Evaluating Juniors and Top Picks - Sid Rajeev
Published on August 24, 2017
00:00:09. Good afternoon everyone. My name is Sid, Head of Research at Fundamental Research Corp. It is so good to see so many happy faces this time, the last few years were a disaster. It is good to see the market is getting better.
00:00:23. The problem we have today is hundreds of opportunities come to us, if not thousands. How do we select companies? How do we shortlist companies? How do we go ahead and do our due diligence properly?
00:00:37. So, today I thought I am going to give you some short tips, a five-minute process to shortlist companies and then invest in juniors and after that I'm going to talk about our top picks, a few companies that have come into due diligence that look promising so far.
00:00:54. There a few disclaimers and disclosures for the BSCE*, who employs anyone here.
00:01:02. Who is Fundamental, a few words on them. At Fundamental we are one of the largest independent research shops in the country.
00:01:11. There are different kinds of researchers that you see out there. Sell, sell, research. New, sell, research. Be sure, paid research. We come on be sure, paid research and we think we are the least biased of all, sell side, research in what’s banking and obviously the sell, sell, industry banking guide is not going to accept the negative report from a sell, sell analyst, so we think it is biased.
00:01:35. New sell writers tend to hold shares before writing up a story, so we think there is an obvious bias there. We can not invest in any of the companies we cover. We cannot do banking, no back-end fees, all the fees are collected up front in cash which allows us to be objective and do unbiased research.
00:01:55. Here is a distribution chart of Canaccord; it is the latest report from Canaccord. You can see that 83% of the numicon banking clients get a buy recommendation, only 1 % get a sell recommendation.
00:02:10. What is ours? It is 70% buy, 30% of the reports are either neutral or negative. This is why quality audience, institutional retail come to us and subscribe to our research and follow our research.
00:02:24. This is the five-step process that I encourage all investors to use at home, so you can shortlist companies.
00:02:33. Number one: select a commodity that you like based on the supply and demand fundamentals. Stick to it, don't get sold by promoters, don't get sold by a neighbour to invest in something that you don't like. So, select commodities that you like, screen for companies in that sector.
00:02:51. Number two: check their enterprise value to resource. This is only for companies with resource estimate. What you want to do is find the inner price value, which is simple. Market cap, plus debt, minus cash. Find the leasehold estimate, which we normally take 100% of measure and indicator and 50% of in foot.
00:03:14. Imagine you are looking at a gold company. Enterprise value is one hundred million; resource is two million - you are looking at EV to resource of fifty dollars an ounce. That's a good starting point to start due diligence on any company.
00:03:28. Quick rule of thumb if you are seeing gold projects under fifty, that's a good starting point. For silver under two dollars an ounce; good starting point. For uranium under three dollars a pound; good starting point. Copper, two to three cents per pound; good starting point.
00:03:46. Start with this and move on to the next sector, the next point. This is something that is always overlooked by investors, which is to see the Management biography. So, take your time to read what they have done in the past and more importantly see how many shares they own.
00:04:05. You can find that information from Cedar which is the platform which has all the publicly available information. Look for management information circular or SADiE not CA that has information on company’s ownership by management.
00:04:22. That will give you a lot on whether management believes in what they are selling to you. So, if they believe in it, if they hold it, then that means they have skin in the game and it's good for you.
00:04:33. Next aspect is who else owns the shares. If you see big institutions, big names holding it, you know that they have done the due diligence so you have some bench mark due diligence done there already.
00:04:46. Next one is NPV and IRR. This is very crucial to look at, this is for companies that have always done a PEA of feasibility.
00:04:56. Look for present values after tax. A lot of companies come out and promote before tax NPV's. They promote low discounted NPV's which look higher. We think anything over 7% plus is a good benchmark.
00:05:11. You want to look at after tax NPV and also you want to look at what commodity prices that they use in their NPV estimates. These are very critical and these are good ways how management can for lack of better words, fool you.
00:05:27. The fifth point to look for is, is the stock exciting? All of us here are interested in highly speculative, junior resource companies so obviously you want the stories to be exciting.
00:05:41. So, take a few minutes, read the past few press releases, read for management guidance and see what results are they expecting in the forthcoming months. That will give you an idea if there are upcoming catalysts and if the stock is exciting.
00:05:56. This is the five-step process that I encourage everyone to do before they even start looking at a company more seriously.
00:06:05. Here are some red flags. Obviously, management team with little background in the space is a huge red flag for us. Management team with little ownership of shares; huge red flag. Companies that do not regularly publish their drilling results. Non-arm length transaction is another red flag.
00:06:25. Another big one which is kind of overlooked is a non-independent board. The rule of thumb is you need to have at least 60% of the board to be independent, a lot of junior resources do not have that and that kind of gives you an idea that there is no one to control the management team.
00:06:42. Now moving on to our top picks. I'm going to mention five names and after that I'm going to mention six other names that we have commenced due diligence and they look promising.
00:06:53. Number one is Chesapeake Gold with eighteen-million-ounce deposit gold. Five hundred million ounces silver, four million pounds of zinc. One of the largest undeveloped deposits that's yet to be acquired this is a primary acquisition target and is I believe for the big players.
00:07:10. Obviously this a high capex, two million plus project, so it makes sense for bigger players to acquire this company. The gold is about thirteen, fourteen hundred dollars an ounce, but once it goes there we think this could be one of the best stories out there.
00:07:21. The best part is that it's run by Randy Reifel he's kind of a Rock star in the house street market. He owns 9% of the company, he's also director of Gold Corp. He has done PUSMNA with Glamis, Robert Freeland. Gold Corp also owns 9% of the company.
00:07:46. Stock used to be eighteen dollar plus stock and now it's at three dollars, seventy cents. We have a target of thirteen dollars, the stock is now at three dollars seventy cents.
