Value Microcaps Junior Miners

[checkmate28]

St. Andrew Goldfields (SAS.TO) I just added after reading this piece and reminding me all the good reasons to own SAS. I was hoping to get a lower share price before Taylor comes on line, but I don't think I'll get the chance. The author who wrote the below text wrote a 20 page document that can be found on the stockhouse link provided on the bottom. I've been long on SAS for a couple years due to the disconnect of the current share price and the current and future valuations I can see.

St. Andrew Goldfields (SAS.TO)

St. Andrew Goldfields is a Canadian junior gold miner with two producing underground mines, Holt and Holloway, and a third mine, Taylor, set to begin commercial production in 4Q15. All three mines are located in the Timmins district of Ontario, Canada.

[SEE FULL INVESTMENT THESIS FOR VALUATION DETAIL IMAGE]

Thesis

St. Andrew’s common stock represents a compelling risk/reward opportunity. SAS trades at a material discount to the sum of discounted future free cash flows at spot gold (US$1,120 currently) using onerously conservative assumptions. There are several upcoming catalysts, including the start of commercial production at the company’s third mine in 4Q15, which are likely to narrow the valuation gap. A low cost of production, a favorable U.S. dollar/Canadian dollar exchange rate, a substantial net cash position and material insider ownership, coupled with the wide discount to intrinsic valuation, provide a margin of safety.

SAS trades at a material discount to intrinsic valuation.
Incorporating only current proven and probable reserve ounces (a reserve burndown scenario), the net present value of future production at the Holt Mine alone is worth $0.32/share, 30% more than SAS’s current enterprise value. SAS has consistently been able to not only replace but grow Holt’s reserves.
Incorporating DCFs from SAS’s two other mines and including corporate overhead burden suggests a 79% upside to the current stock price.
Giving credit for SAS’s exploration assets (using a per resource ounce multiple)suggests an 111% upside.
Despite St. Andrew’s small size, SAS is one of the lower risk companies in the mining sector with a conservative, cash-rich balance sheet, a low cost of production which produces consistent free cash flow and many years of reserves at its flagship Holt Mine.
Based solely upon current reserves, the Holt Mine will produce for approximately the next eight years. Since acquiring Holt and ramping up production, SAS has actually increased the mine’s reserves despite recovering more 200K ounces over the last five years. Recent results have been strong, highlighted by 2014 where SAS replaced 270% of the tonnes mined at Holt during the year which increased reserves by 25% YoY. The company has significant additional opportunities to add to reserves. Resource ounces, exclusive of reserves, are 2.6x greater than reserve ounces.
[SEE FULL INVESTMENT THESIS FOR HOLT HISTORICAL RESERVES VS. PRODUCTION IMAGE]
SAS’s C$24.1MM net cash balance represents 21% of the company’s current market capitalization.
St. Andrew produced C$6.6MM of FCF in 1H15 even while funding the development of the Taylor Mine. Excluding Taylor CAPEX, SAS generated C$9.3MM of FCF in 1H15. Annualized, SAS is trading at less than 5x EV/FCF (or 4.4x LTM FCF).
St. Andrew produced more than 47K ounces of gold in 1H15 at an all-in sustaining cost (AISC) of US$951 per ounce. While there is rightly some controversy about the manipulation of this non-standardized metric throughout the industry, given SAS’s net cash position (no interest expense) and NOLs (no taxes), this metric is roughly equivalent to the company’s breakeven price. There are few Canadian or U.S.-based miners who can produce at such a low cost at the consolidated company level.
SAS’s $200MM+ of future tax deductions to offset future income taxes will ensure continued strong FCF conversion going forward.
All three of St. Andrew’s mines are located in Ontario. The mining-friendly province is consistently ranked by mining executives as one of the most attractive jurisdictions in the world. In addition, SAS has benefited greatly from the decline in the Canadian dollar in U.S. dollar terms which is now at 11-year lows. Revenues are in U.S. dollars while the majority of expenditures are made in the weaker Canadian dollar. The significant decline in the price of gold in recent years has had much less of an impact on the Canadian miners.
[SEE FULL INVESTMENT THESIS FOR HISTORICAL PRICES OF GOLD IN USD AND CAD TERMS]
Substantial insider ownership, ~41%, ensures shareholder-focused capital allocation decisions.
There are multiple catalysts to narrow the valuation discount even at current gold prices.
Commercial-production will be declared at SAS’s newest mine, Taylor, early in 4Q15.
Taylor will likely add 10K-12K ounces of production in the fourth quarter alone, bringing SAS’s total production from a 23.6K ounce quarterly average in 1H15 to ~34K ounces in 4Q15. Taylor’s reserves grade out ~50% higher than the ore SAS processed in 2014. With Taylor’s full year contribution, SAS’s total production is expected to reach ~125K ounces in 2016 vs. 91K ounces in 2014.
SAS will likely increase guidance when 3Q15 earnings are released.
Updated resource estimates released in 1Q16 will likely show a significant increase in reserves and resources at all three mines.
Research coverage initiations will bring more investors to the name.
This opportunity exists because even for a micro-cap, Canadian-listed commodity producer, the degree that SAS is underfollowed by the sell-side and investors in general is astounding. There are a number of Canadian brokers who have traditionally devoted a great deal of equity research resources to junior gold producers, especially those based in Canada. Up until a small firm called Mackie Research initiated on SAS in July 2015 (target price = C$0.60), St. Andrew had lacked any research coverage for many years. The reason is simple and likely driven by the investment banking side of the brokerage business: (1) SAS’s net cash position and FCF production has meant it is unlikely to raise capital, and (2) the company has chosen to reinvest capital internally, whether it is in Taylor or in its multiple exploration opportunities, in lieu of M&A. Ironically enough, the qualities which make SAS such a poor prospect for banking fees are partly what make the company an attractive investment. I believe the title of Mackie’s SAS initiation does a good job encapsulating the company’s current situation, “St. Andrew: A Stealth Producer in Plain Sight.”

Before I dig in, I would like to preface it with the following: I’m not a ‘gold bug.’ I don’t think that gold must inevitably rise to some US$5,000+ per ounce price because central banks have irreparably debased their currencies. I don’t believe that the price of gold has only fallen from its 2011 high because those same central banks are manipulating the commodity’s trading to hide rampant inflation and the fact that they have long since sold off all of their gold reserves to China and Russia. I kid here a bit, but I recognize that the typical mining article (precious metals in particular, gold even more so) relies upon some higher commodity price assumption and some absurd multiple of NPV or ounces in the ground to justify valuation (if valuation is even discussed).

In this situation, I think St. Andrew trades at a significant discount to even the most conservative estimates of future free cash flow. Even as a commodity producer, SAS has multiple qualities such as a low cost of production and a sizeable net cash position which make it a safe investment. I believe there are several upcoming catalysts which will narrow the discount to intrinsic value in the near future. In any event, I think that SAS is such an unknown name in an unloved industry and the discount to fair value is so wide, simply getting eyeballs on the name is enough to bridge much of the discount.


Read more at http://www.stockhouse.com/companies/bullboard/t.sas/st-andrew-goldfields-ltd#ReXUtqjlvr60ykUt.99