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
