Erik Wetterling, Founder and Editor of The Hedgeless Horseman website, joins me to discuss how the derisked junior gold stocks are presenting the most amazing valuation disconnects that we’ve ever seen. We start off talking about just how divorced many junior precious metals economic studies are with their “base case” metals price assumptions, from where the spot gold and silver prices actually are at present. This begs the question of a what a fair base case metals assumption is for PM projects, and if companies and analysts should be doing a better job of comparing these projects at values closer to spot pricing. We heard for so many prior years in lower metals price environments that we had to deal in the real and value companies based on current metals prices, but now that gold and silver prices are substantially higher, it seems those same people don’t want to value the projects based on where metals prices are in the here and now. The gold producers are going to demonstrating what the actual metals prices can do to their margins in the quarters to come.
In a sea of companies using far too conservative of metals price assumptions in the $1,400-$1,700 levels, we laid out a few companies I sat down with at the Beaver Creek PM Summit that actually did provide both reasonable base case metal price assumptions on their development projects at $1,800-$1,900 gold and $23-$25 silver, but then also provided metal sensitivity data for levels more in alignment with current metals prices at $2,500 gold and $30 silver; like Thesis Gold Inc (TSXV: TAU) (OTCQX: THSGF), Vista Gold Vista Gold Corp. (TSX: VGZ) (NYSE: VGZ), and Skeena Resources Limited (TSX:SKE)(NYSE:SKE). Some also provided data for the upside potential at $3,000 gold and $35-$36 silver. In these examples these projects are valued in the current market caps of the companies at a large discount to where the net present value of the projects come in between the $2.3-$4.4Billion ranges. This just demonstrates how backward-looking the current valuations are on many of these developers and the potential for a sector-wide rerating in many of these derisked projects with defined ounces in the ground and solid economic studies in place.
Wrapping up this lead the conversation in the topic of M&A and if merger or acquisition transactions for these companies at 30%-50% premiums was anywhere close to enough to get a proper valuation multiple on these projects. We may very well see future M&A transactions at much higher premiums if these companies and projects don’t start getting re-rated higher to close the value arbitrage.
* In full disclosure, Shad is also a shareholder of Thesis Gold and Skeena Resources at the time of this recording.
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