I don't think I've ever come across a stock like Nautilus Minerals (NUS). This company is proposing to build the world's first underwater mine. The implications of this is beyond enormous to say the least. Most people are probably unaware that the ocean's floors hold an abundance of untapped minerals/metals in what's called SMS deposits These deposits contain primarily copper, zinc and gold with grades far superior to that of the average land based mine. Since the discovery of SMS deposits over 50 years ago, nobody has ever attempted to exploit them until now. NUS believes that thanks to the developments in offshore oil drilling in recent years, we now have the technological capabilities to mine the ocean's floors and they believe they can do it profitably and safely (which is debated of course).
NUS first began exploring for underwater SMS deposits as far back as 1997. They became a public company in 2006 and had identified targets for underwater mining in the Bizmark Sea just off the coast of Papua New Guinea and since then they have been working towards getting all the necessary permits, studies, equipment and partnerships to achieve their vision of mining the seabed for the first time in history. The road to this vision has not been an easy one to travel. There have been serious stumbles along the way which included the financial crisis in 2008 along with a 3 year dispute with their joint venture partner, the PNG government.
In April of 2014, it appears as though NUS hit a major turning point after many years of suffering. They came to an agreement with the PNG government whereby PNG took a 15% stake in their joint venture to mine the Solwara 1 deposit with the option to increase to 30%. As a result of PNG's 15% commitment there is $113M in escrow which will be released to NUS on the condition that they secure the vessel that is required to carry out the project by November. NUS is confident they can do it and in the meantime are in the process of building the equipment and machinery needed to mine the deposit. Once the vessel is secured, mining is expected to begin 2-3 years afterwards. That's still quite some time from today but never has NUS been this close to carrying out what they set on doing 17 years ago. If NUS is successful with their first mine, the sky is the limit. They have explorations licenses for about 500,000 square KM of prime seabed real estate.
This is not just some pump and dump pipe dream stock. These guys are actually in position to make a serious go at this and they have a government partner along with some big name investors behind it. There's no doubt many serious risks and uncertainties with this play including the potential for more stumbles, but for the first time in several years NUS has the wind at their back and have never been in a better position to make their dream a reality. The hype alone could make this stock soar once they are on the verge of production and it could easily turn into a bubble stock as is the case with most "new paradigm" companies. The question I've been asking myself is how much should I commit now given that we are still 2-3 years away before mining begins (assuming things go as planned). I think some sort of a commitment now is warranted. I'm sure a lot of people including big money players are going to take a wait and see approach and only be convinced once they see results but by the time they see what they're looking for the stock will be much, much higher than 0.54. One near term catalyst is when NUS secures the vessel which would unlock the $113M from PNG. That could cause the stock could pop another 20-30 cents easy. At this valuation I think the risk is well worth the potential reward to commit 40-50% of what I have in mind and then take a wait and see approach with the balance over the next year or 2. Of course with this type of play I can't bet big but I think you gotta have a piece of this, even if it's just 500 shares.
Sunday, August 24, 2014
Tuesday, August 19, 2014
Foran Mining
I normally don't look at long shots because I try to avoid gambling when it comes to putting my money on the line. While every investment is a gamble to some degree, when you buy companies that don't have a proven product and are burning through cash, the risk of major or total loss is high. Having said that though, if you buy at the right price and with the right circumstances, it can be worth making a play given the potential reward although you still have to keep such bets small. One such play I believe is Foran Mining (FOM).
