at $100 AUEQ Per oz is a calculation that compares the FD market cap to the value in the $100 AUEQ per oz column.
Okay, let me list each stock on the list in the same order as the list above. I will include the company description from the GSD database. Some of these descriptions are not recent, so keep that in mind. This list is only a starting point for you to do your own DD (Due Diligence).
International Tower Hill Mines (THM) has a monster project (Livengood) in Alaska with 16 million oz (.6 gpt) with an 80% recovery rate. It has a pre-feasibility study with a $1.8 billion capex to produce 350,000 oz for 23 years (8 million oz). Cash costs are about $900 per oz and all-in costs around $1400 per oz (free cash flow). The IRR is only about 1% at $1500 gold. The project probably needs at least $2000 gold to get financed and built.
THM has begun the permitting process, which will take another 4 to 5 years to complete. They plan to release an updated pre-feasibility study in 2022. I'm expecting the capex and operating costs to be higher than their 2017 pre-feasibility. The NPV is currently $5B at $2500 gold. Hopefully, that won't decrease.
I think this mine will get built, but once gold prices rise, a major will likely buy it. Thus, if you invest today, it will be a major that gets the reward and not the THM shareholders. The good news is that it can't get much cheaper than their current market cap. It's probably a good speculation stock to double or triple in value once gold prices rise.
The stock should begin to move around 2024 if investors are confident it will get permitted. Permitting should be completed around 2025 or 2026. The build is 2.5 years. The ugly part is the capex, and operating costs are likely to increase substantially between now and 2028. We no longer have any cost certainty.
Chesapeake Gold (CKG:CA) is developing a huge gold/silver/zinc project in Mexico. Metates has 18 million oz. of gold (.6 gpt), 500 million oz. of silver (15 gpt), and 4 billion lbs. of zinc. With AUEQ production potentially reaching 500,000 oz. per year, this could be one of the most profitable gold mines in the world (using silver and zinc for offsets). They currently have a $116 million market cap, which is only about $10 per oz, counting only their gold. If you include their silver, it is much lower.
Metates will be built in phases because of the large size of the project. Phase 1 has a capex of approximately $360 million to produce 150,000 oz of AUEQ with cash costs around $700 per oz. It is economic at $1400 gold, and when they try to finance the capex in 2024, gold prices should be higher.
Here is the schedule:
2021: Heap leach and metallurgy testing (both of these could slip to 2023). Infill drilling.
2022: Complete heap leach testing and metallurgy. PFS.
2024: Permitting and financing.
They have about $25 million in cash and no debt. Management and directors own approximately 20%, and long-term core shareholders own about 24%. Those 44% should be able to prevent a hostile takeover for a low premium. They are well-positioned to take it to production in 2026. Why sell today when free cash flow from the project could be more than $300 million per year for 20+ years at higher gold prices?
The red flag is their heap leach testing, which is a new technology that needs to prove itself during testing in 2021/2022. If successful, the stock should begin trending. If I was sure the heap leach will work on the gold sulfides, it would be a top pick.
Metates isn't all they have. Talapoosa (Nevada) is a 1.5 million oz open pit project with exploration potential to increase in size (they are looking for offers and want to sell it). They also have 8 drill targets near Metates that are potential discoveries. They could easily have already found a second or third mine near Metates. Plus, they have another project (Tatatila) in Vera Cruz, Mexico, that appears to be a discovery.
Hycroft Mining (HYMC) is the rebirth of Allied Nevada, which went bankrupt several years ago. They have expunged most of their debt, although they still have $146 million in debt. They have one of the largest gold/silver mines in the world. It’s about half gold revenue and half silver. With 15 million oz of gold and 600 million oz of silver. It is low grade for both gold (.35 gpt) and silver (10 gpt). We have no guidance on the expected recovery rates.
The current company presentation does not provide their plans. All we know is they have some gold/silver on their leach pads. What do they plan to do? I think they are working on a PFS, but they don't mention it in the company presentation. The CEO said they have given up on sulphide heap leach technology and will focus on using a mill for their sulphide ore.
The location of the Hycroft mine is in Nevada in a good location. I think one of the majors could make an offer, although insiders own 36%. They are not likely to let it go for a low premium, especially Eric Sprott who owns 12%. In 2020, they replaced the executive team (CEO, CFO, COO) and hired a new general manager for mining operations. Their weakness is their board, with the chairman from Mudrick Capital, who is not a miner. Plus, the board seems to be overweight finance people. I found it odd that the company presentation is lacking guidance and had too much information on exploration. Who cares about exploration when you have a HUGE resource? It felt like a salesman wrote it.
