Source: Adrian Day for Streetwise Reports 01/29/2020
Fund manager Adrian Day writes about junior exploration companies in his portfolio that he is recommending for purchase.
Evrim Resources Corp. (EVM:TSX.V, Toronto, 0.315) is coming closer to generating long-term revenue. The Ermitano project it discovered and sold to First Majestic keeping a royalty is on track for a Q1 2021 production start-up. The property is adjacent to First Majestic’s Santa Elena mine, which is running low on ore. FM has been aggressive in exploring Ermitano, and now ramp construction has commenced. For the initial couple of years, some 40% of the Santa Elena mill feed will come from the higher-grade Ermitano, moving up over time. The current resource is 57.8 million ounces of silver, with a PEA expected this quarter. Analysts of First Majestic are looking at up to nine-year mine life.
Undervalued on hard assets alone
Evrim has cash of C$10 million (US$7.7 million), while the Ermitano royalty has an NPV of around US$16 million (on reasonably conservative assumptions). With a market cap of C$26 million, it is clearly valued close to the value of these two hard assets alone, with the rest of the company—the joint ventures and alliances, and other properties—essentially free. In calculating the value of the royalty, we assumed a static gold price. Given the royalty revenue is off the top, any increase in the gold price will have a meaningful impact on the value of that asset. Importantly, a royalty such as this one could be turned to cash immediately, should the company wish.
The other assets are worth far more than the value the market is giving them. There are too many to delve into here, but two warrant a brief comment. The Ball Creek copper porphyry project in British Columbia is delivering promising initial results; Evrim is fully carried for 20%, a very strong deal. Separately, the western U.S. project data from Yamana has all been digitized and the geos are now looking for projects in the extensive database. Other projects that Evrim holds 100% are ripe for partners.
Market on wait-and-see, which is our opportunity
No doubt, the extreme disappointment just over a year ago from drill results on its highly-anticipated Cuale project has made investors skeptical of jumping back on board. We suspect that the shares acquired at higher prices purely in anticipation of drill results are all long gone, so the stock should respond well to positive news. In the meantime, Ermitano draws ever closer to generating revenue. With solid management—technically, financially, and market-savvy—Evrim is a very strong buy at these levels.
Indeed, we are now officially recommending purchase of a second tranche of Evrim Resources. We will use a limit of C$0.32 for this second buy.
Midland, with strong balance sheet, looks forward to activity
Midland Exploration Inc. (MD:TSX.V, Toronto, 0.87 x 0.90) follows the prospect-generator model in Quebec. Given its strong balance sheet—C$14 million in cash—it is able to do more of its own work, generating new projects, identifying targets on properties before joint venturing, and drilling its own high-potential projects.
One of these high-potential projects is Mythril, a polymetallic target in northern Quebec. Midland is now undertaking geophysical surveys over boulder fields and other showings, as well as constructing a 3D model, to gain a better understanding of the property as well as identify targets for the next round of drilling. Recent exploration found several new boulder fields, but without the stunning grades achieved in initial grab samples.
It is a large property, consistently returning mineralization, but the company needs a better understanding of geology (including the age of the rocks), as well as time; this type of project can require extensive drilling.
Lots of activity at different projects
Midland has been busy on other fronts, acquiring by map designation ground near Azimut’s high-grade drill results earlier this month that sent that stock soaring. Similarly, it previously acquired three properties in the Detour Lake Belt, near Wallbridge’s discovery.
In addition, Agnico will do more drilling on its joint-venture with Midland in the Cadillac trend. Having fulfilled its work commitment early, Agnico had been slow with drilling in recent seasons, but the results were strong, so it is not a surprise they are back.
In all, some $6.5 million in exploration expenditures for this year have been budgeted, about $4.5 million from Midland, but that is likely to change as the year progresses.
