Almaden Minerals Ltd. (AAU, NY, 0.52), like Vista from our last article, is very undervalued based on its ownership of a solid project, in Almaden's case the gold-silver Tuligtic project (which includes the Ixtaca deposit) in Pueblo State, Mexico. But, also like Vista, has been in the rather long period after delineating a deposit. Acquiring houses on land required for the mine, for example, is only exciting if it goes wrong.
In coming months, Almaden will apply for final permits—the application was delayed during the Mexican presidential election—and publish its Feasibility Study, expected before the end of the year. Under Mexican law, there is a six-month mandated limit for a reply to the permit application.
Improved feasibility expected
Two major changed are expected in the Feasibility over the last prefeasibility (PFS) study. First, money has already been spent on the used mill that Almaden bought some years ago; it has recently been dismantled ready for shipping to site next spring or summer. These dollars will reduce the capex somewhat. Almaden has about $8.5 million, sufficient for this work.
Offsetting that will be the cost of ore-sorting equipment, which will increase capex, but improve the economics of the projects, reducing costs and adding to its NAV and rate of return. The PFS capex of $117 million is very low, so the project can withstand some additional capital. With a measured and indicated resource of almost 2.5 million ounces of gold equivalent (with production almost half and half gold and silver), the deposit has room to grow, both from adding some of the inferred resource and from new deposits. A new zone discovered just over one kilometer to the southwest, has very good grades.
An outside activist created lots of noise but failed to stir up opposition to the project. Almaden has been very pro-active with frequent community meetings and taking groups to different operating mines in Mexico to see a modern operation for themselves.
Acquisition target?
In all, a solid operation, half silver, in a good jurisdiction, with low capex and lots of room to grow should be an attractive target for a larger miner. The publication of the Feasibility Study and receipt of permits next year might be the trigger for a company to make a move. Meanwhile, Almaden is very undervalued. The project (per PFS) has an after-tax NAV of $310 million, while the market cap is just $58 million, giving lots of room for a company to pay a premium and still acquire the project at a good price.
Almaden will likely see tax-loss selling; the stock entered the year just over $1 and has basically slid all year. Given the FS and permit application expected in coming weeks—precise dates unknown—we wouldn't want to wait too long and miss buying it.
Two spin offs from Almaden
In August 2015, Almaden spun off all of its assets, except the Tuligtic project and some cash, into a company called Almadex. That subsequently in May this year became Azucar Minerals, and spun off all its assets, except El Cobre and some cash, into a third company called Almadex, while keeping Almadex's stock symbol. All clear now?
Azucar Minerals Ltd. (AMZ, To., 0.43) holds the large-scale El Cobre copper-gold project in Veracruz State, Mexico. After Ixtaca, this is the next most advanced project in the group. Newcrest has a 19.9% stake in the company, after recently exercising its rights to top up its investment. Recent results, including some released last week, have been strong. Newcrest wants to drill aggressively looking for a large deposit. There are currently three rigs turning under a two-year drill program, for which Azucar is well funded, with about C$16 million in cash.
This type of porphyry deposit requires a lot of drilling, which takes time as well as money. Hence, the decision to put El Cobre into its own company made sense. This stock will also likely see tax-loss selling. Earlier in the year, prior to the spin-off of the "new" Almadex, it was trading over $1.60—so still significantly higher than today's price even adding back Almadex. Next results are unlikely to be until the end of the year, at the earliest. So we would wait a little and try to pick up more on any declines over the next few weeks.
Exploration to start up again
Almadex Minerals Ltd. (DEX, To., 0.27) is a prospect generator explorer, with about 17 projects in western North America (B.C., Nevada and Mexico), most fairly early stage. There has been very little drilling, other than on some optioned properties. And of late, there has been little activity on these exploration properties as the group management have focused on the more advanced projects and the spin out. Almaden now has its own operations manager, which will allow the father-and-son Poliquin team to turn some attention to the exploration portfolio in Almadex. We expect to see some news flow in the new year.
