(Editor's Note: This article discusses a micro-cap stock. Please be aware of the risks associated with these stocks.)
Executive Summary
The bloodbath in the gold markets has wiped out hundreds of billions from the market capitalization of gold miners and exploration companies. While the large miners have been hit hard, it is the juniors and exploration companies that have really suffered the most and many are trading at pennies on the dollar compared to their former valuations. It is these types of environments that offer savvy investors the best opportunities because panic selling and forced fund liquidation has affected both the good and the bad companies.
But investors have to be careful when looking for those opportunities because many exploration companies will not be able to survive, so there has to be more of a case to buy them than just a nice sized gold deposit.
Additionally, the share prices of majors have improved over the last few weeks with the rising gold price, but explorers, who have been beaten down much more than the majors, have not recovered to the same degree as their larger counterparts. This provides an opportunity for larger miners to acquire exploration companies for a discount while taking advantage of the recent rise in share prices.
Cayden Resources (CDKNF.PK) offers investors an interesting opportunity to buy in on a very early-stage explorer with experienced management and strategic properties. Its Morelos Sur gold project is located adjacent to the second largest gold producing mine in Mexico, Goldcorp's (GG) Los Filos mine in the Guerrero state of Mexico. Goldcorp has already bought a portion of their Morelos property in the last year, so if Cayden can show quality drill results for the rest of their Morelos Sur property, it would be a terrific candidate for a GG buyout - but at a price much higher than its current valuation.
Overview of the Company
In this article we will examine Cayden Resources, a very early-stage mineral exploration company focusing on the discovery and development of two gold projects in Mexico; the Morelos Sur and El-Barqueno projects in south and central Mexico. For this particular article we will focus on the Morelos Sur property.
We will lay both the bullish and bearish cases for investing in the company, to offer investors a fair evaluation of the company, its prospects, and potential challenges.
(click to enlarge)
Morelos Sur Project
We believe this is the most interesting of the company's projects, and at this point, it offers the largest portion of value present in CDKNF.
(click to enlarge)
As investors can see from the map above, Morelos Sur is very strategically located between Goldcorp's Los Filos mine and the Torex Gold property (TORXF.PK). In fact in February of 2013, CDKNF sold the former Morelos East property (shown in yellow) to Goldcorp for $15.7 million plus a sliding scale royalty - which is quite significant for a company carrying a $40 million market capitalization. Additionally, the Las Calles section of CDKNF's property has not been sold yet and has shown some good drilling results, so it has the potential to be sold to generate additional non-dilutive capital for the company.
But the real value here lies in the La Magnetita portion of the property. As Brian Lundin, of Jefferson Financial, has noted:
"Then you have the La Magnetita target. The key to that is that every mine and discovery in the Guerrero Gold Belt has been identified through geophysical means. Importantly, La Magnetita is the largest geophysical anomaly in the belt. To date Cayden has gotten some outstanding sampling and trenching results, and is now drilling, so I'm very excited about that potential."
As investors can see in the map below, the significant deposits in the Guerrero gold belt owned by other miners have shown magnetic anomalies. This makes the La Magnetita district very promising, though it does not guarantee that there will be economically viable gold.
Bullish Factor #1: La Magnetita's Strategic Location and Buyout Potential
As we have shown above, La Magnetita offers the company a very interesting opportunity to show significant mineralization that would add quite a bit of value to the company. Additionally, the location of the project is in an outstanding area that borders the largest miner in Mexico (Goldcorp) which operates a mine a few kilometers to the east. To the north, is Torex Gold's Media Luna and El Limon deposits, which adds to the strategic position.
Both Goldcorp and Torex Gold have the cash to buyout Cayden Resources if La Magnetita drill results are positive, and if they come back with very good results then there may be quite a rush to acquire the company or property.
Bullish Factor #2: Management has Significant Ownership
With explorers, investors should always look at management's experience and how much of the company they own. If management does not own much of an explorer, this should be a very significant red flag since they know the most about the prospects of the property.
(click to enlarge)
As investors can see, top management owns nearly 20% of the company, with the most significant ownership by the Chairman and the CEO. That is a significant portion of the company and shows that management is eating their cooking. Additionally, over the last six months, management has continued to buy shares of the company - which is very bullish.
Bullish Factor #3: Top Management has Quality Experience
Top Management of Shawn Wallace, Daniel McCoy, and Ivan Bebek all come from Keegan Resources (now known as Asanko Gold (AKG)), where they held positions ranging from founder to CEO of Keegan. Additionally, Mr. McCoy led the exploration team that discovered and delineated the Esaase Gold deposit in Ghana, West Africa.