FOM is an exploration company located in East Saskatwean that owns a few VMS deposits which contain primarily copper and zinc. VMS stands for Volcanic Massive Sulfide. Pretty interesting stuff. Its flagship project is McIlvenna Bay which has the potential to be a significant copper and zinc mine. Here's the thing about exploration companies on the TSXV - they are a dime a dozen and all of them would seem to have "potential" but the vast majority end up either going bust or diluting their shareholders into infinity which is why I generally avoided these plays, but because of the carnage that has taken place in this space in recent years I have become more open minded as there's gotta be some worthwhile prospects trading on the cheap that were unduly trashed. One of them appears to be FOM which has a rare confluence of positive factors going for them. They have management and significant investors with great reputations and deep pocks. The Chairman is Darren Marcombe who once worked for Newmont Mining. He restructured this company in 2010 and brought in his former colleagues Pierre Lassond and David Harquail as significant investors. He then hired the CEO Patrick Sores who had just come off a success leading a company that got acquired. FOM's flagship property is sizable and appears to have attractive fundamentals, it operates in a safe, mining friendly jurisdiction, has infrastructure already in place (roads, power) and is located 60 km from the mining town of Flin Flon which means there's readily available personnel. There's a mid sized mining company called Hudbay Minerals nearby (which is the founder and vital employer of Flin Flon) which operates 2 mines similar to the one that FOM hopes to be to build. They only have about 7 years worth of ore remaining in their mines surrounding Flin Flon without any worthy prospects (apparently) which means FOM is in a perfect position to be acquired by Hudbay sometime in the future and it wouldn't happen 6-7 years from now either as it would probably take at 2-3 years to permit and build the mine before it's ready for production and Hudbay would almost certainly not wait until the last minute to replenish their inventory which means FOM could be acquired in the not too distant future. The more they can prove their resource is in fact economical the greater the chance they will get acquired by Hudbay or someone else.
They are conducting a Preliminary Economic Assessment a.k.a. Scoping Study which should be complete by year end or early next year. If that checks out, the next step would be a Feasibility Study which I've learned is what you need to have done in order to provide the highest level of confidence/proof to financiers that the resource in question would make for a profitable mine. I spoke to Darren Marcombe at length and based upon his calculations (not the company's) he thinks McIlvenna Bay could have a NPV(8%) of $250M with a capital cost of about $250M. This NPV number is based upon a 24M ton resource which assumes that the current indicated and inferred resources in their most recent 43-101 technical report end up becoming actual reserves. That's a rather aggressive assumption and I'm not sure what other numbers he's plugging in but he knows more than I do and even if he's just half right it would be quite significant given FOM's current $16 M market cap.
Looking into mining companies such as FOM and NSU has forced me to learn new things. Prior to this I had no idea what a Scoping Study was or that you need to be aware of the major difference between a resource and a reserve. Mining is no doubt a tricky and complex business and there's no way I will be able to understand all the details of a report but I can tell you that I know a lot more now than I did just a few weeks ago. I'm getting to know what the important terminology is and the basic rules of thumb. For instance, it usually takes several years i.e.7-10, to go from discovery of a deposit to building a mine. After reading the historical news releases of these companies and others, I can see that there's a lot of ups and downs with the mine development and operation of it even with the successful, profitable companies like NSU. There always seems to be unexpected developments that even geologoist experts couldn't have predicted and things often take longer to develop that you would hope for which is why timing and the price you pay is important. With FOM I may very well be a little early unless base metal prices heat up in the next few months and the "animal spirits" create a rising tide that lifts all boats situation. Either way, I think FOM is worthy of a small bet at 19 cents given the potential catalysts and large payoff.
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FOM is an exploration company located in East Saskatwean that owns a few VMS deposits which contain primarily copper and zinc. VMS stands for Volcanic Massive Sulfide. Pretty interesting stuff. Its flagship project is McIlvenna Bay which has the potential to be a significant copper and zinc mine. Here's the thing about exploration companies on the TSXV - they are a dime a dozen and all of them would seem to have "potential" but the vast majority end up either going bust or diluting their shareholders into infinity which is why I generally avoided these plays, but because of the carnage that has taken place in this space in recent years I have become more open minded as there's gotta be some worthwhile prospects trading on the cheap that were unduly trashed. One of them appears to be FOM which has a rare confluence of positive factors going for them. They have management and significant investors with great reputations and deep pocks. The Chairman is Darren Marcombe who once worked for Newmont Mining. He restructured this company in 2010 and brought in his former colleagues Pierre Lassond and David Harquail as significant investors. He then hired the CEO Patrick Sores who had just come off a success leading a company that got acquired. FOM's flagship property is sizable and appears to have attractive fundamentals, it operates in a safe, mining friendly jurisdiction, has infrastructure already in place (roads, power) and is located 60 km from the mining town of Flin Flon which means there's readily available personnel. There's a mid sized mining company called Hudbay Minerals nearby (which is the founder and vital employer of Flin Flon) which operates 2 mines similar to the one that FOM hopes to be to build. They only have about 7 years worth of ore remaining in their mines surrounding Flin Flon without any worthy prospects (apparently) which means FOM is in a perfect position to be acquired by Hudbay sometime in the future and it wouldn't happen 6-7 years from now either as it would probably take at 2-3 years to permit and build the mine before it's ready for production and Hudbay would almost certainly not wait until the last minute to replenish their inventory which means FOM could be acquired in the not too distant future. The more they can prove their resource is in fact economical the greater the chance they will get acquired by Hudbay or someone else.
