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Deep Value - Jubilee Gold Exploration (TSXV:JUB; Q:JBULF)

|Includes: FFMGF, Jubilee Gold Exploration Ltd (JBULF)

These days what I see among investors in the mining sector is FOMO, Fear Of Losing Out. People are chasing companies that everyone else is. They expect what has gone up to continue going up, confident that they can get out when the market turns. Ironically, in such an environment the concept of value gets forgotten and people end up taking massive risks with their capital.

Perhaps the best thing about the junior mining industry, and other small-cap companies, is the possibility of finding opportunities that not many people know or care about. Even in this bullish environment one who keeps looking does not have to chase the usual companies, or to participate in feeding frenzy and herd mentality.

Funds and brokers have certain institutional imperatives. Funds need liquidity and brokers like companies that will need to be financed. Such needs of Funds and brokers often require a compromise on value; at the very least easy upside is gone by the time major Funds get involved.

Small Funds and retail investors, who can use lack of liquidity to their advantage, can look elsewhere for gold, literally and figuratively. They can go where risk-reward is hugely in their favor. But this requires self-confidence, and the ability to look where not many are looking.

Going for illiquid, small companies with hidden value that not many give attention to might give you outsized gains.

I recall that my first big-win was a company called Brilliant Mining. Many years back, it was merging with an Australian company, Panoramic Resources. Anyone with primary school math could see that the arbitrage upside in owning Brilliant was about 300%. The only problem was that most of the upside, the non-cash component, was going to be un-tradable for a few months. Should I have cared if the huge-upside that I was getting for free was going to be locked-in for a few months? I thought it would take the market a few days to recognize the value and the arbitrage would disappear rapidly. To my surprise the arbitrage lasted for several months and even increased towards the closing days. I have never really fully understood why so much value can stay unrecognized by the market for so long, but I have experienced this again, and again, and again.

Today I understand fully-well that it can be months before the market recognizes value.

But one might respond that the market has gone up too much and now one's only option is to participate in feeding frenzy. Wrong again. If that were one's only option, the rational thing to do is to stay in cash. But there are still many thinly-traded companies that have gone unaffected by the recent market trend and still offer, in my view, huge upsides. I want to mention one such company here, a company you very likely have never heard of...

Jubilee Gold Exploration (OTC:JBULF; $0.38) has a MCap. of $3 million. Cash and investments that they have are worth more than $3 million. On top, unlike most junior companies, JBULF actually generates revenue, from a couple of royalty ownerships. If they did not have to incur overhead costs, which would be the case were it to merge with a bigger entity, the revenue by itself would more than justify the current MCap. But this is only the start. JBULF has a large portfolio of properties and royalty ownerships, which still have to start producing revenue or capital gains.

While the above already offers a very nice upside, I want to talk about only one of the royalties that JBULF owns: Its royalty ownership on 5-million ounce Springpole project. Springpole is the flagship, and by far the most important, project of First Mining Finance (OTCQX:FFMGF), a $360 million company. FFMGF's MCap. tells me that the market believes that Springpole is either much bigger than what it is known to have or that it would sooner rather than later go into production.

Based on my calculations, JBULF's royalty ownership on Springpole, assuming that only 2.2 million oz of gold get produced, is worth about $35 million. And it pays to remember that Springpole's resources are over 5 million ounces, offering huge extra optionality.

So, based on the above, in my view JBULF offers a very nice upside based merely on its cash-value and royalty ownership on Springpole.

Let's look at JBULF from another angle...

JBULF is a product of a merger of three companies that happened in 2012. They did a fairness opinion before the merger summary of which is in JBULF's Information Circular of 12 November 2012. Go to to download this document. The fairness opinion gave a value of between $23 million and $26 million to what is now JBULF. This would equate to about $3 per share of JBULF. Interestingly this valuation is not too different from what I arrive to.

My interest has been to show how much unrecognized value can exist in the market even in what is otherwise a very bullish environment. And, again, I strongly suggest that you do your own due diligence before investing.

In my view, one day JBULF will be a part of a major royalty company. And royalty companies, given that they trade for a multiple of what they are worth, will likely pay a premium on the rational-value mentioned above.

There are of course risks. Insiders own about 90% of JBULF stock. A hostile takeover of such a company cannot work. And pretty much minority shareholders have no voice in such a company. The company does not market itself and does not even have a website. But given the upside, I am happy to take these risks.

Disclosure: I am/we are long JBULF, FFMGF.