Gecko Research, Apr 7, 2015
The Importance of a Good Management
Since the bear market for gold started in 2011, we have seen valuations in the gold companies come down significantly. Not only that, we have also witnessed a lot of value completely vanish in the companies themselves, and in many cases, never to return again. The way we see it, the cause of the destruction of value within the companies, is due to two major reasons besides the obvious, the price of gold. The first one is the poor quality of management. The second reason is that the companies’ flagship property never had enough quality to make it in the first place.
Is it really that simple? Of course we are simplifying a bit, but this is the way we see things. We are also of the opinion that just as a bad management can destroy a decent or even good project, a great management can make a so-so property work enough to eventually become a mine.
It makes sense to remind ourselves of what a venture company is supposed to do. They are supposed to be ventures, where a team develops a project using its competencies and then passes on the baton to someone else who has different set of competencies to keep moving it forward. A generative company is not necessarily good at exploring and exploration is a totally different business than being a miner. Therefore, projects might change hands many times before getting into production.
Managements, being human beings, are afraid of losing their jobs. They stay on despite having outlived their use since they are comfortable with a regular salary and life-style. What we do know is that the management of Gold Canyon is not like this, we have found that they really work in the shareholders’ best interest. They will move on when the time comes and handover the project to those who can take it further. We think that time has come.
As a reminder to our readers, management of Gold Canyon has no management contracts with change of control payouts (aka golden parachute payments), a rarity in a business where this is how it should be.
Some Reflections on the Price of GCU
* At the peak almost to the day four years ago, GCU hit its all-time-high around $4.25
* End of July 2014, (~8 months ago) GCU hit 42 cents
* December 9th, 2014, GCU made a low at 9 cents
* Six weeks ago on Feb 26th, we added GCU to our portfolio at 17 cents
When we are writing this article, the price of Gold Canyon is C$0.21 which gives the company a market capitalization of $33 Million. How can one determine if that is cheap or perhaps even expensive? In all honesty, to compare to the >4 dollar share price in 2011 does not make much sense today, but we feel the same when comparing to the low set in December as well and we see a lot of upside in Gold Canyon. Let us point to why.
Making Our Point – How Deficits and Book Value Can Add a Lot of Value
Most investors use a company’s book value and deficit at the end of their analysis work, to assess tax liabilities. Mostly, this is how it should be. Book value and deficit mostly make no sense if a project is uneconomical or is too far from production. But there is an interesting twist that must be considered.
Book value and deficit have values by themselves, independent of the projects. For example, assume what would happen if a profit-making company acquires another company with $100 million in deficit and book value combined and no project of value. If the corporate tax is 35%, such an acquiring company would save $35 million in its tax liabilities. So, it makes sense to look at the balance sheet of companies to see if they have value from a mere tax perspective.
Gold Canyon (GCU) has $74 million of asset value, most of which comes from their Canadian project, Springpole. They also have an accumulated deficit of $42 million. While not all of this deficit can be used for tax purposes, given complex tax regulations, and some might have expired, to us it is clear that between $74 million and $116 million is available to be written off for tax purposes for an acquiring company. As we wrote earlier, our thesis to own Gold Canyon in the first place is for GCU being an obvious take-over target.
At the current share price of $0.21, Gold Canyon’s market capitalization is $33 Million. In our opinion, and in a very interesting way, just the balance sheet of Gold Canyon is worth close to its current market capitalization for a profit-making acquiring company. Of course, as we wrote earlier, Springpole is one of the better and rare big Canadian gold projects available.
A Fair Value
Although, GCU has gone up quite a bit since our first recommendation (when the share price was $0.17), given tax benefits Gold Canyon’s balance sheet offers to an acquiring company, you might still be getting the project for almost no value. We cannot stress enough how strongly we feel that someone should take Gold Canyon out, someone with good mining skills to put Springpole into production. No one can dispute the fact that the current management of Gold Canyon has put the company on a silver platter for the right mining company to take the Springpole project to production.
How much are GCU shares worth then? Well, the numbers we are working on internally is no use to publish here, we would be called fools for sure, that is how high our valuation is on GCU. We recognize that the market is what it is right now, but we do not see why the Springpole project would not be worth ~$200 Million to an acquiring company. Add another $30-40 Million or so in built up deficit and book value combined and a fair price for GCU would arrive at ~$1.25/share. We are not naïve enough to think that will happen in today’s environment but anything less than half of that would seriously disappoint us. And remember, if Gold Canyon would get a “Probe-Mines-valuation” (Goldcorp to buy Probe Mines for $526 million) a bid could be reaching our internal numbers.
That answers our initial question pretty well we think, “Gold Canyon – Just how cheap is it?”.
Previous articles on Gold Canyon:
* Gold Canyon is Heating up – Institutional Buying is Evident
(http://blog.geckoresearch.com/content/7964, March 6, 2015)
* Ripe for a Take-over – Gold Canyon Resources
(http://blog.geckoresearch.com/content/7814, February 26, 2015)
Team Gecko Research
If you like our work, feel free to share this link with your friends for our free newsletter: www.geckoresearch.com/signup
We are not investment advisors and what we write is our own view only. Please read our disclaimer