They are conducting a Preliminary Economic Assessment a.k.a. Scoping Study which should be complete by year end or early next year. If that checks out, the next step would be a Feasibility Study which I've learned is what you need to have done in order to provide the highest level of confidence/proof to financiers that the resource in question would make for a profitable mine. I spoke to Darren Marcombe at length and based upon his calculations (not the company's) he thinks McIlvenna Bay could have a NPV(8%) of $250M with a capital cost of about $250M. This NPV number is based upon a 24M ton resource which assumes that the current indicated and inferred resources in their most recent 43-101 technical report end up becoming actual reserves. That's a rather aggressive assumption and I'm not sure what other numbers he's plugging in but he knows more than I do and even if he's just half right it would be quite significant given FOM's current $16 M market cap.
Looking into mining companies such as FOM and NSU has forced me to learn new things. Prior to this I had no idea what a Scoping Study was or that you need to be aware of the major difference between a resource and a reserve. Mining is no doubt a tricky and complex business and there's no way I will be able to understand all the details of a report but I can tell you that I know a lot more now than I did just a few weeks ago. I'm getting to know what the important terminology is and the basic rules of thumb. For instance, it usually takes several years i.e.7-10, to go from discovery of a deposit to building a mine. After reading the historical news releases of these companies and others, I can see that there's a lot of ups and downs with the mine development and operation of it even with the successful, profitable companies like NSU. There always seems to be unexpected developments that even geologoist experts couldn't have predicted and things often take longer to develop that you would hope for which is why timing and the price you pay is important. With FOM I may very well be a little early unless base metal prices heat up in the next few months and the "animal spirits" create a rising tide that lifts all boats situation. Either way, I think FOM is worthy of a small bet at 19 cents given the potential catalysts and large payoff.
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Friday, August 15, 2014
Show must go on
Still no word from Greenstar and my disposition towards the situation remains the same. The prolonged silence tells me it's pretty much game over. I've moved on though. I've gone through some of the darkest days in my life and I feel like I'm walking around with a hole in my chest but I'm not going to give up. I will do my best to come back from this and if I fail, I fail. At least I won't fail without a fight.
For the first time in a while I've come across a handful of interesting companies and that has helped me to get my mind off of Greenstar. These names are all in the resource sector and each of them have interesting stories. I think that junior base metal plays in particular are looking interesting here. The sector has been badly trashed from 2011 to 2013 but it looks as though may have found a bottom about a year ago and if that's the case we're still early in the recovery phase making this what I like to call the "sweet spot" whereby you have the wind at your back early in a turnaround situation. Here are a couple of solid cash flow generator stocks with clean balance sheets, attractive valuations and promising growth potential I have started positions on.
Dynacor Gold Mines (DNG)
This little company owns a gold mill and a few exploration properties in Peru. They purchase the ore for their mill from small local miners which account for a lot of the mining activity in the country. The beauty of the business is that they always purchase the ore at a discount to the gold spot price, therefore, it doesn't matter what gold trades at, these guys always make money. Well, that's not entirely true. I've been told by IR that the company would feel the pinch if gold were to drop to $700/oz or so as it would no longer be economical for a lot of the local miners to extract and sell the ore. Also, the discount from spot they get from buying the ore will widen or contract slightly as gold price rise or fall respectively but the bottom line here is that so long as the gold price doesn't tank really big from current levels, the mill is a steady cash flow generating machine. They are planning to double their capacity by constructing a new mill for which they are still awaiting a permit from the government. This expansion will be organically financed given the company's cash position which means no dilution to shareholders and a potential doubling of EPS to about 0.60. The new mill will be scalable giving DNG the ability to increase capacity as much as 6 fold from current levels in the future. I was told it would take about 8-9 months after the permit is issued before the new mill would be constructed and operational. Once they have the new mill operating they will likely start a dividend.
