Last week, Strategic Metals Ltd. (TSXV: SMD) reached a binding letter of intent (LOI) to sell its 100% stakes in three silver-focused development properties located in the Yukon Territory to Honey Badger Silver Inc. (TSXV: TUF). In exchange, Strategic Metals, a Yukon-focused project generator, will receive about 23 million shares of Honey Badger, equivalent to a 19.9% stake in the company, plus a perpetual 2% net smelter royalty (NSR) on all minerals produced in the Plata, Groundhog and Hy properties other than silver. The 23 million common shares of Honey Badger are worth about $1.7 million.
The February 11 transaction highlights the value of Strategic Metals’ asset portfolio. The company’s chief assets are:
- Its 100% stake in the Mount Hinton gold/silver project in the Yukon Territory’s Keno Hill silver mining camp; the district hosts 35 individual mines.
- An investment portfolio of junior mining stocks with a current value of about $41.5 million, or $0.39 per Strategic Metals share.
- A portfolio of 120 projects, primarily in the Yukon Territory, that are available for option or joint venture. The Plata, Groundhog and Hy properties were part of this portfolio.
In a 2019 exploration program, Strategic Metals recovered a sample from rock debris at Mount Hinton that assayed at 2,340 grams of gold per tonne and 30,822 grams of silver per tonne, along with a separate rock fragment which graded at 33.3 grams of gold per tonne and 654 grams of silver of silver per tonne.
Assays from a 2020 exploration program yielded the following impressive results:
- 4.78 g/t gold over 12.14 m, including 42.7 g/t gold over 0.96 m;
- 3.86 g/t gold and 182 g/t silver over 9.75 m;
- 6.74 g/t gold and 186 g/t silver over 7.25 m, including 1.77 m grading 22.7 g/t gold and 5.14 g/t silver;
- 17.00 g/t gold over 1.56 m;
- 9.57 g/t gold over 1.47 m, including 0.52 m grading 25.8 g/t gold.
Strategic Metals’ four key equity investments are substantial stakes in Rockhaven Resources (the Klaza gold/silver deposit in the Yukon Territory); Precipitate Gold (the Pueblo Grande gold project in the Dominican Republic, near the large Pueblo Viejo mine which is owned by Barrick Gold and Newmont Corp.); GGL Resources (the Gold Point project in the well-known Walker Lane District in Nevada; and Terra CO2 Technologies (developer of a potential environmentally-friendly replacement for Portland cement).
A detailed breakdown of Strategic Metals’ principal equity investments, as well as its net cash position, in shown below. As of mid-February, its investment portfolio had a market value of around $41.5 million, equivalent to $0.39 per share.
|Investment Portfolio Valuation, Including Cash |
(in millions of Canadian dollars)
|Market Capitalization||SMD’s Stake||Value of Stake|
|Terra Co2 Technologies||$19.2||21.9%||$4.2 (A)|
|Silver Range Resources||$24.8||18.7%||$4.6|
|Honey Badger Silver||$8.7||19.9%||$1.7|
|Small Positions in About Twenty Other Companies||$1.0 (B)|
|Cash as of February 2021||$9.0|
|Less: Debt as of February 2021||$0.0|
|Value Per Strategic Metals Share||$0.39|
Strong Balance Sheet and Good Cost Controls
As of February 2021, Strategic Metals, a pre-revenue company, had approximately $9 million of cash and no debt according to its own presentation materials. On September 30, 2020 (the date of its last publicly-released financial statements), the company had $18 million of cash and negligible debt. Over the last five reported quarters, the company reported an average quarterly operating cash flow shortfall of around $0.7 million, which is quite reasonable in relation to its cash position.
|(in thousands of Canadian $, except for shares outstanding)||3Q 2020||2Q 2020||1Q 2020||4Q 2019||3Q 2019|
|Operating Cash Flow||($1,467)||($697)||($449)||($618)||($521)|
|Cash – Period End||$18,059||$9,760||$10,033||$10,044||$12,413|
|Debt – Period End||$606||$59||$67||$75||$83|
|Shares Outstanding (Millions)||106.7||96.6||96.6||96.6||96.6|
Since Strategic Metals’ investment portfolio comprises a large part of the company’s overall value, a significant decline in its three main public equity investments could cause Strategic Metals’ stock to correct. Also, if the prices of precious metals were to move lower, reflecting lower inflation expectations, that could also negatively affect Strategic Metals’ stock.
Strategic Metals’ February 11 transaction with Honey Badger Silver underscores the total value of the company’s investments. This fairly minor deal creates $1.7 million or more of value which investors generally did not know existed. Strategic Metals’ stock does appear to be trading at a noticeably lower value than the sum of its parts. Indeed, the investment portfolio’s value alone appears to be approximately equal to Strategic Metals’ stock market capitalization.
Strategic Metals Ltd. and Honey Badger Silver Inc. are trading at $0.39 and $0.105, respectively, on the TSX Venture Exchange.
Information for this briefing was found via Sedar and the companies mentioned. The author has no securities or affiliations related to this organization. Not a recommendation to buy or sell. Always do additional research and consult a professional before purchasing a security. The author holds no licenses.