"I trade and wear track pants, and you can too."
- Matt Hayes
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I spend most of my days researching small cap ASX stocks. Here's a report on those findings ...
(my investment strategy is detailed at the end of this email)
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| DEEP DIVE - AUTECO MINERALS (ASX:AUT) |
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A couple of times per year I make a large and calculated investment, this is one of those times. The stock must have a potential x10 plus upside, with unrecognised value and minimal downside scenarios. The risk of 100% loss is always real, but so is the potential of significant returns.
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Executive Summary:
ASX: AUT
Current share price: $0.017
Fully diluted MC: $21m
Cash at bank: $1.2m
Total shares on issue: Approx. 1250m shares, options and performance rights on issue.
Price target: $0.10
Read this if nothing else:- Existing inferred resource 637,000 ounces gold at 9.1g/t
- 2232.9 g/t sample at surface
- 1325.73 g/t over 0.5m at 23.65m depth
- Historic producing mine of 1.5m ounces at 16 g/t
- Tier 1 gold country, one of highest grade gold regions in world
- Red Lake mining district produced over 25m oz of gold at 22g/t.
- AUT conversion of NI 43 101 resource to JORC is yet to happen, market largely unaware.
- Founding team Bellevue Gold, invested most cash of any company, hold 20%
- Unused gravity mill, generators and man camp with 30,000 oz year production capacity
Deal Terms:
AUT have an earn-In agreement to acquire up to 80% of Pickle Crow asset which is owned by TSX listed First Gold Mining Corp. Stage 1 Earn in of 51% over 3 years exploration spending $5M CAD, Stage 2 a further $5m CAD exploration + $1m for 19%, and final $3m CAD for further 10%. Plus a 2% net smelter royalty and 25m AUT shares to First Mining.
Asset:
Existing 637,000 ounces gold at 9.1g/t inferred resource under TSX compliant NI 43 101 report.
Ultra high grade shallow drill intercepts including
2232.9 g/t at surface (ASX Ann 26/03/2020)
1325.73 g/t over 0.5m at 23.65m depth (page 130 TSXtechnical report)
878.69 g/t over 0.9m at 65.89m depth (TSX)
444.38 g/t over 1.5m at 22.65m depth (TSX)
A historic producing mine of 1.5M ounces at 16 g/T in one of the highest grade gold regions in the world.
Team:
Entire team is from Bellevue Gold (BGL).
I have personally interviewed Sam Brooks, Ray Shorrocks & Marcus Harden. All of them occur as surprised that their bid to secure this project was successful and very excited. I spoke with other another team member of BGL who expressed their desire to work on this project (and willingness to relocate from Australia to Canada) and disappointment to have missed out. The strong impression I get is a huge amount of eagerness, commitment and confidence in this project from all the team.- Steve Parsons - AUT NED (Managing Director BGL)
- Sam Brooks - AUT Director (Chief Geo BGL)
- Ray Shorrocks - AUT Chair (Founding Chair BGL)
- Michael Naylor - AUT NED (Founding Co-Sec CFO BGL)
- Marcus Harden - AUT Chief Geo (2IC Geo at BGL, left to work FT AUT in Feb 2020)
- Duncan Grieve - AUT Senior Geo (Senior Geo BGL, left to work FT AUT in Feb 2020).
This team has invested their own cash of between $500k - $1m collectively in the last 6 months, owning over 20% of registry.
Management and founding top 20 shareholders own over 50% of registry.
This is the largest single holding of any company the BGL team have.
While the market has speculated about the BGL team being spread thin across multiple assets (AQI, BGL, African Gold, Blackstone etc.) AUT has the most full time staff, the largest management shareholding and largest management cash contribution of all their early stage ventures.
Infrastructure
Existing,unused gravity mill, work camp, accommodation, generators which can process 300t per day through put (30,000 ounces per gold year production possible) Built in 2002 for circa $20m when gold price $350CAD oz, never commissioned. Company ran out of $. Refit for production possible for nominal amount for under $5m. (Had this audited by engineering and commercial/contracts engineering colleagues.)
Peer comparison
The closest peer comparison is Madsen Lake,Pure Gold TSX
2m ounces at 8.9g/t inferred, 20km away- same geology, same grade, Market Cap = $250m AUD
Or $125 per ounce in ground value
Equivalent ounce value gives Pickle Crow current estimate of $80m AUD plus upside exploration potential with significantly higher grade shallower intersects.
Note, this valuation was done as of 1 April 2020, with global markets down 30%. Valuations in late 2019 of surrounding high-grade assets in the Red Lake area were as high as $200 - $250 an ounce in ground.
In Nov 2019, Evolution Gold purchased Red Lake Mine from Newmont for $450m US, or $110 AUD per ounce in ground
Timing
With recession pending, gold price is forecast to increase and the AUD projected to decrease in value. Estimated Australian gold price circa $2,800 + according to multiple global investment banks forecasts. While producing gold companies will be favoured and exploration companies overlooked for some time, the existing infrastructure and high-grade existing resource, creates a unique value proposition at these prices. Do they follow the Bellevue model and expand on a high grade resource targeting multimillion ounces maximising in ground valuation, or turn on production? There is an underlying assumption that if previous owners built the plant but never turned it on at $350 an ounce, it is likely to be highly commercial at $2,500 an ounce +
Unresolved questions:
- Why would First Mining Gold sell this asset to Auteco?
