Undervalued Miner Scoops up Bargain You Could Profit From
Dear Gold Speculator,
Two weeks ago, I received an email that caught my eye. It was a routine-looking note from Brazil Resources (TSX-V: BRI)(OTC: BRIZF) announcing a deal to acquire a gold-bearing asset in Colombia from another mining company named NovaCopper.
I know that Brazil Resources is good at making deals. The company's chairman, Amir Adnani, has a gift for spotting value. I've seen Amir at work in both the uranium and gold spaces. Still, I was surprised to learn that NovaCopper owned anything in Colombia, let alone a gold prospect.
I've followed NovaCopper for several years, and I've met NovaCopper management. My understanding is that NovaCopper is built around developing a massive copper deposit up near the Brooks Range of northern Alaska.
Yet if NovaCopper owns a gold project in Colombia, there must be a story. Meanwhile, if Brazil Resources is buying a Colombian gold project, there must be something intriguing going on. So I looked deeper into the deal. I found that Brazil Resources just made a heck of a deal!
This Week's Data Shot:
The Art of the Gold Deal
Before we get to the deal Brazil made, here's NovaCopper's background. In mid-2015, NovaCopper used shares ‹ meaning not cash ‹ to acquire a beaten-down company called Sunward Resources. Sunward owned a gold-copper exploration project in Colombia, called Titiribi, with quite a bit of drilling already accomplished. Here's the site on a map:
When NovaCopper bought Sunward in mid-2015, the latter company had about $23 million cash in the bank. But its market cap was a paltry $13 million due to the horrible market for mining shares at the time. A few years earlier, Sunward had a market cap near $300 million, which had plummeted by over 95%. That's how bad things were just over a year ago, during what I call the Mining Zombie Apocalypse.
By buying Sunward, NovaCopper picked up the Colombia mining claim plus a nice chunk of Sunward's cash. And NovaCopper made no bones about it ‹ all that Sunward cash would go toward development in Alaska, not Colombia. Titiribi was destined for obscurity, per NovaCopper.
But what about that Colombia play? Titiribi is right in the heart of a major gold-copper belt that runs up the spine of the "Wet Andes" region of Colombia. (It's called "Wet Andes" because it is in part of the rugged Andes that receives immense levels of rainfall.) Here's another map, showing major mining plays in the region:
Before getting bought by NovaCopper, Sunward drilled over 144,000 meters of core in Titiribi, mostly to a depth of 200-300 meters. That's a lot of drilling. There's quite a bit of excellent geologic engineering data firmly established at Titiribi.
I've been to Colombia, but not specifically to Titiribi. Still, we can apply our M.I.D.A.S. analysis system to this idea, based on known data and reasonable inferences from publicly available information.
Geologically, Titiribi is a large gold-copper porphyry with associated epithermal gold mineralization in nine zones ‹ nine zones identified to date. Indeed, when I looked at Sunward's scope of effort, I learned that, per the former owner, Titiribi has a measured and indicated resource of 285 million tonnes, grading 0.5 grams gold per tonne, for about 4.6 million ounces of gold. The "inferred" resource ranges up toward 6 million ounces of gold and 650 million pounds of copper.
Meanwhile, there's evidence that the surface features are part of a deep-seated mineralized system, which gives the deposit district-scale potential. For example, the hilltop and mountainside outcrops are the only drilling sites so far.
There's likely much more to discover at Titiribi with more drilling. But it'll require time and more money for basic exploration ‹ likely something along the lines of a joint venture between an ambitious asset owner and a larger company that can write large checks. (Similar to how Reservoir Minerals teamed with Freeport-McMoRan to develop the Timok project, in Serbia, now part of Nevsun [NSU
So now we return to that new deal, in which Brazil Resources just bought the Titiribi project from NovaCopper.
This morning's news release from Brazil Resources is entitled "Brazil Resources Completes Acquisition of Titiribi Gold-Copper Project from NovaCopper." Brazil Resources forked over 5 million common shares and 1 million share purchase warrants for under 5% dilution to existing Brazil Resources shareholders. Note the lack of cash here. Brazil Resources is accomplishing the asset buy with shares and preserving the company treasury. Smart move.
When you do the math, it means that for under $10 million of shares, Brazil Resources just picked up a gold-copper asset that a few years ago, in the Sunward days, was worth nearly $300 million. It's an astonishing bargain!
