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.
2013 ideas - ARL at 44 cents, VIT at 27 cents, and LVN at 36 cents
I. Note: This past week The Gold Report published an interview with Rick Rule that provides some excellent insight into junior resource stock investing. It is worth taking five minutes to read.
II. This weekend I am throwing out a few alternatives for 2013. Small company (micro cap) valuations across the board continue to defy normal logic and I must admit there are many days when I shake my head in amazement (or disgust). I am hoping this comes to a head over the next few weeks once tax loss selling is removed from the equation.
I have been buying penny stocks for almost 30 years so this isn’t my first rodeo. However I am finding it a real challenge even bottom fishing stocks because normal valuation logic doesn’t apply right now. I can fully understand when I hear people say they are throwing in the towel for the time being. This is a rough environment to be a penny stock speculator.
The three companies I am commenting on this weekend all have large bank accounts and proven reserves or advanced exploration programs. Cash continues to remain king as it is very difficult for companies to finance.
I was going to leave Africo out of the report because liquidity is horrendous – the stock rarely trades. However, some of you may have an interest because of the large discount to cash value.
The following content was sent to paid Ticker Trax Subscribers early November. Everything remains relevant with the exception of closing shares prices which have been adjusted to November 30th.
Africo (TSX: T.ARL, Stock Forum; 44 cents)
Shares outstanding: 71 million
Net cash & investments (Sept 30th): $66 million = 93 cents per share
Options and warrants all priced $1 to $2.89
ARL is tightly held and can be very illiquid in this current price range. However, it has been trading some paper in the 40-cent range recently and the speculation is that we see tax loss selling between now and Christmas to generate more selling.
The company is partnered on a high-grade copper project in the DRC but I view this project as high risk and we are assigning zero value to it. In this case I am simply interested in that grossly discounted war chest of cash. If the copper project amounts to something decent in 2013 (or they are able to sell their interest), then the stock should easily move above cash value.
Otherwise the hope is that they put this money to work elsewhere in an effort to rebuild shareholder value. Financing remains very tight for small companies and anyone sitting on this much cash is valuable. The trick is trying to get the cheap paper and there may be a six-week window to accomplish this.
Africo’s 75% Kalukundi Copper-Cobalt Project in the Democratic Republic of the Congo:
Located 32km west of the Tenke Fungurume deposit controlled by Freeport–McMoRan and 65km by road from the mining centre of Kolwezi. The Congolese copper belt hosts some of the world's richest copper deposits known.
They have an electrified railway 2km south of the southern boundary of the property and the national power grid carrying hydroelectric power from the Congo River scheme passes through the south of the project.
The project itself has proven and probable copper of 372 million lbs. (2.37%) and an inferred resource of 790 million lbs. at 2.63%.
Project risks - In order for development of this project to proceed, they would require substantial financing as the capital costs would be high. They have also experienced disruption (unrest) in the field by local artisanal miners. I am also not convinced their regional partner would move forward in their best interests.
Long story short – they are sitting on a substantial asset in the DRC but we want to discount it down to zero. This way if they lost it or dropped it, we have done nothing but speculate on a large bank account – and done so at a substantial discount.
Relevance of the Andina takeover to VIT & LVN
The proposed takeover of Andina in Chile (TSX: V.ADM, Stock Forum; 78 cents) by mining giant Hochschild carries particular relevance to our speculation of Victoria Gold (TSX: V.VIT, Stock Forum; 27 cents) and Levon (TSX: T.LVN, Stock Forum; 36 cents).
ADM was sitting near a five-year low and even considering the fact that they had more than six million ounces of (low grade) gold, few had any interest in them. The resource had well known metallurgy challenges and the economics were questionable (the company was also running out of money).
The takeover comes only three weeks after we saw Argonaut Gold buying Prodigy Gold. Prodigy's 6.2 million Canadian ounces were valued at approx. $45 per ounce and this was similar in size and grade to Victoria Gold, which we have followed for months in the 20-cent range. VIT has over $35 million in the bank but its gold is only valued in the $10/oz range.
Because Hochschild is willing to buy one of the low grade black sheep of the sector it proves there is significant value in VIT’s Yukon project (especially when we take the Prodigy takeover into consideration). I am hoping others recognize this value in Q1/13.
The Andina takeover also shines a light on one of our other cash rich, low grade (very large) silver projects - Levon (Mexico).
We have been following LVN since the summer in the mid 30-cent range but I am convinced (especially now) that we just need patience with this company. They have $55 million in the bank worth 28 cents per share and ignoring the other metals, Levon is sitting on a lower grade 310 million ounce silver deposit. With 200 million shares outstanding the market currently values that resource at only $20 million, or six cents per silver ounce – this is one of the lowest silver valuations in the junior sector.
310 million ounces silver
900,000 ounces gold
5.3 billion pounds zinc
2.9 billion pounds lead
Disclosure: Danny Deadlock owns 15,000 shares of Africo (TSX: T.ARL), 40,000 shares of Victoria Gold (TSX: V.VIT), and 30,000 shares of Levon (TSX: T.LVN).
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.