Stockhouse Ticker Trax
is published to subscribers every Monday (annual cost only $47 - lock in before prices rise!
). We focus on best-in-class high growth
small companies trading on the TSX and TSX.V between 5 cents and $3 with a market cap below $300 million.
Equity Analyst Danny Deadlock has 30 years of experience speculating on Canadian penny stocks and targets capital gain opportunities and diversification in metals and minerals exploration, energy, and technology.
For the experienced investor, Ticker Trax provides an extra set of eyes and ears (idea generation) and for those learning to invest in micro cap stocks, we provide stock picks and market education.
; (1) new research (stock picks) weeks in advance of being featured on this weekend column (2) exclusive
access to our list of junior gold exploration companies (critical for peer valuation), (3) exclusive
access to our list of Cash Rich micro cap companies (our Virtual Vulture Fund) which contains 80 companies with almost $3 Billion.
Both tables are updated monthly.
Many of you will be familiar with this table as I have used it for almost three years to benchmark the junior gold stocks.
Many other factors come into play in valuing these companies (grade, depth, access to infrastructure, country risk, etc.) but all things considered this has served us very well.
It helped us identify a serious breakdown in junior gold stock valuations spring of 2011 and even in 2013 it allowed me to identify two takeover targets - Volta Resources Inc.
and PMI Gold Corp.
, Stock Forum
As you can see in January we had a significant rebound in valuation and (assuming gold can hold above $1200 in the first half of 2014) we likely saw a sector bottom in December when the level of pessimism was at its highest. This was fueled in part by tax loss selling and Wall Street calling for $1000 gold as they pushed their over-priced U.S. blue chips.
Gold will likely remain volatile and junior gold stocks will remain high risk. This means the challenge of financing them will not change in 2014. Unless you are running the drill, I would be extremely cautious of what you buy in the sector this year unless they have a sizeable bank account.
China’s shadow banking system will continue to be a risk to commodities and markets in 2014 and (as we are seeing this past week) emerging market economies in addition to Europe could weigh heavily on global stock markets.
The United States with their insane levels of government debt continue to be in denial and (along with Wall Street) have done a great job convincing investors that the U.S. stock markets are nothing but fields of roses and tulips (versus a minefield). If they are proven to be wrong, then Gold has a realistic chance of performing far better than we have seen this past year.
THE ASANKO / PMI GOLD MERGER - POTENTIAL OPPORTUNITY?
On November 26th
I featured PMI Gold (40 cents) to Ticker Trax subscribers at 25 cents. A couple weeks later it was announced that Asanko Gold Inc.
, Stock Forum
) ($1.95) would try to merge the two companies and create a West Africa mid-tier gold producer.
As I noted at the beginning of this report, the average valuation for junior gold stocks in January (with a minimum 1 million ounces that are 43-101 compliant) is in the range of $19 per ounce.
Consider the following with Asanko and PMI as a merged entity:
172 Million shares outstanding
Risked Reserves: 100% of 7.5M oz Measured & Indicated + 60% of 2.9M oz Inferred
= 9.25 Million Risked Ounces (it costs additional $ to move inferred to M&I)
Assuming a $2 Share Price (based on the Jan 31st trading range of Asanko)
172M shares outstanding X $2 = $344 Million (market cap)
The combined entity will have approx. $280 Million in cash so if we remove that from the market cap of Asanko at $2, the market is valuing their reserves at $344M - $280M = $64 Million
$64 Million / 9.25 million gold ounces = $6.90 per gold ounce
In theory this should be worth closer to $19 per ounce
which would equate to approx. 65 cents per share more (or about 30% higher than the current share price).
A strong case could also be made for saying this gold should be worth closer to $30 per ounce
simply because of the large gold resource and because the company has such a strong balance sheet with access to another $150 million for building a mine.
Under a $30 per ounce gold scenario, fair value for the merged company should be in the $3 to $3.50 range.
Unfortunately though, there are several unknowns in the equation
; the price of gold over the next year (never mind the next two or three years), the final cost to build their first mine (and the time frame), the operating costs, the economy, and the sector interest.
These risks will be the reason we are seeing a $2 share price on Asanko but it seems low given the $19 per ounce average for the peers (never mind using $30 per ounce).
The share price should now move in line with the price of gold and will be re-rated by investors as they move through the stages of development and further exploration.
PMI Acquisition Highlights:
Co-development of Esaase and Obotan Gold Projects within 15km radius, located in Ghana, West Africa
7.5Moz Measured & Indicated Resources & 2.9Moz Inferred Resources1, including 4.8Moz Proven and Probable Reserves
400,0002oz of annual gold production from 2017:
Phase 1 production: 200,0001oz/pa Q1 2016
Obotan Project (200,0002oz/yr additional production) to be co-developed with Esaase
Estimating >US$100m co-development synergies
Significant exploration potential for future project development pipeline
Well-funded with US$280m in cash and US$150m debt facility available
Highly experienced Board and management team with proven mine development and operating track records in Africa
To view larger versions of the two charts below, please click on the links:
PMI is seeking a final order of the Supreme Court of British Columbia to approve the arrangement, which is expected to be granted on Feb. 4, 2014. Once the final order is received, the arrangement is expected to be completed on or about Feb. 6, 2014.
An Excellent Overview of the Combined Entity
Disclosure: Danny Deadlock owns 75,000 shares of PMV