The stock crashed from $15.82 in August 2020 down to 29 cents in 2022, without any share dilution. That shows that investors are extremely concerned with management. It appeared to be heading to bankruptcy, and then AMC and Eric Sprott both injected money. They have refinanced their debt, with no principal payments due until 2027. The red flags are their debt, expected dilution, management, lack of guidance for production, costs, and capex. There are a lot of unknowns, but higher gold/silver prices solve all of those issues.
7/18/2022: Gave guidance that they plan to drill. They are also working on scoping of a sulphide mill, but have not provided the capex or timeline until completion.
Moneta Gold (OTCQX:MEAUD)(ME:CA) (previously Moneta Porcupine) in 2021 acquired the Garrison project from O3 Mining (OTCQX:OIIIF), which obtained 25% of Moneta’s shares. It is next to their Golden Hwy project in Ontario. Combined, the projects will have 5.5 million oz (.9 gpt) surface gold and 2.7 million oz (4 gpt) underground.
What is 8 million oz of gold worth in Canada at $2500 gold? A lot. That is why they did the acquisition. They plan to drill 40,000 meters in 2021 and release an updated PEA in H1 2022. Then begin a pre-feasibility study in 2022, followed by a feasibility study in 2023. My guess is construction could begin in 2025. So, it's a long wait for first pour. And, as usual, they will likely sell it before first pour. So, shareholders will pay for development, and then a larger company will get it for a small premium. When does this death cycle for shareholders end?
The CEO is a CPA. The board is two geologists, two CPAs, and a CFA. My expectation is for them to sell or option it. It’s possible they will attempt to build the mine, but that is not usually what happens for projects of this size. It might be a good optionality play, although I think they will accept the first good offer they receive.
If you value the company at $100 per oz (why would they sell it for less?), that is $800 million, which is about what an exploration company can expect. However, as a producer, that much gold could easily be worth $500 per oz at $2500 gold, or $4 billion. The vultures will be circling once we are over $2000 gold and the economics look very strong.
9/7/2022: PEA released. $520M capex to produce 250K oz for 15+ years at $900 cash costs, 31% after-tax IRR at $1600 gold. No guidance for PFS. They plan to drill in 2023. I think the project is too big for them. They are stuck and must sell for a bargain price or wait.
First Mining Gold (OTCQX:FFMGF) was started as a new company in 2014 by Keith Neumeyer, the CEO of First Majestic Silver (AG). His goal was to grow the company by creating a mineral bank of properties. However, in 2017, he hired a CEO (Jeff Swinoga) to develop their properties.
They are advancing their flagship project (Springpole) to production in 2025. The capex is $720 million to produce 350,000 oz annually ($650 cash costs). A pre-feasibility is due in 2021. A feasibility is due in 2022. Then permitting is due in 2023. The NPV is $1.6 billion and will increase at higher gold prices.
They recently sold their Goldlund project for shares of Treasury Metals (15%), plus a 1.5% NSR. They also did a JV for their Pickle Crow project and kept 20% and received 15% shares of Auteco. And they did a JV for their Hope Brook project and kept 20% and received 13% shares of Big Ridge. Plus, they have 20 royalties. None of these push up their valuation, which is entirely based on Springpole. I'm hoping they sell them to finance the capex.
They have $31 million in cash but will need to dilute next year for the feasibility study and permitting. Plus, they will need to dilute to pay for the $720 million capex. So, expect a significant reverse split. Probably 10 to 1. I expect them to also do a silver stream, which will increase their cash costs.
This stock is cheap considering what they own. All of their projects are in good locations in Canada (Ontario, Quebec, and Newfoundland). Plus, they have excellent exploration potential and a good management team. It all adds up to a good risk/reward play.
Their red flags are high share dilution, the high capex of Springpole, the length of time until production (about 3 years), and potential permitting risk at Springpole. Plus, they will be a takeover target for any company looking to grow via acquisition. That would be ugly for shareholders, who need to see first pour for a big payoff.
Wallbridge Mining (OTCQX:WLBMF) is advancing a high-grade gold project (Fenelon) in Quebec. They had an FD market cap of $20 million in 2018, and then it exploded to $139 million in 2019 from high-grade drill results. Today, after their acquisition with Balmoral Resources, it is up to $256 million. They are trying to leap from being a small exploration company to becoming a significant mid-tier producer in a few years.
