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October junior gold valuation validated by Prodigy deal: Stockhouse TickerTrax

Danny Deadlock Danny Deadlock, TickerTrax
0 Comments| October 19, 2012


Stockhouse Ticker Trax is equity specific research (Canadian listed and market cap < $300 million) published every Monday to paid subscribers. Our free Friday column may feature companies previously featured to paid subscribers (with a minimum one month delay) or discuss topics of interest to the general investment community and relevant to overall portfolio management.

Current junior gold valuation average at $45/oz - $46 in September and $45 in December 2011. Prodigy takeover Monday near $45/oz but Galway approaches $200/oz

After the first few days of October, the recovery in the junior resource stocks stalled. This recovery only started the first week of September (after hitting 18-month lows this summer).

The odds remain decent that a recovery will resume before year end but right now it is important to get through high-risk October without a broader market selloff. Historically this has been a tough month for stocks so I will be more comfortable in November.

In light of the weakness, we did see encouraging news Monday - not encouraging from a valuation perspective, but from the aspect of validating our junior gold valuation table that is published each month to Ticker Trax paid subscribers – we have been using this as a sector benchmark since 2011. Below is a snapshot: 

Click to enlarge

It was announced on Monday that Argonaut Gold (TSX: T.AR, Stock Forum; $9.86) will be trying to buy Prodigy Gold (TSX: V.PDG, Stock Forum; 98 cents) for the equivalent of $1.08 per share (based upon AR's trading average over the past 20 days). This was a 54% premium over last Friday's closing price of PDG.

The Enterprise Value (EV) of Prodigy is approx. $277 million - for the most part this is the implied value of the transaction less certain financial assets like cash, accounts receivable and debt.

For the sake of valuing the gold in the ground, we take this EV and divide it by the 6.2 million ounces of gold reported by Prodigy.  Doing so values the transaction at approx. $45 per ounce.

This is a very important transaction for our bench-marking within the sector. The $45/oz is very close to the recent average we have been arriving at when compiling our monthly gold valuation table of 54 junior gold exploration companies.

In the table we published last month to subscribers, the average was $46.22 per ounce and in December 2011, it was $45.53 - this summer it hit $36.

This takeover is also important because it reflects the fact that mid and large cap miners remain very interested in larger-scale Canadian gold projects. It is also important because the average grade of the deposit was only 0.87 g/t (grams per tonne).

This is a relatively low-grade project where the operating and capital costs will be higher - although that also explains the lower price per ounce they are paying.

Galway Resources takeover near $200/oz

By comparison today, we are seeing a takeover attempt of Galway Resources (TSX: V.GWY, Stock Forum; $2.16) in Colombia. Compared to what we saw with Prodigy and what our valuation table is averaging, this is a very expensive acquisition.

This Galway transaction is valued at more than $250 million and yet the primary target is the company’s California project.

This project at a cut-off grade of 0.50 g/t has an Indicated resource of 615k gold ounces and an Inferred resource of 1.4 million ounces. The average gold grade is decent near 2 g/t but far from earth shattering.

Even giving them credit for half the inferred ounces, the risked reserve value of this transaction values the gold ounces in the range of $190 per ounce.

A very dramatic difference over what we saw with Prodigy or what the peer average is. It is also rather abnormal given the fact they are in a higher risk country. Colombia has been far more stable than Africa or other regions of South America, but it definitely does not have the stability of mining in North America.

The value of this transaction is definitely surprising. I would assume they must see a lot more there than meets the eye – or they are assigning a very high valuation to the higher grade aspect of the project (which averages just over 5 g/t).

Victoria Gold (TSX: V.VIT, Stock Forum; 30 cents)

While the Prodigy takeover had no impact this week on the share price of Victoria Gold, I am convinced VIT must now be on the radar of larger companies.

In our gold valuation table we show VIT's Yukon gold project with 6.3 million ounces – very similar to Prodigy who we also tracked. However, VIT’s gold grade appears slightly higher than that of Prodigy. Where Argonaut is paying $45 per ounce for Prodigy's gold, the VIT gold project is currently valued by the market at only $10 per ounce.

While it may not happen overnight, I cannot see where someone much larger will not be interested in a takeover of this project. Even paying $20 or $30 per ounce produces an attractive capital gain from this level.

If the juniors weaken further this month, VIT becomes very attractive in the low or mid 20-cent range - in particular because of this Prodigy takeover. Undeveloped large ounce gold projects in Canada are few and far between. Otherwise these big miners go overseas and assume tremendous risk.

Disclosure: Danny Deadlock owns 20,000 shares of Victoria Gold

In addition to this weekend column and the bottom fishing research sent to paid Ticker Trax subscribers on Monday, I also provide free MicroCap alerts throughout the week. These are based upon News or Abnormal Price/Volume Activity on the several hundred stocks we track from our own research, brokerage analysts, or third-party newsletter writers.

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Tags: GOLD

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