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).

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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:

Credit: SolitarioXR.com

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: CanadianInsider.com

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

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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!

Magellan Minerals Presents Rare Buying Opportunity

Gold stocks have moved up significantly during the latest run-up in the price of gold, as physical gold shot up from $1550 to over $1750 an ounce. The stocks led the way higher, with the HUI Gold Bugs index eclipsing 500 after hitting lows around 350 just months ago.

As gold approaches $2,000 an ounce an ultimately $5,000 an ounce in the coming years, the gold stocks will led the charge, outperforming. As I've stated before, I believe the junior gold stocks and exploration companies will outperform the major mining companies. Juniors are smaller in size, but hold explosive, 1,000 percent gain potential. And, of course, more risk.

Now, many gold and silver mining stocks have made big moves this past month as the Federal Reserve announced monthly, unlimited Quantitative Easing. But not all gold stocks have made big moves and it is a challenge to find one that hasn't.
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*Magellan Minerals is one micro-cap gold stock I've written about before. They own two very promising gold projects in Brazil.

They are a Canadian-based junior gold exploration company "focused on mineral exploration and development in the state of Para in northern Brazil. The Company has interests in a number of properties in the Tapajos region which has a historic gold production estimated at 20-30Moz of gold. The Company has two advanced gold projects, Cuiu Cuiu and Coringa."

Magellan has been a big underperformer as the stock has gone from .35 cents a month ago to just .22 cents today. And in 2011, the stock was over $1.50. The brutal correction in the gold mining stocks was not kind to Magellan.

However, I see the tides changing very soon for this company.

Credit: www.MagellanMinerals.com

**Here are three big reasons why I consider Magellan Minerals an outstanding buying opportunity at current prices: 

1) Financing with Sandstorm Gold  - on May 15 for $7.5 million. This gives them an ample supply of cash (Probably still much of it left over to date). The latest presentation says they have $5 million cash on hand, however, this does not include the $7.5 million financing. So I believe they likely have over $10 million cash on hand currently. *This financing is a third party validation from Sandstorm Gold. Sandstorm does not do deals with companies they don't believe in.

This shows me that: A) Sandstorm believes in Magellan management. As Sandstorm has stated a number of times, this is very important in their process of finding gold streams, and,B) They believe in the upside potential of Magellan's properties.

2) Insiders have been buying - They first started back in May around the time of the financing. More recently, insiders bought over 200K shares on Sept. 21. There are a number of reasons for selling, however, there is one reason for insider buying - they think the share price will rise.

Insider Buys at Magellan. Credit: CanadianInsider.com

3) Positive news flow to come - while they have been quiet of late, I expect news going forward, and very shortly. Coming at the end of this month or early next month will be the updated PEA on the Coringa deposit (1.1 million ounces).

*The previous NPV of  Coringa was just $41 million but was only based on a resource of 370K ounces! The new PEA will be based on 1.1 million ounces!

Plus, the previous PEA was based on $950 gold. At $1,200 gold, the original PEA gave the project a NPV of $80 million. ***With a 1.1 million resource and a price of gold at $1,700, one can expect the new NPV of Coringa to be well above $100 million.

(Have I mentioned that the current market cap of Magellan is around $20 million!)

In conclusion, I strongly feel that the market has not placed a fair value on shares of this company.

Best of luck investing!

FULL DISCLOSURE: I am long V.MNM and SSL. 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!

Is Charlie Munger a Moron?

"Civilized people don't buy gold....I think gold is a great thing to sew onto your garments if you're a Jewish family in Vienna in 1939, but civilized people don't buy gold, they invest in productive businesses."

I just posted a comment to an article at the Motley Fool titled "A Civilized Rebuttal to Charlie Munger" by Christopher Barker. I strongly urge you to read this article and to follow Mr. Barker at the Fool. He has done a great service to the blog community over there and, in my opinion, is one of the best gold analysts out there today.

Here is my remark:

"Civilized people don't buy gold" - So basically China and India is full of uncivilized people. 

"I think gold is a great thing to sew onto your garments if you're a Jewish family in Vienna in 1939..."

Both of these comments are pretty offensive to a lot of people.

Gold is money.... Gold's value is in its rarity and in the effort it takes to get it out of the ground. It takes a lot of manpower, time and money to do this. It's not easy. And to do it profitably is even harder. Just watch that stupid Alaska show on the Discovery channel, although they are clearly gold mining amateurs, it's funny to watch. 

I have a simple question for people to ask: If you had the choice to hold your savings in the US Dollar or in gold coins, which would you choose? It's a simple question. 

I just think this is all common sense and would think people as "smart" as these two would understand the multiple reasons for owning gold. but JRS is probably right on the mark with the "Rothschilds agents" remark."

The fundamental reasons for owning gold are stronger than they have ever been. Gold is money, and will always be. You can't print REAL money. Gold will continue to rise in price (AND IN VALUE which is more important to understand) as long as the currencies continue to fall in value (which they will). It is crucial to understand this. Good luck to all.
Steve