Buy on weakness will be rewarded
Given that initial Mythril results did not live up to over-hyped expectations, the stock sold off, and now, I believe, we need another definitive positive development to push the stock up again. This could be an exciting new joint-venture or dazzling drill results, but it will have to be real rather than anticipated. Given Midland’s history of delivering, we are confident this will occur at some point in the future. In the meantime, Midland should be accumulated.
Stalled permit masks value at Almaden
Almaden Minerals Ltd. (AMM:TSX; AAU:NYSE, NY, 0.54) has been busy with lobbying efforts, much behind the scenes after the Mexico environmental agency, SEMARNAT, suspended consideration of the final permit required for Almaden’s Ixtaca project at the end of October. This is not the only mineral project held up at the agency; indeed, it is estimated that around 80 permits are bogged down, suggesting a political rationale. There is no specific issue at Ixtaca and the local people are on side, notwithstanding a noisy, U.S.-backed NGO.
With a market cap of $60 million, the 100% owner of Ixtaca is very undervalued on an asset basis. Of course, it needs the permit for the value to be realized, and repeated delays with consequent financings, have weighed on the market. For the investor who recognizes the risk—crazy governments can do crazy things—Almaden should be accumulated for a major payoff.
Top Current Buys
Best buys on our list at current prices, apart from those above, include Osisko Gold Royalties Ltd. (OR:TSX; OR:NYSE, NY, 9.70); Altius Minerals Corp. (ALS:TSX.V, Toronto, 11.13); Lara Exploration Ltd. (LRA:TSX.V, Toronto, C$0.59); Kingsmen Creatives Ltd. (KMEN:SI, Singapore, 0.39); and Almadex Minerals Ltd. (DEX:TSX.V, Toronto, 0.23).
Adrian Day, London-born and a graduate of the London School of Economics, heads the money management firm Adrian Day Asset Management, where he manages discretionary accounts in both global and resource areas. Day is also sub-adviser to the EuroPacific Gold Fund (EPGFX). His latest book is “Investing in Resources: How to Profit from the Outsized Potential and Avoid the Risks.”
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Disclosure:
1) Adrian Day: I, or members of my immediate household or family, own shares of the following companies mentioned in this article: Evrim Resources, Midland Exploration and Lara Exploration. I personally am, or members of my immediate household or family are, paid by the following companies mentioned in this article: None. My company has a financial relationship with the following companies mentioned in this article: None. Funds controlled by Adrian Day Asset Management hold shares of the following companies mentioned in this article: Osisko Gold Royalties, Midland Exploration, Kingsmen Creatives, Lara Exploration, Evrim Resources, Almaden Minerals, Almadex Minerals and Altius Minerals. I determined which companies would be included in this article based on my research and understanding of the sector.
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Adrian Day’s disclosures: Adrian Day’s Global Analyst is distributed for $990 per year by Investment Consultants International, Ltd., P.O. Box 6644, Annapolis, MD 21401. (410) 224-8885. Publisher: Adrian Day. Owner: Investment Consultants International, Ltd. Staff may have positions in securities discussed herein. Adrian Day is also President of Global Strategic Management (GSM), a registered investment advisor, and a separate company from this service. In his capacity as GSM president, Adrian Day may be buying or selling for clients securities recommended herein concurrently, before or after recommendations herein, and may be acting for clients in a manner contrary to recommendations herein. This is not a solicitation for GSM. Views herein are the editor’s opinion and not fact. All information is believed to be correct, but its accuracy cannot be guaranteed. The owner and editor are not responsible for errors and omissions. © 2019. Adrian Day’s Global Analyst. Information and advice herein are intended purely for the subscriber’s own account. Under no circumstances may any part of a Global Analyst fax or e-mail be copied or distributed without prior written permission of the editor. Given the nature of this service, we will pursue any violations aggressively.
( Companies Mentioned: AMM:TSX; AAU:NYSE,
DEX:TSX.V,
ALS:TSX.V,
EVM:TSX.V,
KMEN:SI,
LRA:TSX.V,
MD:TSX.V,
OR:TSX; OR:NYSE,
)