Dishing The Sizzle And Steak On 1 Australian Gold Miner And 1 Silver Pure Play In Mexico.

Sizzle And Steak!

Ideally, we want some combination of both.

Australian-listed Gold mining stocks have been performing better, on average, than Canadian-listed companies.  Their share price outperformance has been such that many are shopping for North American assets, leveraging relatively lofty valuations to make deals.  I say that to say this:  If Superior were listed in Australia, or even had a dual listing, as opposed to being traded solely on the Venture, the stock would be valued at least 100% higher.

Instead of 100% I initially was going to say 50%, for concern of making too strong a statement.  But screw it!  Shares of SGI should be fetching $1.50 or more!

You don’t have to take my word for it either.  Of 9 analysts covering SGI, not one has a price target below $1.50 (and BMO is calling for $2 per share!), yet Friday’s closing price was 77 cents.

Normally I’d be inclined to be a bit skeptical when EVERYBODY has a “BUY” rating on a stock, but in the case of SGI I think we all can be right eventually.

However, until SGI turns upward convincingly, it seems Mr. Market will remain skeptical because the deal has a “too good to be true” err about it.

First, the big volume bar of nearly 6 million shares in October.  Record breaking volume on a down day is often indicative of a low.

Doesn’t always prove to be the all-time low, but volume spikes tell you you’re getting close.  Secondly, following the volume spike in October there are 3 tails (they don’t show up as clearly on the long-term chart) downward on light volume but SGI never closed below 70 cents on those occasions.  Technical analysts could argue a triple bottom is in place.

Lots of meat on the bone with Superior and I’ve been coming at this story from various angles for several months now.  Where to start?

One of my favorite features is “excess mill capacity”.  Building mines is expensive, really expensive.  Superior and its shareholders are the beneficiaries of a bear market because they purchased $150 million worth of mills and operational facilities for $34 million.  On top of that they inherited 450 km of underground development and 7,000 km of drill core (so they’ve got data out the wazoo!).  Doing all this work from scratch would cost upwards of $2 billion!

Superior likes to say they acquired this asset for 1 penny on the dollar.

Getting back to the point of excess mill capacity, Superior’s producing at a runrate of 100,000 ounces Gold per year via a 1.8 Mtpa conventional CIL mill.  All good.  Even better is the 1.2 Mtpa (a second mill!) sitting on the sidelines.  Once they’ve got the tonnage, perhaps following a new discovery, Superior can bring its second mill into the game rather quickly and inexpensively.  In other words, they’ve got great organic growth potential.

However you want to break it down on metrics, SGI is stinking cheap.  Almost too cheap, which leads me to believe there’s a “too good to be true” feeling about the stock (that feeling of slight concern will change quickly, though, when SGI starts heading higher).  On a price-per-ounce of production, after subtracting its $22 million cash from the $73 million market cap, savvy speculators are paying roughly $500.  Given the backdrop – Gold’s in a bull market – I’d argue each ounce of production should be valued at $1,000 or more (which brings SGI to the $1.50+ share price many analysts are calling for).

After shopping around you’ll find most junior Gold miners are priced anywhere between $1,500 and $3,000 per ounce of production.  Therefore, SGI has a legitimate shot of trading north of $1.50 per share.  Yet simultaneously, given the valuation, it’s hard to see how SGI could spend much time below 70 cents.  So the risk-reward from a buyer’s standpoint doesn’t get much better, call it 10% downside and +100% upside.

Tick tock, tick tock, the clock’s counting down and I think GoGold will announce a strategic acquisition before April (that’s what insiders are hoping for, anyway).  They’re sitting on about $16 million worth of cash and shares of Metalla Royalty (MTA, TSX-V), a position that’s increased 25% in the month of January, and CEO Brad Langille isn’t in the business of accumulating money.

Langille’s a proven business builder and wealth creator, which only increases the odds of him being successful again with GoGold.

Langille and his team have been been doing due diligence for a good while now and I’m told they’re deep into the process on one asset in particular.  They’re working thru permitting and legal stuff as we speak.  If successful in closing the transaction, GoGold shareholders and watchers may be very impressed with both the terms and potential of this project (2 g/t Au open-pit potential?).

Adding a new project with production and/or exploration upside will complement GoGold’s existing Parral Tailings Project nicely, hence the reason any acquisition announcement should provide a boost for GGD.

Looking at a shorter-term chart, GGD has a really nice bent to it.  I’m pretty darn sure the bottom is in the rear view mirror and GGD drives higher in the weeks and months ahead.

Pioneers in “agglomerated heap leaching”, GoGold has a few arrows in its back to show for it.  Recovery and production rates had been all over the place, mainly lower than expected, but following years of trial and error Langille and GoGold have agglomerated heap leaching figured out (they believe).  To my knowledge they exited December with a production rate of approximately 5,000 ounces Silver per day, or 150,000 ounces (using recent Silver prices GoGold’s breakeven should be about 110,000 ounces per month).

Assuming 150,000 ounces per month holds throughout 2019 (although in theory, with a daily stacking rate of 7,500 tpd, production could increase to 200,000 ounces per month) and Silver prices average $18, this stock could easily double from 24 cents.

Here’s how I arrive at a share price of 50 cents for GGD – 1.8 million ounces x $18 per ounce = $32.4 million in revenue.

Silver miners can trade at valuations of at least 3 x revenues during a bull market, therefore GoGold’s market cap appreciates from $42 million to $97 million.  And that only accounts for the Parral Tailings Project.  As per the sizzle, Langille is keen to make an accretive acquisition during Q1.

p.s. If the past few years weren’t hard enough for most miners, Tocqueville Funds really put a lot of pressure on GGD.  Their position was reduced from around 30 million shares to less than 3 million (cut by 90%!).

daniel
(561) 596-5067

Asset Management & Equity Research