A recently published article referenced Rick Rule’sguidelines for investing in gold juniors and explorers.Rick Rule may be the world’s most successful investor in gold explorers and gold junior miners who is living today so his thoughts are more than relevant for investors in De Grey.Using the Rick Rule hurdles for an investment to pass muster it must first have 5 million ounces of gold in situ (that is not necessarily recoverable gold in situ but it does promise a high probability of 3 million ounces of recoverable gold and maybe much more).Second, he wants to see the stock trading towards the lower bound of its price range before he invests into the company. Clearly, this is not anywhere near its pre-discovery price but the trading range since the pre-DFS statement was released might be more appropriate.Third, he wants to see a management that makes him confident that they will deliver the project on time and on budget.Now, let’s look at DEG.First, it easily exceeds his first hurdle with an in situ of 9 million ounces reported (and lots of open ore bodies to drill out putting in plenty of room for the extension of the life of the mine.Second, the share price is not at the top of its trading range but towards the lower half.There is a period of correction coming for asset prices and gold will go down and with it the price of the gold miners will also go down.But this is where the big traders are looking to accumulate and some of them looking to do it in size because they anticipate that a sizable move up in the share price of mining companies listed in the GDXJ is coming.Third, we need to see a strong transition in the management from explorer to project manager.I think that we can see that from the recruitment of executives with a wealth of project management experience. This is not the time to explore for further ore bodies as a major activity – although some work should continue such as exploratory holes on as yet undrilled anomalies.Be that as it may, DEG has most certainly passed the three hurdles to qualify as a good investment.
Now here if the thing – Rick Rule is on record sayingthat most of his ten baggers took him FIVE years to reel in and he had to sitthrough a 50% draw down along the way.If we presume that Mr. Rule himself has been accumulating shares in DEG then he would have been acquiring them in the $1.00 to $1.25 range where possible as real bargains because they are pre-DFS acquisitions.More to the point, this is only the beginning of the five year time frame used to realise the ten bagger investment. In other words, we are really only at the end of the beginning of the story of the Hemi ore body and it becoming a mine.
After the DFS and the associated resolution of theboard to make the investment has been announced the share price will be goingup.This is where an educated guess has to be made.Is Rick Rule’s draw down on the initial buy in price or is the draw down on his post DFS share price? Here is an associated question with important implications for people who acquired their holdings at twenty cents each or so – would Rick Rule be looking for $10.00 to $12.50 as his exit level if he did indeed acquire his shares in the $1.00 to $1.25 range after five years?On paper it is possible.
These questions are purely hypothetical but they docross my mind.I have heard no announcements or rumours of Mr. Rule making any such investment and I am not starting any such rumour that he has done so.It is just an interesting hypothetical exercise with a lesson for shareholders in DEG.That lesson is that there are going to be some violent moves in the share price of DEG both up and down as the collapse in confidence in the quality of entire classes of collateral runs its course and the price of energy in terms of gold collapses, or possibly better still, the price of energy gets locked in long term at a low price in terms of grams of gold per barrel of oil.This is important as energy costs are the largest input to modern gold mining and such a discount makes gold mining a very profitable activity.And finally, there is the ever present probability of the price of gold going up against all currencies simultaneously to consider as well since we are living in times where that is distinctly possible.Any of these factors could cause a tenfold increase in the share price of DEG.
I do not know what is going to happen.There are no guarantees, only possibilities and probabilities.The probability of DEG being stuck in a trading range of $1.30 to $1.65 for much longer is very low and there is a well-trod path to a higher share price to come.This is not the time to sell but a time to sit tight and ride the wave because we are on the right side of the curve.What about the possibility of a takeover of De Grey by one of the big players?That is an interesting question.If we go back to the Rick Rule figures we also assume that the institutional investors in DEG have similar numbers in mind too.They may be inclined to take a little less in return for selling out sooner but what would be “a little less”?What time frame are they trying to collapse five years and ten bags into in order to come up with a dollar value? On a linear model you are looking at two bags a year; but the world isn’t digital and things do not go in a straight line. It’s going to be a curve and as time goes on the curve is going to get steeper and steeper as it approaches the ten bag reality.If a takeover bid is made it could (would?) trigger one or more counter bids from rival gold majors because if I am not mistaken this is the only new tier one discovery that is going to be in production within five years because the infrastructure is already there. Counter bids push the share price further up the ten bag curve sooner in time.
The key to any takeover bid for De Grey is going to bethe 20% shareholding in DEG held by Gold Road.Gold Road have been made aware of how vulnerable they are to being taken over once before.If they were to get a phone call from Newmont about that 20% parcel of shares in DEG the best strategy would be to go to a merchant bank and use them to auction the share parcel - thus getting the best price and hopefully avoid being taken over.But who am I to advise the board of Gold Road what to do.Suffice to say that Gold Road is where the pre-game warm up is happening and that is where we need to keep our eye while the curve steepens.
GLTAH