00:07:55. The next one is Fortune Minerals. It is a gold and colbalt story in the North-West territory. They have done two feasible early stories, excellent economics with negative operating costs.
00:08:10. Cobalt is one of the few commodities out that has been, we think this one has the best outlook because it's driven both by demand and supply. You have excellent demand coming from Lithium made batteries and the demand, supply side has constraints because more than 50% of production comes from DRC and most of the big tech companies have openly come out and said that they are going to stop taking in supply that is coming from the DRC.
00:08:37. Companies like this who own politically stable regions are going to hugely benefit. Fortune is the largest cobalt project holder in Canada.
00:08:49. Third one is Foran Mining. It's a Copper, Zinc, play. I've put a map here to show you the structure or the location of the project.
00:08:59. It is close to Hudbay. It is in a region called Flin Flon they are developing a new camp and this we believe is a prime acquisition target for something that a lot of players are going to come and take a look at.
00:09:12. Why? Because Hudbay operates most of the properties in the area and two of the three mines are running out of ore in the next two to three years. So, they are going to go out and start looking for new ore.
00:09:23. Foran is the most advanced stage project in that area, with already identified economics and also as underlined here, with negative operating costs. Fantastic economics, good management team and we think it's a good player for acquisition.
00:09:41. The forth one is Amerigo Resource is a producing company, copper and molybdenum producer in Chile. They take ore from the tailings from one the largest or the largest underground copper producer in the world.
00:09:54. They take the tailings, process it and sell. They produced 16 million pounds of copper last year, they are in the process of expanding their production by 50%. That's increasing to ninety pounds by ninety million pounds in the next two years so we are going to see huge increasing revenues in the EPS from the company, compensating at 1.1 times revenue the market is trading at 1.5 times.
00:10:21. Last one is Dynacor Gold Mines. This is one of the largest, if not the largest, custom gold processing facility in Peru. They've been operating the space for almost twenty years. Like Amerigo they are also amping up production from 72,000 to almost 90,000 this year.
00:10:41. Looking at the metrics, 0.8 times revenue. The market is trading at two to three times revenue. EV to EBITDA is 7.5 times, when the market is trading 50% higher. So, the metrics clearly indicate they are under value, plus these metrics do not account for the potential increase in production.
00:11:03. So those are the top five picks, now I'm going to mention six quick names that we have started due diligence on.
00:11:10. Duran Ventures similar to Dynacor. Dynacor operates in the south. Duran Ventures is a startup company they are going to set up a similar facility in the North. Northern Peru, custom link with facility, one hundred times a day which if it's feasible it's going to be producing three million dollars in net profits. The market gap is just three million dollars right now. They also have expiration stage projects in Peru.
00:11:34. Next one is Corvus Gold. It is an open pit oxide deposit in Nevada, already identified 1.8 million ounce of gold and 7 million ounce of silver.
00:11:46. This is the point I like the most, operating cost. Look at that! Just over six hundred dollars and the table here shows how sensitive is their project economics to the gold prices. You look at thousand dollars here, it's a giving positive NPV. Post tax IRR over 20%.
00:12:06. That is really hard to find these days when you are getting so good economics on gold projects at thousand dollars an ounce.
00:12:14. Another good point, management team is ex AngloGold. They hold 60% of the stock, their average costs for share acquists is 87 cents the stock is at 80 cents which means that they are going to make sure that they don't sell the project under their cost.
00:12:33. The next one is GMV Minerals another gold story that we like. It is in Arizona, open pit oxide deposit, half a million ounces of gold and the beauty of this story is that it's trading at fifteen dollars an ounce.
00:12:48. I mentioned earlier that if you see a project under forty dollars an ounce, it's a good sign. Aggressive drilling going on right now, thirteen to fifteen-whole drill program announced. We think there is huge room for expansion and a good story to start monitoring.
00:13:04. The gold for this stock the deposit is 0.7 grams per ton. A lot of people say it is low grade but this chart kind of shows the other comparable heap leach projects in the world and it is actually 0.7 grams return for a heap leach is not bad. It's actually good. Especially for a project that can expand its resources.
00:13:28. Last two stories. Alexandria Minerals is another gold project. They have been increasing their resources for the last seven years from half a million to now almost 2.4 million ounces. Their projects are in one of the best regions in the world. Cadillac area of Val d'or and also Flin Flon mining camp which I mentioned earlier. They are trading at seventeen dollars an ounce another stock that looks undervalued, based on resource identified so far.
00:13:57. Next one is Global Energy Metals Corp. I talked about how bullish we are on cobalt. This is a brand-new company that is trying to acquire projects that's required for the rechargeable battery. So mainly cobalt, lithium, manganese - these are projects that function as capital for rechargeable batteries. They are aggressively going out and acquiring projects. They already have one in Ontario and Australia and the best part is that they have already have signed an agreement with a Chinese firm that is a big supplier of materials to lithium battery manufacturers.
00:14:37. Last one, is a uranium play, it is the only uranium play we cover. One of the commodities we are very bullish on, on a long-term basis. This company, Skyharbour, is one of the most active uranium companies that you see out there. They have been acquiring projects and also doing a lot of deeds. The biggest project is close to Denison Mines Wheeler River, Cameco's McArthur. This project has been giving out high grade results in the past few weeks and it's definitely worth noticing.
00:15:08. They also have signed option agreements with AREVA Azincourt to option out a few projects. Fantastic management team like the other companies I mentioned and this is a uranium company you want to watch out for.
00:15:23. So companies that I mention here I encourage to go to their booths and question them and find out more information and you can also get samples of our work on our booth here, number seven, come by over there and I will answer any questions. Thank You.