Canadian high-risk investment dollars have gone to pot. Literally. The marijuana industry is booming in Canada, exploration companies have been overlooked.
Australian companies have been swooping in picking up high grade assets cheap. Think NST Pogo, EVN Red Lake etc.
Additionally, Bellevue's numerous global awards rank them at the top of gold explorers by international brokers including Canaccord. It looks as though the First Mining directors are using BGL status as marketing as well as a learning experience to leverage on their other 7M ounce gold project in Canada. The deal also sees First Gold take a large holding of Auteco, cash payment, no exploration spend and retain royalties and 20% of the project.
- Why did the previous owners not orientate the drill cores? Auteco intend to drill around the extremely high-grade shallow 1325g/t at 23m depth and 2232g/t at surface and follow the vein. PC gold discovered the vein in 2012 did not orientate the cores and hence did not follow the bonanza grade veins. Isn't Canada a savvier country at Gold Exploration? This seems an incredulous mistake, and almost too easy for Auteco to chase and expand a very high-grade discovery.
- Will Auteco flick production on or keep expanding the resource in this current economic climate?
It's under the radar at the moment due to the exploration speculators running for yield and the fact that the TSX inferred resource has not been converted over to the ASX. There is a huge high-grade gold story here that has gone largely unnoticed due to highly unusual circumstances.
Downside Risk:- Being a new shell, the liquidity of investors of the old shell is relatively high at nearly 40% of the registry, there may be many loose hands who don't understand the value of this asset. that sell off to cash in before recession. I view this as already largely having happened as the share price began to run to 4.5 cents prior to market crash.
- Trying to acquire a significant holding on market seems to rapidly push the share price north; the recent sell off in the market crash has been precipitated by rather small volumes (approximately $50k daily sell off has dropped the share price 75% in 2 weeks). Other than this, the major shareholders registry is quite tight. With only $1.2m cash at bank and an aggressive drill campaign, they will be looking to raise cash in the next 12 months which may present an opportunity to take a large stake.
- The existing Pickle Crow resource may in time prove not commercial, and the drill campaign yield underwhelming results.
- The lower cut off grade existing 1.23m oz at 4.1g/t could be converted to JORC, I view this as a mistake and focusing on converting over the higher grade shallower 637k ounces at 9.1g/t resource and building on that as being key to unlocking shareholder value.
- Gold price could go down. It happened once in recession history from 1980-82. However, in most instances of financial crisis gold goes up (76, 87, 90, 00, 07, 11 etc.). It is prudent to be conscious however that gold was already at historical highs prior to the recent stock market crash. But with interest rates at near zero, and major world economies printing money and bond yields at all time lows, where else can themarket keep its cash safe?
I am of the view the ASX will fall lower as the Coronavirus lock down develops and the impact to the economy is realised. This may see lower share prices for AUT. I note though, the share registry is very tightly held, and the last time we saw any amount of volume buying occur with this stock (February 2020) the share price quickly tripled. Acquiring a position through this time could achieve a low entry price prior to anticipated maiden JORC announcement some time in the next few months.
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| Performance Summary
Note: Last 2 stock picks by The Matt Report on 28 Jan 2020; BGL at $0.51 (up 2%) and PGX at $0.38 (down 53%)
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My investment strategy:
I'm a value investor focusing on mid term trades. I invest primarily in ASX listed Resources, Tech & Industrials. I look for stocks with a minimum 200% upside and 20% downside. They must have a strong management team who are personally invested. I use my networks to thoroughly research the companies directors, management, reputation, their workplace culture & the quality of their product. On average, for every one hundred companies researched, I heavily invest in only one. Any company I invest in must meet all of my screening criteria. My leads come from regularly trawling through ASX company announcements and professional industry contacts I've spent decades developing. I then thoroughly read every announcement back several years trawling for risks & value that the rest of the market may have missed. So hit me up with any stocks you're liking or want an opinion on. This will be an irregular email summarising key stocks I'm considering (or in some cases, not liking) and a summary of why. As well as the occasional deep dive or alert report on a stock I'm investing heavily in. At the end of each email is a performance summary of all stocks I buy and how they are tracking, with my lowest entry price and highest exit price (note there may be buying and selling along the way in between!)
Pass it onto any mates who are keen to join in (subscribe here). Enjoy! |
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Matt Hayes is the Director ofGeronimo Executive Search, providing head hunting services within the West Australian resources sector. He has been an avid investor in the ASX since 2005. He was founding CEO ofRaisebook; online capital raising platform for resources and technology stocks.
He is also an artist, and co-owner ofKing SommWine Bar.Note: This report is for educational purposes only. While Matt Hayes, director of the Matt Report owns many of the stocks contained in the reports, he receives no brokerage fees or promotional fees for writing this content. By sharing this information and insight into how Matt invests, the purpose of this report is to connect a community of investors to interesting unsponsored and relatively unbiased opportunities (Except Matt believes in and often owns stocks covered in the report). This report IS NOT personal advice.The Matt report is intended for High Net Worth investors (708's) only who are invited or referred to subscribe to the Matt Report. If you have been sent this report without invitation, it is very important to refer to the ASX website for information on any companies / stocks that are contained in this report and as always please consult your financial adviser before acting. update your preferencesorunsubscribe |
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