Looking ahead, I foresee Brazil Resources taking the former Sunward drilling and geological data and re-confirming it with a new set of "qualified persons." Then Brazil Resources will issue a new gold resource number,which will add nearly 5 million ounces of gold resource to Brazil's ledger books. This should happen soon ‹ within a few weeks ‹ because it's not all that difficult of a task. The hard part of drilling and assaying is completed. The market will notice this, I'm sure.
Plus, consider that Brazil Resources is way undervalued in terms of enterprise value per ounce of reported gold resource, as compared with pretty much any metric you care to consider. See the chart below:
By every metric, Brazil Resources is undervalued. Currently trading in the $1.68 per share range (on OTC markets), it is way beneath our buy limit of $2.50. Brazil Resources is thus a bargain and in the process of becoming even more of a bargain with the Titiribi resource on the books.
This all fits right in with our view of setting up asymmetric trades, with well-understood control on the downside and excellent leverage to the upside. Right now the market gives essentially no value at all to Brazil Resource's new Titiribi asset. Yet it's about to tilt the scale with nearly 5 million ounces of gold on the Brazil Resources side, with more to come. There's great potential for strong upside here.
**** NOTE: For Brazil Resources, as well as every other mining share in our Gold Speculator portfolio, I want to reiterate how important it is that you follow the strict buy-up-to prices and the position sizing recommendations we make. Jim and I don't want you to get hurt. We want you to protect and grow your wealth using safe and smart risk-management strategies. Don't bet your mortgage money, your child's tuition money or essential retirement funds on these plays. Only use money that you can afford to lose and that's set aside for these speculations. ****
This Week's Five Gold Nuggets
I. Executives Say Big Miners Are Boring
"Boring is the new excitement," said Rio Tinto CFO Chris Lynch earlier this month. Indeed, "We could be boring for a long time," added his boss, Jean-Sébastien Jacques. The point these top-level executives want to share with investors is that large mining companies are focused on capital discipline and internal efficiency. The mining industry still suffers from a painful, lingering hangover after its capital-destructive spending binge during the last business cycle. Between 2011-15, many miners across the globe nearly went broke due to low commodity prices. Click here
to see why now the message from top corporate offices to the field is to cut back on expenses across the board, lower capex and restore balance sheet integrity.
II. James Grant Loves Gold & Gold Miners
In a lengthy interview, longtime bond guru James Grant minces no words. "I'm very bullish on gold and I'm very bullish on gold mining shares," he states. "That's because I think that the world will lose faith in the Ph.D. standard in monetary management. Gold is by no means the best investment. Gold is money and money is sterile, as Aristotle would remind us. It does not pay dividends or earn income. So keep in mind that gold is not a conventional investment. That's why I don't want to suggest that it is the one and only thing that people should have their money in. But to me, gold is a very timely way to invest in monetary disorder." Click here
to read the whole interview. It's a fascinating perspective.
III. What if This Gold Rally Repeats the Past?
The people at Palisade Research seem to like sports. So using a sports analogy, they estimate that "we are not even halfway through the second inning" of the current gold rally. Below is what the gold bull market could look like if we use previous years as the template. Click here
to read more.
IV. Wealthy Asians Seek Safety in Precious Metals
Here's a rare peek behind the curtain of secrecy, to a place where the world's wealthiest people move heaven and earth to preserve their status.Click here
to see why the key trend for high net-worth individuals right now is to diversify into "tangible assets like precious metals, precious stones," according to a representative of one of the largest private vault service companies in Singapore. "This is mostly to preserve and protect their wealth. They're looking into places like Hong Kong and Singapore as places they deem to be safe."
V. Central Banks Reduce Gold Buys
Central banks appear to be throttling back on gold purchases. According to recent reports, central bankers reduced gold buys by about 40% through June 2016 compared with the same period a year earlier. Of course, central banks already hold almost 33,000 metric tons of bullion. Perhaps it was just sticker shock, as gold prices rallied in early 2016 for the largest first-half yearly gain in 40 years. Another factor is that weak exports across most of the world are affecting most economies and disrupting cash flows to governments everywhere. Click here
to see why many governments can't afford to stock up on gold in the current macroeconomic climate.
Byron W. King
Senior geologist, Rickards' Gold Speculator