Early this year the government cracked down on illegal mining activity which had a temporary disruptive effect on all mining in the country including the legal operators like DNG and their customers which caused DNG to report a weak Q1 and a delay in receiving their permit. Things appear to be back on track though given Q2 results and the oulook for Q3 and the company hopes to get the permit in 2-3 months. The government crackdown was actually a LT blessing for the company because it resulted in the permanent shutdown of 50% of DNG's competitors!
The company also has what appears to be a promising flagship property in an area called Tumipampa which is the cherry on top. I admit that I am quite clueless when it comes to assessing mining properties but from what I've read, this property could be worth $100 M based on drill results so far but I stress the word could as there's been no preliminary economic assessment conducted (getting a formal, albeit early, rough estimate as to what the property could be worth).
When you take into account the existing fundamentals (which includes the pristine balance sheet), how the company is poised for significant organic growth and the blue sky potential with Tumipampa, you don't need to be a gold bug to like DNG at its current valuation. The main risks to the play is a crash in the gold price and political risks of operating in Peru although it should be noted that the company has been operating in Peru successfully for several years.
Nevsun Resources (NSU)
Here's an interesting mining company that operates in Northern Africa in a small country called Eritrea. These guys are making tons of cash from the one and only mine they operate which is 40% owned by the government. The mine is primarily copper with a cash cost of about $1.05/lb. When you consider that copper current trades at about $3.10/lb you can see that their margins are huge. The stock trades around $4.20 (Canadian) and pays a .04/sh quarterly dividend They have a pristine balance sheet with $360 M or $1.80/sh in cash with no debt. They trade at an EV/EBITDA multiple of about 2.5 which is incredibly cheap. There are some reputable institutional investors like Blackrock who are significant shareholders. So the question one should ask is what's the catch? One factor is the location of where the company operates. Eritrea is not what you would consider a politically safe place to do business, however the company has been operating there for many years without incident. Last year the company was accused of using forced labor to work in their mines but apparently it was one of the company's sub contractors was that guilty of doing this which they were not aware of. That issue seems to have dissipated but it just goes to show you the type of risk that exists when you are in a country like Eritrea. Although Eritrea claims to be democratic, it's a one party state whereby the residing president has been in power since 1993. Here's the thing though. With NSU's massive cash position (held in US banks) and no debt, they are in a position to make a significant acquisition in a more politically stable country which would significantly reduce their operational risk while providing major organic growth. They've been on the hunt for an acquisition for some time to do just that and I think it's a question of when, not if they will make one. From what I can see, next year's copper production is slated to decline about 15% and then drop about 50% from current levels in 2016 which will then be supplemented by zinc production. I've read that the zinc is very high grade but I'm not sure yet what the cash flows will look like and perhaps neither does the market. This uncertainty could also possibly account for the low valuation as well, but that would be short sighted thinking since the company is in such a great position to expand organically and is motivated to do so. The company also has prospects surrounding their existing mine that they are exploring.
When you size up up the risks vs rewards NSU looks very appealing to me. It should be also noted that the day to day movements in the price of copper will impact the stock but with NSU's cash cost only about $1.05/lb they will be cash flow positive no matter what copper does (unless of course it totally collapses).
I'll talk about a few "long shots" in my next post
For the first time in a while I've come across a handful of interesting companies and that has helped me to get my mind off of Greenstar. These names are all in the resource sector and each of them have interesting stories. I think that junior base metal plays in particular are looking interesting here. The sector has been badly trashed from 2011 to 2013 but it looks as though may have found a bottom about a year ago and if that's the case we're still early in the recovery phase making this what I like to call the "sweet spot" whereby you have the wind at your back early in a turnaround situation. Here are a couple of solid cash flow generator stocks with clean balance sheets, attractive valuations and promising growth potential I have started positions on.
