SVH Tracker - January 17, 2017: Recommendation Strategy for Midas Gold Corp
Midas Gold Corp proved to be an excellent gold optionality recommendation in 2016, peaking at $1.22 on August 12 for a gain of 294% before settling back to close the year at $0.87 for an overall gain of 181% from the $0.31 price at which I rolled over the SVH 2015 Edition to the SVH 2016 Edition. On December 30, 2016 I rolled over Midas Gold to the SVH 2017 Edition as a Good Relative Spec Value Buy at $0.87. SVH Tracker Mar 22, 2016 is still current except that in December Midas got the green light from the US Forest Service to proceed with project permitting. Although after a triple from the start of 2016 Midas is no longer such a leveraged bet on a higher real gold price, a 33% move in the price of gold to $1,600 should translate into a $3-$6 stock price, which is partly why I am maintaining Midas Gold Corp as a 2017 SVH buy recommendation. The junior bit the financing bullet in January 2016 when it raised $55.2 million through a zero interest debenture convertible at $0.3541 per share of which 62.5% was taken down by John Paulson's hedge fund. Paulson made billions in 2008 by shorting the American real estate market through the purchase of credit default swaps. He next came to the conclusion that America's solution to the problem created by the Bush administration and its Wall Street cohorts would result in runaway inflation. He further jumped to the unwise conclusion that if inflation was going to drive up the price of gold, this would somehow make gold deposits that were worthless at the prevailing gold price very valuable (knock, knock, are there any suppliers of mining inputs home who are oblivious to inflation?). So he went on a buying spree of companies such as Novagold whose Donlin Creek deposit in Alaska needs a significantly higher real price to be worth developing, not exactly what the traditional gold narrative about quantitative easing was predicting. Nevertheless, that worked well until Goldman Sachs engineered the great gold smackdown in 2013 and wiped out the illusion of gold onwards and upwards forever.
With his Midas investment Paulson's timing and choice were much better; the Stibnite gold-antimony deposit needs a real gold price of only $1,600 to achieve the key development hurdles for a large CapEx project. Not everybody was happy with CEO Stephen Quin's decision to push fully diluted to 341 million; some shareholders wanted Midas to go into hibernation as an optionality gold play. Quin feared that if the environmental permitting cycle were interrupted now, it would take many years to restart what was still gong to be a minimum three year permitting cycle. When he defied the optionality pumpers they became dumpers below $0.40, leaving lots of money on the table for less cynical speculators to gather up. Midas was conspicuous by its absence in 2016 from the Vancouver Sprott-Global conference where in 2015 I had declared exhibitor Midas the best gold optionality exhibitor. Quin also understood that the antimony by-product credit could become of strategic importance to the United States, which might even shorten the permitting cycle in that event, though Donald Trump becoming president never figured even in his dreams. Trump, of course, would not be very sympathetic to a reclamation project funded by a gold mine, but once he uses tariffs to bully companies into setting up highly automated manufacturing facilities in the United States, companies which happen to need antimony for its flame retardant properties or old-fashioned lead-acid batteries, he would quickly see how good it would be for America to have a domestic supply of antimony. China currently supplies 76% of the world's antimony, much of it from a single mine, with another 7% coming from Russia. The Stibnite project, for which a PFS has been completed supporting a 20,000 tpd open pit mine with an autoclave to handle the refractory ore, would produce 4 million ounces gold and 100 million lbs antimony over a 12 year mine life. However, the antimony output potential is at least double that amount and will be "restored" when feasibility study related infill drilling is complete.
The Stibnite project also has a geological context whose limits have not been delineated; the gold resource ultimately mined will likely approach 10 million ounces, which makes the project in its current form attractive to a major gold producer such as Newmont or Barrick which could truck refractory concentrates to a roaster in Nevada. The stock suffered a sharp price drop in December right after announcing the US Forest Service green light to proceed with an Environmental Impact Assessment but jumped back smartly during the last days of 2016. The market was feeling pretty sorry for itself in December when the election of Wrecking Ball Trump caused gold to go down rather than up. The Midas price drop was likely due to a distressed seller or possibly tax loss selling from somebody who bought the stock above $1 before gold peaked in mid August. We are currently in a market where worthless gold deposits put into development hibernation and heavily promoted as optionality plays generate strong buying volume. But as we saw in 2016, these momentum oriented audiences can be very fickle when the wind changes. Admittedly, if we do get a gold bull that takes the price above $1,400 these hibernating garbage cans will end up absorbed by even bigger garbage cans assembled by poisonous dwarves (Giftzwerge) as we saw during the last bull cycle. Midas Gold Corp may not be worth developing below a price of $1,600, but the junior is working full thrust on completing the permitting cycle and delivering a feasibility study over the next couple years. That makes it a worthy optionality bet for speculators who prefer to sell out to a major gold producer rather than another Matryoshka Doll. Of course, if Trump translates into policy all the nonsense he spewed forth prior to his inauguration, owning any gold garbage can will prove very profitable; Midas is a gold optionality bet for the American majority that did not vote for Trump and earnestly hope that the reign of Putin's Chump is a non-event.