Thursday, September 27, 2012

Solitario Exploration - An Undervalued, Shareholder-Friendly Company

Finding undervalued junior gold exploration companies is no easy task - it takes countless hours of digging and research.

However, it is becoming easier for myself to spot great deals because Sandstorm Gold has been finding them for me!

Solitario (Quote: XPL) is one such example. I had never heard of them before they completed a $10 financing with Sandstorm Gold (for a 2.4 % NSR - more on that later). Here is the story on Solitario. In bold is the main points I'd like to make:

Current Market Cap - $58 million ($1.75 a share).

The company has a number of exciting projects, but for this discussion, we will focus solely on its Mt. Hamilton Gold Project. (Although the Bongara Zinc project is also very exciting).


The Mt. Hamilton gold project is located in Nevada, one of the most mining-friendly regions in the world. A new resource estimate gave the project a total of 751,000 Au Eq (Gold Equivalent Ounces, Measured and Indicated) and 154,000 Au Eq inferred, for a total of 905,000 ounces. The resource is growing and has almost doubled since 2010. You can bet that management is focused on expanding the resource even further.

The project carries robust economics, with estimated $575 operating cash costs per ounce, and just $72 million capital cost to bring the gold mine online (really not that much, IMO). The mine is projected to produce 48,000 gold ounces and 330,000 silver ounces per year. However, drilling is ongoing, and the resource is expected to be increased even more. They are aiming for first production in 2015. I am expecting the total resource to be north of 1+ million ounces, and potentially 70K+ average annual Au Eq production.

The estimated pre-tax cash flow of this project, at $1500 gold and $29 silver, is $35.6 million a year and $284 mill. for the life of mine, which makes it interesting because their current market cap is under $60 million. Based on more current prices of $1700 and $33, however, the pre-tax cash flows increases to $48 million a year and $389 million for life of mine. With $1700 gold, the project carries a NPV of $261 million! With gold price of $2,000 and silver of $40+, you can imagine how much more profitable the mine becomes. See the below chart:

Again, low initial capital costs of just $71.9 million is required. Sandstorm bought a NSR for $10 million - however, I expect they will convert this to a streaming deal later on. I see them cutting a deal with Solitario for an upfront payment of $30+ million, for the right to purchase 15 or so percent of life of mine gold production, at $450-500 an ounce. From their agreement: ( If (Solitario) enters into a gold stream agreement with Sandstorm that has an upfront deposit of no less than US$30 million, (Solitario) will have the option, for a period of 30 months, to repurchase up to 100% of the NSR for US$12 million.) The rest of the financing will come from either equity or, more likely, a credit facility with RMB. *Financing will not be a problem, in my opinion, and share dilution is unlikely, because...

Solitario management seems to be very shareholder friendly. Maybe it's because management owns nearly 12 percent of the company themselves. The current share count is only 34.5 million. This is unheard of for a junior mining company that has been around for 5+ years. Most companies have to resort to dilution, which can be painful. With $10 million cash on hand, Solitario is in an enviably position.

Insiders have also been buying - On June 28, the CEO of the company bought 180,000 shares.

Insiders are buying. Credit:
The Mt. Hamilton gold project is just one of four projects for Solitario, and I believe this project makes the company worth buying alone!


To sum it up, here's why I consider Solitario to be an exceptional buying opportunity:

*1) Gold Project in safe region with robust economics - low operating cash costs and minimal capital required to get in production.

*2) Major backing by Sandstorm Gold - Vote of confidence and third party validation - Sandstorm only cuts deals with companies that have solid management and upside potential. I don't see raising money as a problem -  based on their past actions, I really don't think shareholders should be concerned about dilution.

*3) Undervalued based on the numbers - Mt. Hamilton has a Net Present Value of $261 million based on $1700 gold - current market cap under $60 million.

*4) Shareholder-friendly management - no dilution, large insider ownership and recent insider buying gives me more confidence.

*5) Upside in price of gold - money printing from central banks around the world should lead to a higher gold price, thus increasing the value of Solitario's assets.

Full Disclosure: I am long SSL. I do not own any shares of XPL, but may initiate a position within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it and I have no business relationship with any company whose stock is mentioned in this article.

Please do you own due diligence when investing and good luck!

No comments:

Post a Comment