The Balmoral property overlaps Fenelon and increases the size of Fenelon to 200,000 acres (50-mile trend). Fenelon now has 6 discovery areas (Fenelon, Tabasco/Area 51, Ripley, Martiniere, Rambo, and Lynx). These combined areas should find around 4 to 5 million oz of high-grade gold. Eric Sprott thought that Wallbridge's original property could find 4 million oz. He owns 20% of the company. Balmoral's management thought their property could also find 4 million oz. So, combined, the potential is very high. 8 million oz seems like a stretch, but perhaps 5 million oz is a good estimate for the long term.
This is a pricey stock based on their current resources, which are about 3 million oz. So, it's really a drill story, and its value is based on exploration success. Unless they can double their resources, investors will probably be disappointed. If they can find 5 million oz and produce 250,000 oz annually, that would make them a valuable company.
They are cashed up and plan to drill 170,000 meters in 2022 (which is what they drilled in 2021). This is a very aggressive company. They plan to begin a PEA in 2023 after they analyze the drill results. Perhaps a PFS in 2024?
Perpetua Resources (PPTA) (formerly Midas Gold) has a very large gold project in Idaho that is heading to production around 2027. Stibnite is a 6.8 million oz resource (1.6 gpt) that is growing in size and has significant exploration potential. They have an FD market cap of $269 million, and the project will produce 400,000 oz of gold at low cash costs (years 2-8). The low cash costs (around $600 per oz) are from offsets in silver and antimony (used in batteries and flame retardants).
Production is forecasted to drop to 300,000 oz in years 9-14, and cash costs will increase, but with exploration success, that production drop likely won’t happen. They already have 4.8 million oz of reserves. This is likely to increase by at least 2 million oz.
It's possible that Midas could maintain production at 400,000 oz for 15 years. Also, they could take that cash flow and buy another mine to grow the company. Thus, the upside potential is significant. However, it is a long time until first pour and they could get taken out. Plus, they have to finance the huge capex, which will create significant dilution.
There are significant red flags: 1) They need to get financing without substantially diluting the stock or hedging profit. 2) They need higher gold prices to finance such a large project. 3) Permits will take at least 2-3 more years. 4) They need to avoid a takeover, which won't be easy because big profitable mines tend to get taken out for low premiums.
This mine won’t begin construction until at least 2024, so the timeline risk is significant (it's a 3-year build). If they were further along in mine development, with permitting and financing completed, I would like the stock a lot better. That said, it is an economic project at low gold prices and will get built.
They have about 50% insiders, which should prevent a hostile takeover. John Paulson owns 39%, and won't give it away for a low valuation.
Note: Permitting could be an issue. They are being sued by a native tribe over environmental issues impacting local rivers near their proposed mine.
4/13/2022: From their IR: Our current timeline (to production) assumes a construction period of about 3 years following a final Record of Decision late next year. That puts us on track for first production in 2027.
Benchmark Metals (OTCQX:BNCHF) is advancing a large gold mine (Lawyer) in the Golden Triangle (British Columbia). The initial resource was released in 2021 at 3 million oz (1.5 gpt). They are targeting 5 million oz and might get there. I am valuing them at 3.5 million oz of future reserves.
The exploration potential looks very good. They have several target areas that are ready to be drilled. If they exceed my target of 3.5 million oz of reserves, then it is still cheap.
Investors like it, giving them a $240 million FD market cap. They plan to release a PEA and feasibility study in 2022. The unknown is how long it will take to complete permitting. My guess is 2023 or 2024. So, that will delay first pour for several years. If it was closer to production, I would like it a lot better.
Eric Sprott owns about 20%. Management also has a large position around 15%. They are cashed up with about $30 million and are financed to take it to a construction-ready phase.
Discovery Silver (OTCQX:DSVSF) is advancing a large silver project (Cordero) in Mexico. Cordero has about 1.5 billion oz. of AGEQ (60 gpt), with significant offsets of lead, zinc, and gold. They are focusing on higher grades to improve the economics (about 500 million oz. at 90 gpt AGEQ).
They released a PEA in 2021. They plan to mine 25 million oz. (AGEQ) annually at around 100 gpt (AGEQ), with an AISC around $13 (this will increase by the time they get to production). This is their starting pit, and production will likely increase.