Dynacor Gold Mines (DNG)
This little company owns a gold mill and a few exploration properties in Peru. They purchase the ore for their mill from small local miners which account for a lot of the mining activity in the country. The beauty of the business is that they always purchase the ore at a discount to the gold spot price, therefore, it doesn't matter what gold trades at, these guys always make money. Well, that's not entirely true. I've been told by IR that the company would feel the pinch if gold were to drop to $700/oz or so as it would no longer be economical for a lot of the local miners to extract and sell the ore. Also, the discount from spot they get from buying the ore will widen or contract slightly as gold price rise or fall respectively but the bottom line here is that so long as the gold price doesn't tank really big from current levels, the mill is a steady cash flow generating machine. They are planning to double their capacity by constructing a new mill for which they are still awaiting a permit from the government. This expansion will be organically financed given the company's cash position which means no dilution to shareholders and a potential doubling of EPS to about 0.60. The new mill will be scalable giving DNG the ability to increase capacity as much as 6 fold from current levels in the future. I was told it would take about 8-9 months after the permit is issued before the new mill would be constructed and operational. Once they have the new mill operating they will likely start a dividend.
Early this year the government cracked down on illegal mining activity which had a temporary disruptive effect on all mining in the country including the legal operators like DNG and their customers which caused DNG to report a weak Q1 and a delay in receiving their permit. Things appear to be back on track though given Q2 results and the oulook for Q3 and the company hopes to get the permit in 2-3 months. The government crackdown was actually a LT blessing for the company because it resulted in the permanent shutdown of 50% of DNG's competitors!
The company also has what appears to be a promising flagship property in an area called Tumipampa which is the cherry on top. I admit that I am quite clueless when it comes to assessing mining properties but from what I've read, this property could be worth $100 M based on drill results so far but I stress the word could as there's been no preliminary economic assessment conducted (getting a formal, albeit early, rough estimate as to what the property could be worth).
When you take into account the existing fundamentals (which includes the pristine balance sheet), how the company is poised for significant organic growth and the blue sky potential with Tumipampa, you don't need to be a gold bug to like DNG at its current valuation. The main risks to the play is a crash in the gold price and political risks of operating in Peru although it should be noted that the company has been operating in Peru successfully for several years.
Nevsun Resources (NSU)
Here's an interesting mining company that operates in Northern Africa in a small country called Eritrea. These guys are making tons of cash from the one and only mine they operate which is 40% owned by the government. The mine is primarily copper with a cash cost of about $1.05/lb. When you consider that copper current trades at about $3.10/lb you can see that their margins are huge. The stock trades around $4.20 (Canadian) and pays a .04/sh quarterly dividend They have a pristine balance sheet with $360 M or $1.80/sh in cash with no debt. They trade at an EV/EBITDA multiple of about 2.5 which is incredibly cheap. There are some reputable institutional investors like Blackrock who are significant shareholders. So the question one should ask is what's the catch? One factor is the location of where the company operates. Eritrea is not what you would consider a politically safe place to do business, however the company has been operating there for many years without incident. Last year the company was accused of using forced labor to work in their mines but apparently it was one of the company's sub contractors was that guilty of doing this which they were not aware of. That issue seems to have dissipated but it just goes to show you the type of risk that exists when you are in a country like Eritrea. Although Eritrea claims to be democratic, it's a one party state whereby the residing president has been in power since 1993. Here's the thing though. With NSU's massive cash position (held in US banks) and no debt, they are in a position to make a significant acquisition in a more politically stable country which would significantly reduce their operational risk while providing major organic growth. They've been on the hunt for an acquisition for some time to do just that and I think it's a question of when, not if they will make one. From what I can see, next year's copper production is slated to decline about 15% and then drop about 50% from current levels in 2016 which will then be supplemented by zinc production. I've read that the zinc is very high grade but I'm not sure yet what the cash flows will look like and perhaps neither does the market. This uncertainty could also possibly account for the low valuation as well, but that would be short sighted thinking since the company is in such a great position to expand organically and is motivated to do so. The company also has prospects surrounding their existing mine that they are exploring.
When you size up up the risks vs rewards NSU looks very appealing to me. It should be also noted that the day to day movements in the price of copper will impact the stock but with NSU's cash cost only about $1.05/lb they will be cash flow positive no matter what copper does (unless of course it totally collapses).
I'll talk about a few "long shots" in my next post
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