1. Very low interest rates - negative real rates
2. High asset prices based on yields
3. End of US stimulus; addition of Japanese stimulus
4. Iran and North Korea as potential issues
So my trading action today inolved, based on the following charts selling MOY.ASX because its a gold producer which has rallied from 1.5c to 2c. Now, in fairness, it still has upside, but in the medium term its earnings are going to be curtailed by the terms of its JV agreement with North West Resources (NWR.ASX), where it will be splitting the revenues. This will diminish earnings. The chart suggests a pull-back to 1.7-1.8c, so I'll expect that.
In the meantime, another one of my favourite stocks, Gryphon Minerals (GRY.ASX) has pulled back considerably in recent times. This stock has significant appeal because it will be a low-cost gold producer. It has 3Moz and a lot of upside. It will of course benefit from low interest rates, and a subdued market to commission a plant, and it is destined to report a revised resource in the next quarter, along with a decision-to-proceed with a mine. The more Iran and North Korea beat their chest, the more one is inclined to expect some imminent action. These countries will not be allowed to develop nuclear weapons. The implications are clear for global monetary policy. The company has $62.8 million in cash, so given the need for 1/3rd equity, it has essentially enough funding to finance the $200mil capex for the plant. It is envisaged to produce 150,000 oz per annum for 5 years, at an average grade of 2.38g/t.
The financial analysis of the company suggests a net present value of $321 million for a rather conservative $1500/oz gold price. Even if you accept the $121million NPV based on a gold price of $1300/oz, you'd have to concede that this is a good investment given:
1. The conservative case gives you upside in terms of economies of scale, i.e. plant expansion and more gold discoveries in the 1200km2 license area.
2. The positive exposure to gold at a time when there is an imminent risk of military action and Quantitative Easings (QE).
3. The company has $62million in cash, a resource base of 4Moz (worth $2.8 million in undiscounted cashflow). The company is capitalised at just $84million, giving the project only a nominal value of $20mil.
The added upside is the prospect of a merger with a similar sized Canadian or Australian producer with the intent of raising the profile and liquidity of the stock to fund managers, as well as diversifying sovereign risk, only adds to the appeal. The prospect of only minimal capital dilution in future as well as the resource upside and exploration appeal is truly good value. The company also has other projects it could divest in future to raise further cash. More likely is the prospect of using mine cashflow to expand these projects. I like this company a lot, so I just bought more of them at 20.5c.
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