May 21, 2009
Looking for Adventure in the Venture.
Today we go poking in the Venture exchange again, to see what bargains we can dig up. We are interested in precious metal junior stocks, that are presently severely undervalued and that may return a large gain. By large, we are looking for what is colloquially known as a ten bagger, or more formally as a ten times gain or 1000% gain.
Well, there are a ton of stocks in the Venture, that are severely undervalued, as this sector was badly beaten up by investors, when investors threw everything out in the 2008 exit. Yes, that is true, and some worthwhile candidates may be showing up in this beginning of a revival, whereas the majority are just idling at sub five cents per share. How can you sort through this mess. Well remember, some key indicators of potential would be being in a rising resource sector, performing mining or close to mining and having money or cash on hand.
Let’s examine a Gold mining stock, Century Mining, with symbol CMM on the Venture exchange. They have two gold operations, one in San Juan in Peru, and the other in their Sigma-Lamaque Mine in Val-d’Or Quebec. Wow, a miner producing? Well San Juan was last reported producing at about 15,000 Gold ounces annually. The Sigma-Lamaque complex is an historic mining complex that has produced over 9 million ounces over eighty years. It is actually the Sigma open pit mine situated right next to the Lamaque underground mine, both mining the same high grade vein type trend of the Abitibi Gold Belt in the city of Val-d’Or (means Power of Gold).
Sounds good so far, what happened to them? Well, as usual, it is a long story, so I will summarize for you. CMM started in 2004 by purchasing the Sigma-Lamaque mine in the bankruptcy of the previous owner McWatters Mining. They obtained $150 million of previous expenditures in both mines and equipment for a cool $28 million.
Century attempted to restart the Sigma open pit in 2005 and 2006 and updated the equipment. However the grades were too low and the costs were too high. Then they switched to starting up the underground Lamaque mine, but ran into difficulties because of the cost and the lack of funds.
At the time in 2006, Wega Mining of Norway invested about $15 million dollars for a 15% share of CMM. This was when Century was trading at from $1 to $1.80 Canadian dollars.
In 2007 Century, led by their ambitious CEO, Peggy Kent, went on an acquisition spree in Peru and ran into legal ramifications. Here is an article on Peggy.
In 2008, Wega became restless because of the declining share price. In June 2008, Century ceased mining in Sigma-Lamaque to conserve cash. Also, they went with Fortis Bank (Fortis bank was bailed out by French and Belgian governments) of Belgium for a $65 million USD debenture to refinance the Lamaque mine. We don’t know the details about Wega’s disagreement with CMM, but Wega started dumping their CMM shares. Also, along came the 2008 financial breakage and just everything about mining was thrown out. Century’s shares hit a low of 1 cent in December 2008.
In January 2009, Fortis finished their due diligence and agreed the venture was promising, but declined to finance it. In February 2009, CMM announced a gold based financing to raise the $65 million USD. In March 2009 CMM announced an overseas consortium were going to provide the $65 million as a debenture. In April 2009, CMM announced that they formed a subsidiary to mortgage Lamaque for the financing. Also in April 2009, CMM announced they would be late in filing their financials.
As a result of their announcements this year, Century’s fortunes have picked up and their share price is at 19 cents Canadian. A chart analysis by Dulcimus (a noted Stockhouse chartist) of CMM’s stock price is here (just scroll down to find Century).
So my contention is that the main risk in a small mining stock is mainly that of no cash incoming. In Century’s case, that is certainly true, but in the March news release, Century says they are also negotiating with two other lending parties. This reduces the risk considerably, or removes it completely. Then with the financing, Century will be a gold producer at Lamaque with 100,000 ounces annually, ramping up in three years.
The second biggest risk in a small mining venture is the vagaries of mineral exploration, how do you know, that this will be profitable to mine. In Century’s case, this risk again is alleviated, as their San Juan mine in Peru is profitable, and Lamaque from due diligence by Gorman (an respected Industry outsider) states Lamaque is expected to be profitable with costs of $457 Canadian per ounce. Lamaque is expected to produce 1 million ounces over ten years from the reserves available. The NPV of Lamaque is $88 million USD.
The third item for a miner to consider is the price of their product, and we all know what seems to be happening with the price of Gold. See the link below for an analysis of the gold price.
There are no risks for mining in politically stable Quebec, Canada, as the mine is fully permitted and was operational.
Wow, there must be a catch, what is the downside? Well, the catch seems to be the existing perception of CMM’s management being unable to deliver upon their forecasts. The prevailing opinion and the fact that CMM almost went bankrupt is what is keeping the stock price down. Now the existing financing seems to be on track, and should be completed within 2 or 3 weeks, but that can be de-railed. However, there are two other lenders, CMM are in discussions with.
Oh yeah, what is the upside? Well, with the profile of a producer of about 120,000 Gold ounces a year, with a rising Gold price, it seems to be pretty blue skies to me.
Another upside is the additional 4 million Gold ounces of indicated and inferred, and the exploration potential within the mine itself. CMM issued two press releases this year indicating just that.
It’s always exciting for the adventurous in the Venture.
Century Mining website:
Summary of Due Diligence for $65 Million USD Financing:
Century Mining Blog:
An analysis of where Gold prices is going:
Disclosure: The author has a position in Century Mining, CMM on the TSX Venture