Just Throw Arbitrary Out The Window On This One!

Arbitrary: Based on random choice or personal whim, rather than any reason or system

The following statement from CEO Tim Warman nicely sums up Fiore Gold’s (F, TSX-V) whole situation:

“Fiore has struggled to gain attention in the markets because of our size.”

Fiore’s a “small” producer, I get it.  But if you can look past the fact that Fiore is only producing around 43,000 ounces of Gold this year, I believe you’ll find an absolute steal of a deal.  And the opportunity to buy it for less than 50 cents won’t last because Fiore isn’t going to stay small forever.  Warman and Frank Giustra (an early financier of Fiore) envision becoming a 150,000 ounce per year producer, and they’re already on the road toward making it happen.

Lots of money managers and investment houses won’t buy Fiore because they aren’t producing 100,000 ounces – therein lies the opportunity for astute retail investors.

How and when did 100,000 ounces become so important, to the point people won’t even look at an opportunity?  That’s what I’d like to know.  It’s just an arbitrary number!  At the end of the day we want to own great stocks.  We want to own stocks that are going to appreciate in value and make us a ton of money.

Here’s the #1 reason I’m nearly certain F will make you a ton of money:

1. Growth at a reasonable price (GARP)

The Warren Buffet/Benjamin Graham-style of value investing is in the midst of its worst decade ever.  That’s right, the worst decade ever.  It’s actually astonishing how bad it has been, and for such a long time.  Many really smart people have been debating whether or not traditional methods of valuation, like “book value”, even work anymore.  A generation of Buffett disciples are losing their religion.

Many books will be written about this period of time, the worst ever for value investors.

But let me tell you about a strategy that is working!

GARP.

Growth at a reasonable price.  You might think of it like Buffett 2.0.  GARP is basically an evolvement of the value investing strategy.  Money managers have decided they’d rather buy a growth stock that’s cheap (reasonably priced) than a value stock that has no growth potential.  Traditional value stocks are often dying businesses and they can stay undervalued for long periods of time, trapping investors.

Meanwhile, GARP has been flourishing.  There’s almost no price investors won’t pay, assuming there’s strong growth potential.  Multiples expand as sales and profits increase; shareholders who sit tight make a ton of money.

When you look at some of the best performing mining stocks over previous decades, like McEwen’s Goldcorp and Sprott’s Kirkland Lake (KL, TSX), you’ll find that “growth” is one of the common denominators.  Factors like grade and profitability matter, too, of course.  But nobody gets too excited about buying a business that’s standing still (stagnant), that’s my point!  If you’re not growing, you’re dying.

You’ve got to grow!

Fiore is a growth stock.

Fiore has grown its production 4 quarters in a row and they’re going to keep growing until they hit their goal of 150,000 ounces (reminds us of Richmont Mines in its early days, with less than 100,000 ounces a year, and that became a massive winner).

So Fiore’s been growing and it will probably grow more in the years ahead.  Production could increase nearly 300% from current levels if Warman and Fiore hits their goal of 150,000 ounces.

Regarding the “reasonable price”, let’s look at operating cash flow.  On average, the Pan mine in Nevada has generated approximately $3.1 million during each of the past 3 quarters.  If we annualize that rate, Pan will generate $12.5 million for Fiore next year.  $12.5 million in operating cash flow should be a safe assumption (minimum) because Gold prices are currently 14% higher than they were during Fiore’s Q3, or $1,318 per ounce (Gold‘s 22% higher now than it was during Fiore’s Q1).

Therefore, Fiore is currently valued at 2.6 x operating cash flow.  A very reasonable price.  And if you wanted to adjust for Fiore’s cash position, $9 million, it’s valued at only 1.9 x operating cash flow (we’re talking U.S. dollars, and a market cap of $32 million U.S.) .

F is GARP and that’s the #1 reason you should own some.

However, there’s many other reasons F is worth buying.  In my next piece I’ll be happy to go over many of those reasons with you.

This is one of my favorite stocks right now.