The economics are surprisingly good for their low grade. The after-tax IRR is 38% at $22 silver. As long as silver prices are above $25, I think it can get financed. The payback is less than 2 years. Because of their high production, Cordero has huge leverage as silver prices rise. If silver is over $30, the payback period is only 1 year.
They have been finding higher grades and new discoveries on Cordero's large property (85,000 acres). They drilled 50,000 meters in 2021, which has not been added to the PEA. Recent drill results have been excellent.
They plan to do a PFS (pre-feasibility study) in 2022 and an FS (feasibility study) in 2023. They will also be permitting in 2022-23. We could have a construction decision as early as next year.
The management team appears to be competent and ready to build the mine. They have 35% insiders, with management and founders owning 10% of the shares and Eric Sprott with 25%. I don’t think they will sell early and want to take this to production.
If we assume silver reaches $75, they could expand production to mine 1+ billion oz. Annual production could be massive. Let's assume they reach 35 million oz. of AGEQ annual production. That would generate free cash flow of around $1.5 billion per year. Using a 10x multiplier, that values the company at $15 billion. So, you can see how much leverage they have to higher silver prices.
AbraSilver Resource (OTCQX:ABBRF) (previously Abraplata Resources) is advancing a large silver/gold project in Argentina. They obtained the Diablillos project from Silver Standard (now SSR Mining (SSRM)). They paid cash (plus $7 million is still due in 2025), and they gave SSR Mining shares (currently 9% ownership) and a 1% NSR to obtain 100%. Diablillos is an 80 million oz (90 gpt) silver deposit with 750,000 oz (.8 gpt) of gold. That is 140 million oz of silver equivalent. Plus, recent exploration has shown that the resource is going to grow in size.
They released an updated PEA in 2021. The capex is $255 million to produce an average of 8.5 million oz (AGEQ) annually over 16 years. The after-tax IRR is 20% at $20 silver. They will likely need $25 silver to finance it. They plan to release a feasibility study and complete permitting in 2023. Thus, construction could begin in 2023 or 2024. Note that the first 5 years of production will average 12 million oz (AGEQ) at higher grades and lower costs ($11 AISC per oz). They are going to mine the high grade first for a quick payback.
They also have two copper/gold projects in Argentina, and they are seeking JV partners for both. Their focus appears on Diablillos. Insiders own about 30% (SSR Mining 9%, Eric Sprott 15%, Mgt 3%), so I would not expect them to sell the project for a small premium. Their AGEQ silver in the ground is still cheap. Is this a good optionality play? Perhaps. It's a very valuable mine at higher silver prices.
The red flags are high share dilution and if they decide to sell. However, if they build it themselves, it's still cheap. I expect them to get taken out once silver is above $30. Large silver mines are rare. The one thing that might prevent a takeover is the currency controls in Argentina, which act as a high tax. Companies might want to avoid Argentina.
I listened to a podcast with the CEO, and they seem to be thinking about advancing this to production. If that occurs, their upside is much higher. They want to get to a construction decision by the end of 2022 (likely to slip to 2023). They are giving three options: Sell, Option, Develop. The odds favor selling because they are open to that option, and I'm sure they will get good offers if silver is over $30. Their future FCF at $100 silver is more than double their current FD market cap.
8/19/2022: Eric Sprott position is up to 13%.
8/22/2022: I interviewed the CEO and lead geologist today. After the interview was over, I found out that they only have 6 employees. Plus, the CEO's expertise is M&A. He loves making deals. He has never built a mine. I'm 99% convinced they plan to sell in 2024 after it is fully de-risked with a DFS. I expect the PFS to increase the NAV and annual production, with a much higher capex. That will be another reason this small team won't build this mine.
8/25/2022: Email from Abra: Regarding a construction decision, of course, it is necessary to determine the ultimatum size of the project prior to finalizing permitting and commencing construction. At the moment, we expect a construction decision to be announced sometime in 2024, at which stage we’ll have a much better understanding of the ultimate size potential of Diablillos. At that time, we will determine the optimum way of financing the project in order to maximize value to our shareholders.
Emerita Resources (OTCQB:EMOTF) has a large historical resource (Aznalcollar) in Spain. It is 70 million tons at 60 gpt, plus high grade zinc and lead. It is likely an economic mine. Eric Sprott recently invested and owns 10% of the shares, plus 14% on a diluted basis. It looks exciting, although not cheap, with an FD market cap of $276 million. They call themselves a zinc mining company, but that might change with higher silver prices.
