Here’s “the company I hate to write about.” It’s Virginia Mines and I don’t like writing about it because, frankly, I’d like the stock price to come down so I can buy more for my clients, and when I’ve finished buying for clients, perhaps, finally, I could buy some for myself. But no, I write about it, some of you buy it and the price goes up. While the typical junior gold stock has declined 50% or more over the past 18 months, Virginia is up, jumping another 50 cents in the last week. Will it ever come down?
Virginia Mines (VGQ, Toronto, 9.01— 9.08) is an exploration company active in Quebec. It broadly follows the prospect generator model, though now with multiple projects and a strong balance sheet, it is undertaking more of the exploration activities than in the past.
Virginia has a large portfolio of quality projects, mostly, but not exclusively in gold. Currently, it has 21 gold projects and another seven in other resources, including base metals, diamonds, and uranium. Exploration ranges from generative greenfields work to perhaps five projects in the advanced exploration phase.
Other People’s Money
Of these projects, eleven are in joint ventures, where other companies spend the exploration dollars; these are mostly with quality partners including Anglo, Iamgold and Goldcorp.
A new alliance has been formed with Altius Minerals, another of our favorite juniors. This will cover land in the Far North, on the north coast of Quebec and across Labrador. It’s early stage exploration with an initial budget of $600,000. But with two entrepreneurial and cash-rich companies, this will be quickly increased should there be a need. We expect nothing immediate out of this alliance, but there is long-term potential.
A Very Active Year
Of the total, 22 are active, and seven or eight have seen or will see drilling this year. That is an extremely active program for a junior exploration company. Of the current, active exploration projects, five are in joint venture, while the rest are 100% Virginia. There were mostly encouraging results from the winter program, and Virginia has upped its budget for the balance of the year, with an additional $8 million to be spent.
Virginia has approximately half a million ounces in resources on two projects, as well as base metals resources at Coulon. This project is not economic now, but it is moving towards viability. Virginia is drilling to expand the resources; new lenses have been discovered and the project is wide open. So with a combination of higher base metals prices, greater resources, and development of the area around the mine (reducing infrastructure costs), Coulon will, we are confident, one day become economic and an attractive acquisition for a mining company.
The Crown Jewel
In addition, Virginia holds a very attractive royalty on the Eleonore property that it sold to Goldcorp. Eleonore will be Goldcorp’s next flagship property, and development is on track for an end-2014 start up. (See Bulletin #498.) According to Goldcorp’s arguably conservative numbers, the deposit contains a resource of 9.4 million ounces, and is scheduled to produce 600,000 oz. a year for 15 years. But with the deposit open at depth, the potential for significant additions is real. Virginia itself is active exploring around this Eleonore property.
The company also holds other royalties, none close to production, but with meaningful value.
Two other assets are key. First, the balance sheet is one of the strongest of junior companies, with $44 million in cash (and no debt), and ongoing revenue from small payments on the Eleonore royalty in advance of production, and partner payments to manage projects.
The second essential asset is the company’s management, headed by President and CEO Andre Gaumond and Vice President of Exploration Paul Archer. Both are technically strong, well respected and liked. Importantly, they enjoy good relations with employees, analysts, First Nations and governments, all important in running a successful mining company.
So top management, solid balance sheet, a strong revenue producing asset, and a broad portfolio of exploration properties, many of them in joint venture; it all adds up to a great company.
All This & It’s Undervalued Too
It’s also inexpensive. Even after the recent run up in the price, the market cap of the entire company is under $300 million. The Eleonore royalty alone is worth more than that. One respected analyst using very conservative price assumptions (just $1,000 on gold, though envisioning higher production than currently scheduled), gives the royalty a net present value (based on the discounter value of the future cash flow) of $336 million.
Using a higher gold price – a hardly aggressive $1,400 for the life of mine – but using Goldcorp’s conservative production and resource numbers, I arrive at an NAV slightly lower but still in excess of the company’s market cap. Using a $1,600 price, the value of the royalty equates to $21 per share! The Eleonore royalty will generate strong cash flow (as much as $35 million a year after a few years), fully funding all activities with enough to spare for a dividend; or one of the major royalty companies will buy it.
I’ve banged the drum for years and I can only assume you already own Virginia. But it remains solid value, one of the highest-quality companies, arguably among all our stocks, the one with the least risk and certainly as good a potential as any exploration stock. It’s still good value here. The difficulty can be buying it. So far today, for example, it has traded just 2,500 shares and can jump around a bit. So the best approach is to place an order (or some orders) with limits; there is no need to chase it (it closed at C$9.28 yesterday for example). But you should own it and it’s only going to trend higher in coming months and years.
Adrian Day will present an educational workshop on the “Top Seven Low-Risk Stocks for the Year Ahead” Friday, Sept. 21, and give an expert view presentation on “The Resource Boom: Is It Over?” on Saturday, Sept. 22, during the Chicago Hard Assets Investment Conference.