Almadex has $6 million cash, as well as approximately $2 million in gold bullion, and a portfolio in junior stocks, prime among which is approximately C$1.6 million in Azucar shares. It also owns its own drills (and has earned a little income renting out to Azucar and Almaden). That balance sheet is ample for any exploration program on more than one property over the next year or more.
In addition, Almadex holds a portfolio of royalties, mostly on early stage exploration properties it (or Almaden earlier) generated, some optioned out to other companies (including Endeavour Silver and McEwen Mining). It holds two strong royalties on its own discoveries, 2% on Tuligtic and 1.75% on El Cobre. The Tuligtic royalty alone is likely worth more than the entire market cap of Almadex. In production, it would generate well over $40 million in cash flow over the life of the mine.
With a market cap of C$16 million, the company is trading for barely the value of its cash and hard assets (the drills), giving virtually all the exploration projects, joint ventures and royalties for free. Though Almadex too has seen higher prices, we do not expect it to be hit with much tax-loss selling. Besides, given the thinly traded market—5,200 shares on Friday for example—this is not an easy stock to buy in quantity quickly. At this price, it's a buy for patient, value-oriented investors.
How long do we wait?
Yamana Gold Inc. (AUY, NY,2.09) has been a huge disappointment. Recent results have seen a little improvement, with production above guidance (though the company has trimmed expectations), high gold and lower silver. Costs appear good, with cash costs of $482/oz and "all-in sustaining costs" of $730/oz, but Yamana reports on a by-product basis using its significant copper production to reduce reported costs. Recent devaluations in Argentina and Brazil also helped reduce costs. Going forward, however, the Brazilian real is recovering with the new president, while an Argentine tax on exports will also boost costs.
The most important news, perhaps, is that the new mine, Cerro Moro, appears to be gearing up on track. After the conclusion of the Gualcamayo sale, Yamana has no more assets for sale. The program of asset sales was meant to cut debt, but it did not; indeed, debt actually increased in the last quarter.
Now, Yamana says free cash flow boosted by Cerro Moro will enable it to cut debt next year. Debt remains a major problem for Yamana, with $1.66 billion in net debt and high debt ratios. Cash flow now just about covers G&A, so it needs to do a better job to cover ongoing capex, interest payments and other expenses to generate free cash flow to cut debt. It has been much slower to repair its balance sheet than other gold companies that took on debt at the top of the market.
Lastly, Peter Marrone has taken on the new role of executive chairman, focusing on strategy and planning, while long-term chief operating officer Daniel Racine assumes Marrone's old roles of president and CEO. This appears to be a move by the board in response to shareholder pressure.
Share ownership and stock returns
A new study by the newly formed Shareholders' Gold Council, on the relationship between chairman and CEO pay and stock performance, shows a very high correlation. It looks at 17 of the largest gold companies (outside South Africa). Yamana stands at the very bottom of the group in terms of share ownership in both categories (second-to-bottom for chairman and bottom for CEO), while its share price performance, at negative 73% over the last five years covered in the report, is the worst of all companies. Yamana responded by stating that Marrone is "a significant investor in Yamana and continues to focus on the company's long-term success." One wonders how long is long? Six years, when the stock price was almost $19/share, or maybe the end of 2003, when the stock price was almost 50% above where it stands today.
At the other end, Franco rates #2 in terms of share ownership and #6 for stock returns. (We would point out that the date of the stock returns was November 15, and Franco has appreciated since then, while Yamana has continued its slide.)
We are holding Yamana for now, and will watch to see if Cerro Moro can help the company generate free cash flow to cut its debt. We bought the stock because we thought—erroneously—that gold was on the cusp of a strong market and that Yamana would have high leverage to gold. That leverage may still be there. So we give it a little more time.
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: None. 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: Almaden, Almadex, Azucar, Franco-Nevada, Yamana Gold and Vista Gold. I determined which companies would be included in this article based on my research and understanding of the sector.
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