Nice SA write up
Red Eagle Mining
Red Eagle Mining is a Colombian junior miner currently developing its 100%-owned Santa Rose Gold Project. To say the company has fast-tracked its junior-producer life cycle would be a massive understatement. The company is currently on track to see only a five year gap between its first discovery hole on the property to its first gold pour, a very rare occurrence for any gold company. Red Eagle is expecting initial production Q4 of this year, with construction currently over 70% complete. This is the first South American gold company I have covered and is a very rare occurrence for me. I normally stick to North American gold juniors, but believe Red Eagle is a special situation where it's worth leaving my usual top mining jurisdiction comfort zone.
Red Eagle's high-grade Santa Rosa deposit is situated in between Continental Gold's (OTCQX:CGOOF) Buritica deposit and B2Gold's (NYSEMKT:BTG) shared Gramalote deposit. The deposit currently hosts proven and probable reserves of 405,000 ounces at 5.20 grams per tonne gold. In addition, the deposit holds a resource of over 610,000 ounces at an average grade of 3.3 grams per tonne gold. The feasibility study completed on the project in 2014 showed the potential for an eight-year mine life with an annual production rate of 70,000 ounces a year. The all-in sustaining cash costs for the mine were anticipated at $758/oz with an average head grade of over 6.5 grams per tonne gold. The feasibility study provides a payback period on the initial capex of a measly 1.5 years using a gold price of $1,300/oz. Since the feasibility study, all-in sustaining cash costs have been estimated to be below $700/oz, well below the average of $782/oz for gold juniors acquired this year in acquisitions.
In addition to having more robust economics than most of the acquired juniors thus far in 2016, Red Eagle is significantly undervalued compared to its peers. While Red Eagle is the smallest scale producer of the five companies shown above, this does not justify such a massive discount. The company's current enterprise value based on 233 million shares outstanding is $190 million. As shown by the table below, the company trades at less than a 3x multiple for 2017 price to cash flow, less than half of its closest peer. Of its peer group that it does compare, Red Eagle is arguably is in as unfavourable of a jurisdiction as Australia or Burkina Faso, neither of which is much more geopolitically stable than Colombia.
Red Eagle will be a 70,000 ounce high-grade producer as of late 2016 and should pump out significant cash flow to aid in exploration activities to test multiple other targets across its Colombian land package. The current resource is located within the first 200 meters from the surface, and the shear zone remains open down dip and to the east. With a relatively unexplored property and several other magnetic anomalies left to drill, it is very possible for Red Eagle to prove up another 1 million ounces on its land package over the next two years. Red Eagle's operational excellence moving from explorer to producer in less than a five-year span cannot be ignored, and there continues to be huge potential for the company going forward.
Red Eagle & Atlantic Gold Compared to 2016 Acquisitions
I have compiled the below table to aid in comparing current gold juniors to those acquired thus far in 2016. Instead of looking at all acquisitions over the past five years, I believe it makes much more sense to look at recent acquisitions as they are much more indicative of what future M&A deals should look like. Given that gold is trading at the lower end of its five-year range, I find it more relevant to look at gold companies being acquired at current levels, than those acquired with gold near record highs. Below is a table showing all of the acquisitions of the past six months in addition to the two gold companies profiled in this article:
Looking at the table, we can see that Atlantic Gold Corporation is being valued at roughly $61/oz based on its 2.2 million ounces of gold across its four deposits. This figure is almost half the average valuation of Canadian acquisitions this year. While Atlantic Gold's average grade of 1.5 grams per tonne gold is less than half of the average grade of other Canadian takeovers in 2016, the company is closer to production than any of the other companies taken over in 2016, with the exception of Lake Shore Gold (NYSEMKT:LSG). I believe the company's discount is not justified at all at current prices and expect to see the company receive a re-rating with a market capitalization of closer to $300 million once it begins production. This would represent nearly a double in share price over the next year with production slated for late 2017.
Looking at Red Eagle Mining at first glance, it may seem that the company is overvalued compared to its peers. The average international valuation per ounce is $68.63 at time of takeover, and Red Eagle is currently valued at $155.73 per ounce of gold. I believe Red Eagle's higher priced valuation per ounce is more than justified when compared to Amara Mining (OTCPK:CLUGF) and Goldrock Mines (OTC:MFMNF). For starters, Red Eagle's grades are 300% higher than the majority of its international comparisons. In addition to this, Red Eagle's all-in sustaining cash costs are almost 20% lower than its international comparisons to past acquisitions. This shows that Red Eagle is a higher-grade and higher-margin gold producer and should not be placed in the same category as Goldrock Mines, Amara Mining and True Gold Mining (OTCQX:RVREF). I expect Red Eagle to also receive a re-rating upon the beginning of its commercial production to a $300 million market capitalization, a 30% jump in current share price by the end of this year.
