Gecko Research, Apr 22, 2015
Price is what we pay. Value is what we get. The difference is our upside.
As we have learned the hard way, too often the upside stays an illusion, simply because the management keeps frittering away the value, either because they are not business-wise or because they use the company credit card to maintain their lifestyle – we call it theft. Of course, in times of fear or greed, despite good management and all their best attempts, value might still go unappreciated. Sometimes the value goes unappreciated for no good reason and we must wait and watch.
We try our best to avoid investing in life-style companies and we have sold companies in the past even though we knew they had significant upside. We held on to them for too long hoping that the market would see value and our share prices would go up. They never did, as the management slowly and surely wasted away the value.
Among the companies we keep an eye on, we not only want an upside from a valuation perspective, but we also try to find a catalyst that would make the upside reflect in the share price. It makes sense since the sooner value reflects in the share price, the earlier we can move our money to another opportunity.
We want to invest our hard earned money with a management that understands this and ensures that they continue to do what provides the best value for their shareholders. If the market is driven by fear (as is the case these days in the mining industry) or greed, we might invest if we see a possible event that bypasses fear and greed. This is what we think is currently the case with Gold Canyon: the possibility of a takeover.
Consider this. During the past week GCU, MGP, ME, INM, and KTN have shown quite a bit of strength, all on the basis of rumors of possible takeovers. We talk to a lot of industry people to stay in touch with the pulse of the market and we are certain about one thing, the mining industry is in consolidation mood.
In our view the best rewards continue to be in Gold Canyon and at $0.24, GCU still looks like the best bargain. We are not here to fall in love with a stock, so we must continue to keep revising and refining our valuation as the stock goes up.
In our note to subscribers dated March 29th (letter #568 – Weekly Update), we said that our ideal price of Gold Canyon would be “way over a dollar/share”. That may sound like a lot, but if anyone starts to crunch the numbers and compare Gold Canyon to Goldcorp’s take-over of Probe Mines (Goldcorp bought Probe Mines for $526 million), you will be happily surprised to your findings. We were.
Our internal valuation is based on the known in-pit resources in the north-western corner of the Springpole project. A vast remaining area – with a possible district level potential – has had no drilling and stays very prospective. Also, Gold Canyon’s CEO Akiko Levinson has very good connections in Japan, which has resulted in their projects in Malawi and Tanzania, both in association with the Japanese government and companies. The structure of the Tanzanian project is such that Gold Canyon has virtually no financial commitments. This does not come easy.
Astute investors might have noticed that Akiko Levinson is also a Director on the board of Kaizen Discovery (KZD), another holding of ours which has massive Japanese backing. What we do know is that Robert Friedland finds the very best people for his companies. We will let you connect these dots.
For now, we continue to give zero value to everything outside the pit considered in the PEA. We continue to give zero value to the African projects. We give no value to the Japanese connections. Why? For we continue to see so much upside still left in Gold Canyon that we will worry about the above when we are at least half way through our per share valuation of Springpole.
Now, a fair question to ask would be why we should be considering NPV that is based on U$1,300/oz gold (assumed gold price in the PEA). One must remember that Springpole is in Canada, and in terms of Canadian dollar, gold price is now higher than what it was when the PEA was released. But the upside does not only come from change in currency values. Oil and steel prices are much lower, so are labor costs in Canada (as a result of fall in mining activities) and equipment.
(This is actually discussed in the Feb 26 podcast we conducted with Gold Canyon’s Technical advisor Quinton Hennigh, link here)
Finally, the cost of electricity used in the PEA is U$0.08/Kw. This will of course be lower now, given that Canadian dollar has fallen, but as this linked article shows, there is a good possibility that the cost of electricity might come down to C$0.06/Kw. This by itself has the potential to save as much as $9 million per year in costs, based on our quick calculations.
The market has not noticed the benefit from the likely cut in electricity price, which eventually it will. This also shows that Canadian government has started to feel the pinch from falling tax revenues. Hopefully they are also feeling the pressure to speed up permitting processes.
So, our current target is based merely on the in-pit resources and even there without taking into account what see as huge benefits from the above reduction in costs. We have given zero value so far to any upside from project area outside the pit as well as for the African projects.
With all these obvious cost reductions as well as a higher gold price (in Canadian dollars), we have advised the Gold Canyon management to update their PEA, to help the market better understand about the latest on their economics. In the meantime, we will be updating our own valuation by taking the above into account.
If we didn’t already own a significant chunk of GCU stock, we would still be accumulating with both hands. But given that we are already invested, we are sitting easy. If for any reason it weakens we will buy more. We are not investment advisors but if you haven’t bought any so far, it might be worth considering buying a small position and placing some stink bids. You never know, Gold Canyon might just be the next junior to be taken out.
Previous articles on Gold Canyon:
* Why Gold Canyon is a keeper and should be held on to
(http://blog.geckoresearch.com/content/8510, Apr 18, 2015)
* Gold Canyon – Just How Cheap Is It?
(http://blog.geckoresearch.com/content/8364, Apr 7, 2015)
* 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
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