The trouble with investing in small cap equities is that sometimes, it takes a while for others to catch on to an investment opportunity. While that can be tiresome when reviewing a portfolio, it can be extremely beneficial when the timing is right. Take Star Royalties (TSXV: STRR) for instance, whom just acquired a mining royalty for the Elk Gold Mine that is owned and operated by Gold Mountain Mining Corp (TSXV: GMTN).
It appears that by all accounts, Star Royalties has found a diamond in the rough, if you will. The company yesterday acquired a 2% net smelter return royalty on the property, which it purchased from Almadex Minerals (TSXV: DEX). The total purchase price was pegged at $10.6 million, consisting of a $10 million cash payment, as well as 1.7 million shares, and 0.8 million common share purchase warrants that are valid for two years at $0.70.
There’s a couple things to note here. First and foremost, the mine operated by Gold Mountain is not yet producing gold. Rather, the firm is gearing up to production, with waste rock currently being stripped and revenue production expected to begin in the fourth quarter of 2021. Once operational, the current preliminary economic assessment, completed earlier this year, estimates that the life of mine will be roughly 11 years, while operating with an all-in sustaining cost of just $554 per ounce.
Gold production is estimated at 19,000 ounces per year for the first three years, with an expansion driving production to 65,000 ounces per year in years four through to eleven. The company is also targeting another expansion to 100,000 ounces per annum, suggesting they believe there is a much longer mine life span available than the most recent PEA suggests.
Based on these current estimates, Star Royalties is estimating that it will receive approximately $2.0 million per year post year three in royalty revenues, based on current prevailing market prices. The figure paid for the royalty notably also ascribes a valuation to the mine itself of $231 million, which is the full valuation achieved for the mine on a net asset value basis during its most recent PEA.
Now here’s that opportunity tidbit we were going on about earlier. Star Royalties just paid $10.6 million for a royalty of just 2% on the Elk Gold Mine property. Yet, Gold Mountain as a whole, as of yesterday’s close, trades at a valuation of just $121.35 million – barely ten times what was paid for a small royalty on the property.
With production imminent, the firm is set to begin trading at just under half of the net present value of its flagship asset. In other terms, with targeted production of 19,000 ounces of gold in the first year, the firm is trading at 3.64x the estimated topline revenues for the first year of gold production, based on $1`,750 per ounce gold.
And that, sounds like it just may be an opportunity.
FULL DISCLOSURE: Gold Mountain Mining is a client of Canacom Group, the parent company of The Deep Dive. The author has been compensated to cover Gold Mountain Mining on The Deep Dive, with The Deep Dive having full editorial control. Not a recommendation to buy or sell. Always do additional research and consult a professional before purchasing a security.
As the founder of The Deep Dive, Jay is focused on all aspects of the firm. This includes operations, as well as acting as the primary writer for The Deep Dive’s stock analysis. In addition to The Deep Dive, Jay performs freelance writing for a number of firms and has been published on Stockhouse.com and CannaInvestor Magazine among others.