Risks Associated With My Thesis
Both Atlantic Gold Corporation and Red Eagle Mining are micro cap gold juniors with market capitalizations sitting around the $200 million level. There are always risks in investing in smaller junior gold companies as future financing potential and declines in the gold price can be very detrimental to the company's wellbeing. Fortunately, for these two companies unlike most other micro-caps juniors, they are both well financed with over $35 million in their treasury. These substantial cash positions allow them some wiggle room while moving into the construction phase of their life cycle in case there should be any hiccups during the process.
In terms of risk with the price of gold, both companies have industry-leading all-in sustaining cash costs. Even with a dip to the $1,000/oz level, both companies would still be seeing $300/oz margins on their gold sales as their all-in sustaining cash costs come in at the sub-$700 level. Atlantic Gold has gone a step further and hedged over 1/3 of its eight-year mine life (215,000 ounces) at an average gold price of $1,500/oz. This means that despite where the price of gold goes over the next three years, Atlantic Gold will have 215,000 ounces of gold sales secured at the $1,500/oz level. Red Eagle Mining has not done any hedging and thus is exposed to the gold price on both advances and declines. Having said that, its all-in sustaining cash cost is at a very reasonable level and it is currently working with nearly 50% margins. Should these margins erode in the future, the company still has lots of leeway in terms of staying profitable as a producer. Red Eagle Mining would be in serious trouble and likely have to shut down operations if the gold price moves to the $600/oz level, but the same can be said for 99% of gold producers in the world, and I don't see the price of gold even touching the $1,100/oz level in the next two years.
The one worry for me about Red Eagle Mining is its deposit size. While it does have a very high-grade resource of over 1.2 million ounces, it would be nice to have some confirmation of gold mineralization at its soon-to-be-drill-tested targets. There is always the possibility that these targets will not show any favorable gold bearing mineralization and the company will be unable to prove up a larger resource. Having said this, the company is still moving forward to produce for eight years at a run rate of over 70,000 ounces a year. This will provide substantial free cash flow to the tune of well over $50 million after tax over the mine life. The main risk involved with Red Eagle Mining is its ability to prove up a larger resource so it can extend beyond the current eight-year mine life. While I am confident that it will be able to find at least one magnetic anomaly (of the three on its property) that shows favorable mineralization, if the drill targets all come up empty, this could affect the share price moving forward. Red Eagle Mining will still continue as a junior gold producer, but this would significantly cap its future as a gold producer after the year 2024.
Technical Outlook and Summary
Looking at the technical side of things, both companies are sporting very impressive charts. Red Eagle Mining has currently broken out to new 52-week highs and is consolidating above its recent resistance level. We can expect to see the stock base at this level before continuing to trend higher, and it can be noted that it is doing this while most other gold companies have fallen 10% from their highs.
Atlantic Gold has spent most of the year going sideways, but has recently broken out to the upside over the past two weeks at $0.73 CAD. I purchased the stock at this point and currently have a stop on my position below $0.55 CAD on a closing basis. We can expect to see Atlantic Gold find support at the $0.70 cent level where it broke out of after three months finding resistance at this level. If the $0.70 level does not hold, the uptrend line made from connecting the lows thus far this year comes in at the $0.69 level and should also act as strong support going forward.
Looking at the below GDXJ chart, Atlantic Gold and Red Eagle are charted beside it with line charts. Atlantic Gold is represented by a pink line and Red Eagle by an electric blue line. As you can see, while GDXJ has pulled back the past two weeks, these two companies have done the opposite and made new highs. This is extremely bullish and shows their resilience in a time when the price of gold has come under some pressure.
I believe both of the companies highlighted in these articles to be takeover targets due to the depressed valuations they are currently trading at. While many people will criticize me for buying these stocks while they are up over 100% this year, I have used this same strategy to buy several stocks already this year, and my current portfolio is up 24% year to date using this same strategy. I employ a Turtle Trading strategy in my portfolio, which enters new long positions on new 55-day highs, and exits them when their uptrends are invalidated. I have included a snapshot of my current accounts below to show my money is where my mouth is as I am currently holding significant gains in several miners and not taking profits. I believe profit targets are profit limiting and only sell my positions when the trend is broken.
While Red Eagle Mining and Atlantic Gold may not have the most glamorous massive deposits that some juniors that I have highlighted this year share, they are significantly undervalued compared to their peers. I believe the current entries provide a depressed valuation into companies which are moving into production and can expect a re-rating over the next 12 months. I do not believe either company's deposits are impressive enough for gold majors to want to take them over solely for their assets. Having said that, at the valuations they are currently trading at, these companies are a steal to any suitors. I would not be surprised to see them taken over on a purely valuation basis if they do not see a re-rating in the near future.
Disclosure: I am/we are long SPVEF.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
Additional disclosure: I have included the Canadian charts for these stocks in the article as I believe they are much better for trading given the increased volume and cleaner charts which give a better idea of support and resistance levels. If you liked this article and found it useful, please feel free to follow me by clicking on my name next to my avatar at the top of this article. I also invite you to check my performance at TipRanks.com where my average return this year is 60% on new long positions.