I'm assuming they will get ownership of Aznalcollar, but it is currently tied up in a legal battle. They appear to be winning, but these things are never guaranteed.
They also have three other discoveries (Romanera, La Infanta, and Cura) on their IBW project. It has a 35 million ton historical resource. The grade is about 44 gpt, but with high-grade zinc, which makes it significant as an optionality play. These two projects could make Emerita one of the premier silver miners in Europe. However, are they an explorer or developer? I'm not sure, but I think explorer.
They are low on cash, so expect share dilution. This is really a base metals drill story, but their resources could get a lot larger in size. Management thinks there is substantial exploration potential at depth.
6/20/2021: An analyst gave them a $3.30 target. I did some research, and they have big upside potential. They are a developer. Just the Aznalcollar High-Grade Pyritic Complex (43 million tons at $284 revenue per ton) = $12 billion in potential revenue. 3.3% ZN, 1 gpt AU, 67 gpt AG, .44 CU, 1.7% PB. Plus, several other deposits.
7/7/2021: According to the link below, the CEO claim they have 400 million oz of silver. However, all I can find on their website is 100 million tons of historical at under 2 opt.
7/24/2021: I did a YouTube video with Doc Jones. Here is the link: Emerita Resources - Interview with Doc Jones.
And here are my comments from the interview:
I didn't know that they had to build 2 mills. Those will take time and a lot of money. First pour is probably 3 years away. So, it has a long wait for the big payoff. But the long-term upside potential is huge. In about 5 years, they should be mining at least 10,000 tpd of high-grade ore, and should get well beyond that total. Also, they have not received the second mine yet. Until that happens, this is a spec stock. 10,000 tpd at $300 per ton = $3M per day in revenue, or $1B per year. And that is at current metals prices, so we are being conservative. Plus, the first 15 million tons at IBW pencil at around $500 per ton, so $300 is conservative.
It's difficult to estimate their expected FCF, but the margins should be high. Worst case, if metals prices remain the same and their margins were 25%, the valuation would be at least $2.5 billion. The dilution to achieve 10,000 tpd would be significant, but I think you could conservatively pencil in a 5 bagger from their current $300 million FD market cap as a 5 year target.
The bad news is that you have to wait quite a while for that payoff. The critical issue is the price/demand of silver, zinc, lead, copper, and gold in 5 years. Will the bull market be over? I would prefer if the path to 10,000 tpd production was in 3 years.
The good news is that this looks like an easy double or triple if they get the second mine.
Silver Mines Ltd (OTCPK:SLVMF) is trying to become a mid-tier silver producer. Their Bowdens project (500,000 acres) is the largest undeveloped silver project in Australia (160 million oz). It is low grade (50 gpt), but has zinc and lead offsets. The Bowdens project is near a small town (Lue), and there is some expectation that there will be local resistance to the mine. That adds more risk to the stock. Plus, they are already over 1.4 billion shares.
They recently completed a feasibility study for Bowdens and submitted an EIS application. The capex is $185 million to produce 3.5 million oz of silver for 16 years (55 million oz), plus zinc and lead offsets. The after-tax IRR was 14% at $22 silver. This means they will need about $25 silver to finance it.
They also have an early exploration gold project (Tuena) on 150,000 acres.
The red flags are marginal economics, management, high share dilution, potential local resistance, and the timeline until production. It might be a good speculation stock for a potential 5+ bagger. My concern is the local resistance. Also, if the grade was a bit better, it would be an exciting project. They do have exploration potential. This should be a 4 or 5 million oz annual production mine if they can permit the mine.
Note: If they didn't have local resistance, this would be a top pick.
This article was written by
Disclosure: I/we have a beneficial long position in the shares of DSVSF, BAT:CA, MCI:CA, ELEF:CA, PZG, UGDIF, GSHR:CA, AAG:CA, THM, CKG:CA, RVG:CA, NORZF, ITRG, GWA:CA, SPAZF, FPRGF, AUMB:CA, FURY, GXS:CA, MAU:CA, TLG:CA, EMOTF, ABBRF, PPTA, WLBMF, BONXF, FFMGF, BHLL, MZZMF, OSIIF, MEAUD, MRTMF, TSRMF, HYMC 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. I have no business relationship with any company whose stock is mentioned in this article.
Additional disclosure: Gold & silver mining stocks are for speculation only due to the high risk. Some of the information included is out of date and needs to be verified. Do not make the assumption that the data is accurate. Consider this article a starting point for your due diligence.