Almadex Minerals (TSXV:AMZ) Update – Matt Geiger

Matt Geiger August 7, 2016

Featured In: July 2015

Partnership Average Cost per Share: $0.16 CAD

Current Market Price (July 15, 2016): $0.43 CAD

Almadex Minerals was the Partnership’s featured investment in January 2016. At the time, the company’s market capitalization was equal to its working capital position – a ludicrous proposition considering management’s deep mineral exploration expertise and the company’s unique collection of precious metal assets (royalties + promising exploration properties). It was a classic Graham-Dodd value investment with very limited downside and ample upside potential.

While deep value investments generally take years to pan out, AMZ shares have had a stunning 180% gain year to date – helped in a large part by the nascent metals bull market that began in February 2016. But company-specific news also played a big role.

On the prospect generation front, the company reported moderately positive results over the first half of this year. In early February, the company issued a news release stating that the company had “commenced exploration activities on several of its projects and work programs are currently underway. The focus of work to date has been the Company’s El Cobre and Los Venados prospects in Mexico. Some regional exploration work has also been initiated.”

Roughly 4 months later, on June 1st, the company announced the results of three holes at El Cobre. One of the holes showed promise (Hole EC-16-008), but the market was unimpressed. Chairman Duane Poliquin, a prospect generation legend, made sure to point out in the news release that “these first results are from only one of the targets identified” – indicating that more drill results are imminent from elsewhere on the El Cobre property.

Beyond El Cobre, it seem nearly certain that we will see results from Los Venados in the coming months. The property is a textbook “area play”, located immediately adjacent to the operating La India and Mulatos gold mines (owned by Agnico Eagle and Alamos Gold, respectively). I am also hopeful that we will see drill results from the following two properties by the end of the year: Willow in Nevada, USA and Caldera in Puebla State, Mexico.

Almadex’s future as a prospect generator is undoubtedly bright, but thus far in 2016 the company’s royalty and equity holdings have provided the most excitement. There have been three major developments:

(1) the materialization of Gold Mountain Mining’s Elk Gold Project into a legitimate British Columbia development play (now supported by the likes of Marin Katusa, Doug Casey, and Rick Rule)

(2) the revitalization of the Ixtaca Project, on which Almadex owns a 2% NSR royalty

(3) the sale of El Encuentro to McEwen Mining for $250k CAD (Almadex retained a 2% NSR royalty on the property)

When I first wrote about Almadex six months ago, I only mentioned in passing AMZ’s exposure to Gold Mountain Mining and their Elk Gold Project. Almadex did at the time own 27m GUM shares and a 2% royalty on Elk Gold, but Gold Mountain had a sub $2m CAD market cap and scant working capital. Accordingly, I wrote this off as a near term value driver for Almadex shares.

Boy was I wrong – Gold Mountain shares have proceeded to rally from $0.025 to $0.33, a stunning 1200% YTD gain. Just as importantly, development at Elk Creek has been progressing and first production by 2020 is a distinct possibility. Production at Elk Creek would result in at least 7 years of royalty payments to Almadex.

The catalyst for this breathtaking move has been heavy buying from KCR LLC – a group compromised of mining investment legends Marin Katusa, Doug Casey, and Rick Rule. KCR now owns ~44% of outstanding Gold Mountain shares and the market is slowly beginning to take notice (as evidenced by the spike in GUM trading volume we’ve seen in July).

Just a few weeks ago, CEO Morgan Poliquin negotiated a deal directly with KCR and sold $2m CAD in Gold Mountain shares to the group. This is not an insignificant amount of money at all; Almadex is a lean company with an annual burn of $1.5m. So in essence this sale added a year to the company’s runway. Additionally, Almadex still owns 6.75m shares of Gold Mountain for a current market value of ~$2.2m. Almadex shareholders should continue to follow the Gold Mountain story with interest.

Almadex’s most significant royalty asset is not Elk Gold, but rather a 2% royalty that covers the Ixtaca Gold-Silver deposit in Puebla State Mexico. Morgan Poliquin knows the Ixtaca project very well, as he discovered it with his father Duane in 2008. After developing the project within a company named Almaden Minerals, in 2015 the father-son duo spun out all prospect generation activities into ALMADEX and kept Ixtaca within ALMADEN. (The companies are often confused, hence the all caps.) Almadex shareholders still have a lot to gain from success at Ixtaca due to the 2% NSR royalty.

Ixtaca is a relatively large development-stage asset. An updated PEA released in early 2016 envisions a $100m operation that is marginally economic at $1150 gold and $16 silver. However, as most of us know, both gold and silver are trading well above these prices (17% and 27%, respectively), and the market is catching on to the fact that Almaden may be able to get Ixtaca into production within 3 years. The company is currently working on a Pre-Feasibility Study that should be released by year-end.

A third notable transaction was the company’s sale of El Encuentro to McEwen Mining on May 2nd. The project is located just 10 kilometers from McEwen’s operating El Gallo gold-silver project in Sinaloa State, Mexico. Almadex received $250k USD and a 2% NSR royalty in exchange for ownership of the property.

In the news release, Duane Poliquin discussed the deal in further detail: “I have been involved with this project since the early 1990s and believe very strongly in its mineral potential. This sale to McEwen is beneficial to Almadex as it puts US$250,000 in the treasury immediately while preserving upside for shareholders through the creation of a new NSR royalty. Given McEwen’s presence in the area, they are best placed to develop these assets in the near term”.

It is possible that El Encuentro could be fast-tracked to production even more quickly than Ixtaca or Elk Gold, due to McEwen’s existing operations in the area. In fact, the deal included an uncommon term: “advance annual royalty payments in an amount up to US$100,000 per year commencing January 1, 2021, in the event that commercial production does not occur prior to that date.”  The fact that McEwen agreed to this non-standard stipulation demonstrates management’s belief that El Encuentro will begin supplying mill feed for El Gallo within the next few years. This of course would result in cash flow to Almadex from the 2% royalty.

Almadex shares are not nearly as cheap as when I last wrote about the company (current net enterprise value of ~$8m CAD versus $0 just six months ago). That said, this is still a classic value investment – the company’s prospect generation business alone is worth at least $25m in my estimation. The three holding assets discussed above only provide additional upside beyond the company’s core business.

To conclude, I’ve provided below the relevant milestones I’m expecting over the next 18 months:

Additional drill results at El Cobre by end Q3 2016

Almaden Minerals announces Pre-Feasiblity Study at Ixtaca by end Q3 2016

First drill results at Los Venados by end 2016

First drill results at Willow by end 2016

First drill results at Caldera by end 2016

Almaden Minerals announces Feasibility Study at Ixtaca by end Q2 2017

Almaden Minerals commences construction at Ixtaca by end 2017

Gold Mountain commences construction at Elk Gold by end 2017

Disclosure: MJG Capital is LONG Almadex – Link to original write-up

Matt Geiger has a diverse set of skills pertaining to early stage ventures – both in the world of natural resources and tech. He is currently General Partner of MJG Capital – a resource-focused investment partnership with 20+ LPs. He is also Cofounder/President of a venture-backed technology business with $10m in cumulative funding. Known for his exhaustive security analysis and intuitive grasp of contrarian investing, Matt is a rising star in the junior resource field.

Palisade Global Investments Disclaimer:

The views and opinions expressed in this article are those of the authors, and do not represent the views of Palisade Global Investments Ltd. Readers should not consider statements made by the author as formal recommendations and should consult their financial advisor before making any investment decisions.

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