The fact that many previous managers come from the same company is a positive. Much like with sports teams, continuity and working together lead to synergies and strong relationships that can add value greater than the individual parts. Additionally, AKG is in the process of developing the Esaase gold deposit, so that means that their previous company has been successful.
The major negative to management's previous experience at AKG, is that their major project was based in Africa, and thus the Mexican government and political climate may be much different. We would not put too much weight into this because good managers rely on people with experience in their particular environment, but it is something to keep in mind.
Bullish Factor #4: The Company has Ample Liquidity
As of May 7th, Cayden Resources has around $7 million in cash and cash equivalents and is expected to receive another $7.8 million from Goldcorp as the final payment on their Morelos East sale. Over the last fifteen months (they recently changed their accounting year) the company spent close to $7 million, so $15 million in near-term receivables should be sufficient for all near-term financial needs. Additionally, if the company can sell its Las Calles region, it can raise additional funds in a non-dilutive manner.
This is not an explorer that will have to sell assets off because they are desperate for capital
Bullish Factor #5: The Company is at An Attractive Buyout Valuation
We believe that there will be many more small explorers that will be bought out over the next twelve months, especially if gold can continue its rise. The reason is that shares have been battered and majors who have been cutting capital expenditures will still need to increase resources, so explorers offer a very attractive way to increase potential resources at a discount.
Cayden Resources has a current share price of $1.02 per share and a current market capitalization of $42 million dollars (as of 7/24/13). After subtracting its current cash and near-term receivables of $15 million dollars, the company is only valued at $27 million dollars.
Keep in mind that it was only last February that Goldcorp paid $15 million dollars for a portion of Cayden's property. With a $40 million dollar bid, which would offer Cayden shareholders a 50% premium after deducting CDKNF's cash position, Goldcorp could acquire the rest of the Morelos Sur property, the El-Barqueno property, and the future royalties owed to Cayden.
If Cayden can show further gold potential on the La Magnetita portion of the Morelos Sur property, then the valuation will go up significantly. This may be a situation where Goldcorp management may want to weigh the risk and rewards of a buyout as opposed to waiting for drill results - which would significantly increase the price GG would have to pay.
Though there is no certainty of any future bids for Cayden, we believe that there are plenty of positive factors that would preclude a buyout.
The Bearish Arguments
With any company there are always bearish arguments, without that there would be no reason for the undervaluation. We do not like to present a bullish case without at least highlighting the bearish arguments to the case - after all if an investor does not know what the negative cases are concerning the investment, then he really doesn't know what he is investing in.
The following are the primary bearish arguments against CDKNF
1) There are No Economically Demonstrated Reserves - Cayden Resources is an early-stage explorer and there is no guarantee that either property will prove to be economically viable. A bad drilling report could significantly impact the valuation of the company and turn this company with high potential into no more than "Moose Pasture" (or "Coyote Pasture" in this case).
2) Funding Will Be an Issue - Even though Cayden Resources has enough liquidity for the immediate future, they will need to raise much more money to continue drilling and there is a high likelihood that it will be dilutive for current shareholders. The company must be able to demonstrate promise in its current properties to raise additional capital and so there is a constant need to continue to issue positive news to increase the share price and make issuing shares feasible.
3) Share Price has Been Very Robust - This is a positive in the sense that investors have not been selling shares of the Cayden Resources, it is also a negative because it means that new investors are not getting shares at 52-week lows. In fact, the stock has actually increased more than 25% from its May lows, so a pullback would not be surprising.
Conclusion for Investors
We believe Cayden Resources offers investors a terrific opportunity to buy a company that has a very strategic property, experienced management with a good level of insider ownership, in a region that has significant mining properties. Additionally, this company has a high potential to be a buyout candidate at its current valuation, and there is a significant potential acquirer on an adjacent property (that also happens to be the second largest gold mine in Mexico).
Since this is a small capitalization company, investors should be very careful and not allocate too large a position because there is significant risk in these types of companies. But we believe Cayden Resources offers investors a very good risk-to-reward opportunity, and if drill results on La Magnetita turn out good, then this would offer investors significant upside and we believe it could easily trade at a $75 to $100 million market capitalization if results are positive - which would be 100% higher than the current share price.
News 
Market Data 
Discover 
