VAL D’OR,
Quebec — A small Abitibi Belt joint venture continues
to outpace metals equities gainers in the North America stock market. In part,
Abitibi Royalties’ month of May gains derives from Canada’s largest gold mine,
Canadian Malartic.
Dale Houser at Raymond James in
Toronto just tells me about thick trading of Abitibi parent’s shares this
Tuesday morning in Canada. That’s Golden Valley Mines.
The proposition to followers of The
Calandra Report — and in turn those who receive TCR Blips and after
the fact, follow postings at Stockr.com, Stockhouse, CEO.ca and Equities.com —
is that Glenn Mullan‘s gold royalty collector almost surely is
sitting on Quebec property that must see price acceleration from mining
activity in coming months and years.
Abitibi’s Malartic-connected
concessions already are in the hands of Malartic operator Osisko Mining.
Events this spring and summer in the publicized Osisko takeover probably will
demonstrate the case for a $300 million Abitibi Royalties valuation.
Far fetched? Only in that the
shares — RZZ in Canada — are challenging to purchase. This is one reason why
parent Golden Valley Mines’ stock (TSXV: GZZ) is seeing volume quintuple in recent weeks as its
shares also rise smartly.
Abitibi
Royalties has one of the many — at least 16 and
perhaps more — joint ventures that Osisko Mining (OSK in Canada) has fashioned the past five years. The
Golden Valley Mines offshoot, Abitibi Royalties, stands a shot at
giving shareholders a multi-year return on Malartic properties that are part
and parcel of the Osisko land package at Malartic.
I am just off the telephone with
both Glenn Mullan, Abitibi and Golden Valley Mine CEO, and board member Chad
Williams. Glenn is in Quebec and Mr. Williams, a McGill University MBA and
serial mining executive and financier, is in Toronto. The background on Osisko,
the $2.6 billion Canada takeover battle for the company and its roughly 300,000
gold ounces yearly, is here, via Equities.com and The Calandra
Report.
The thesis remains the same and
is gaining traction. Shares of Abitibi Royalties (RZZ in
Canada and ATBYF in USA) this month and in April have about tripled in value.
There are about 9.5 million shares out. The parent, Golden Valley Mines (GZZ
and GLVMF) owns two-thirds of those shares, with the rest owned by Mr. Mullan,
a few board members and three or four Quebec institutions. (I own about 30,000
of ATBYF shares and have for three years.)
Individual Canada and USA
shareholders, and prospective shareholders, likely will receive royalty
dividends from certain Malartic properties half-owned by Abitibi Royalties and
half-owned by Osisko. I have seen the extensions of Malartic, and they appear
rich in grade and necessary for the continued excellent ore-delivery
performance at Osisko’s Malartic.
Mr.Wi?lliams
explains that the net smelter return royalty part of the reward equation is
small: perhaps a total of $5 million from a patch called Gouldie. You know
the drill, a 2 percent NSR that is paid to Abitibi Royalties when ore from
Gouldie is processed at the Malartic smelter and turned into cash-for-gold bars
by Osisko, or its new owners — Agnico-Eagle and Yamana.
Then you have what are known as
the Barnat and Jeffery zones. More here.Osisko will
be mining these by 2016.
It’s the valuation projections
that are a moose’s carcass to contemplate here.
Mr. Williams, a former royalty
executive and a former CEO of a Nevada gold prospector, points to Abitibi’s 30
percent free carried interest on Barnat and Jeffery zones. Thus, these two
zones carry no capital costs for Abitibi Royalties to carry.
“We will get 30 percent of
the joint venture with no capital costs,” says Mr. Williams. He reckons
that at an approximate value of $30 million. Please see respective compliant
reports from the companies at Malartic.
The third part of all this
Abitibi furor is the fresh Odyssey zone. “Osisko in a disclosure gave us
rough dimensions of the zone,” he says. Mr. Williams says if you consider
a conservative gold grade and specific gravity and you agree that the bulk of
the zone is on property that is part of the Abitibi Royalties joint venture,
you arrive at about 1 million ounces for Abitibi’s portion.
Pre-tax on the cash cost profit
margin for the sale of those ounces, at a price of $1,300 gold and assuming a
$1,000 operating cost, leads us to a figure of $300 million, he says.
“The stock of Abitibi is
illiquid, even with its outsized gains this year,” Mr. Williams says. He
says he owns about 250,000 shares of Abitibi, which never has raised money in a
financing.
“It is just a question of
when we get derivative cash flow from Canada’s biggest gold mine,” he
says.
I think — and this is TCR talking
— that Abitibi Royalties at $2 a share leaves us with the possibility that
individuals will pick off 100 shares here and 100 shares there, then stick them
in retirement accounts, as I have. Current fair value before any royalty
payments or Osisko disclosures about the activity at the joint venture’s
Malartic properties is probably $80 million, or about four times the current
price of $2 a share. (I intend to hold until 2016, or when RZZ shares get
closer to full value based on the Quebec holdings — in my estimate
approximately $10 to $12 a share. Whichever comes first. I expect the $8 level
is not far off, given how challenging it is to find shares of RZZ in the first
place.)
Let us add some perspective from
the Mullan’s mouth. Glenn has been at this since 2010 or so. He has been
collecting royalties since he was 17 or 18 and is now 56. I likely will see him
next week in Quebec.
Mr. Mullan says, “It does
not diminish the story that the Operator has not yet confirmed that commercial
production has begun, notwithstanding that the permitting was done, mine leases
issued, pre-stripping done, and the mining appears to be underway, or otherwise
imminent.”
He continues. “When do we
get the payments? I know what the agreement says, but I also know how to create
expectations that cannot be met or maintained. The answer is quarterly after
commercial production, but an accountant may determine that the operator has to
complete its audited financials first, and that is harder for me to know which
tact they will take in the midst of a takeover.”
His job, he says, “is to
find mines. Read our news releases. They are factual and timely. I challenge
anyone to find a better deal than the 30% Free-Carried Interest in this
property, or the 2% NSR on the Gouldie Zone. This is a single asset company and
it has trumpeted its ownership since the date of incorporation and
listing.
“Our intention, stated again
and again, is to dividend as much of the proceeds as we can
from RZZ to GZZ (who owns 62% of RZZ). The story did not change:
this is the same property, the same commodity, the same company with the same
share structure. Most of the shareholder base is the same, we have not
changed the capital structure and we worked with our shareholders to preserve
this through conditions which exceeded our budget and expectations by a year,
and still we have hung on. We did not ask for more money, we did expect
shareholders to be patient through the Osisko developments and (what could
be a) market meltdown.”
For those who need liquidity,
Golden Valley Mines’ shares, which I also own, are far easier to purchase than
those of RZZ. I can see all of the individuals out there who are looking for a
$2 stock to hold for two years, especially those in Canada who take patriotic
pride in owning a piece of their largest gold mine, to start picking off
100-share lots any minute now.
THE CALANDRA REPORT: Subscribe**
**$110: Will Recur
Yearly
Disclaimer: This article was posted with the permission
of a third-party contributor and the opinions contained therein do not
necessarily reflect those of Smallcappower. Smallcappower does not endorse
any investment advice provided by these third-party contributors. Please
consult your investment advisor before making any investment
decisions.
Ubika Corporation and its divisions Smallcappower, Ubika
Communication and Ubika Research are not registered with any financial or
securities regulatory authority in Ontario or Canada, and do not provide
nor claims to provide investment advice or recommendations to any visitor of
this site or readers of any content on this site. – See more at: http://www.smallcappower.com/pages/small-cap-power-disclosure
