Golden Valley Mines: A Gold Investment Ben Graham Would Love
Trading at 35% discount to value of marketable securities.
Three active partner-funded joint ventures provide free upside.
No value currently assigned to 2.5-4% sliding NSR @ Cheechoo.
Golden Valley Mines (OTCQB:GLVMF)
Featured In: July 2018
Average Cost per Share: C$0.27
Current Market Price (Feb 12, 2019): C$0.34
Golden Valley Mines was the featured investment in our most recent semi-annual letter. The partnership has owned GZZ shares since April 2016. Over the past 6 months, we've lowered our cost basis to C$0.27 per share. Golden Valley remains a compelling deep value opportunity with the company valued at a substantial discount to its cash and marketable securities.
The majority of the value inherent in GZZ comes from company's 44.7% equity stake in Abitibi Royalties (TSXV: RZZ). Abitibi Royalties is a well-managed junior royalty company which owns a 3% NSR on the eastern portion of the Canadian Malartic mine. The Canadian Malartic Mine, operated by Agnico Eagle and Yamana Gold, is no small-scale operation. In fact, production from the mine supports the largest gold mill ever built in Canada. (Agnico Eagle will be announcing its year end results on February 15th and will most likely provide a comprehensive update on operations at the Canadian Malartic.)
There have been a couple positive developments for Abitibi Royalties over the past half year. In late October, the company announced opportunistic acquisitions of a 1.5% NSR on the Midway Project and a 15% NPI on the Radium Property from third parties. Both of these are located within the Malartic complex and further increase the company's royalty exposure to this world-class operation.
More recently, on January 16th the company reported "that production commenced at the end of Q4-2018 in the area covered by the Company's 3% net smelter royalty ("NSR") at the Canadian Malartic Mine". This is referring specifically to the Jeffrey Zone, and production from the Barnat Extension zone will follow in late 2019 or early 2020. The first royalty payment from this new source of production was received in January, and Abitibi Royalties is expecting cashflow of C$4.0-4.5m in 2019 - a 33% increase over last year.
There was minor setback however. On December 24th, RZZ announced that despite environmental approval from Quebec regulators "additional conditions will be required to complete the Odyssey Project approval process for a potential operation, beginning with an update of the economic studies for the project". This means that development of an exploration ramp (to provide access to underground drilling and the collection of a bulk sample) to the shallower portions of Odyssey South and East Malartic will be delayed into 2019. It was previously anticipated for ground to be broken on the exploration ramp as soon as Q4 2018. Abitibi Royalties holds a 3% NSR on both the Odyssey South and East Malartic zones.
Golden Valley's equity stake in Abitibi Royalties is worth roughly C$72m at RZZ's current share price of C$12.66. This compares favorably to Golden Valley's current fully diluted market capitalization of C$49m. It is worth nothing that the Abitibi Royalty share price has hit an all-time high in each of the past three weeks. Meanwhile the Golden Valley share price is still 21% off its recent high of C$0.43 reached in January 2017.
Golden Valley of course has additional equity stakes beyond its C$72m position in RZZ. At current share prices, Golden Valley's equity stakes in Val-d'Or Mining (TSXV: VZZ), International Prospect Ventures (TSXV: IZZ) and Sirios Resources (TSXV: SOI) are worth another C$2.5m combined. Each of these companies have catalysts to look forward to in 2019. Val-d'Or Mining is currently conducting ground exploration programs and will look to drill its Oregon, Magoma, and/or Ducros Sill prospects later this year. International Prospect Ventures has recently secured all of its Pilbara tenement titles and will be advancing work programs this year. And Sirios Resources has announced that a maiden resource estimate will be completed by mid-2019 at its Cheechoo Gold Project. (Remember that Golden Valley also owns a sliding scale 2.5-4% NSR on Cheechoo, in addition to the small equity stake in Sirios.)
Finally, Golden Valley Mines has three active partner-funded joint ventures. Cumulatively, these agreements stipulate for C$11m in expenditures over the next three years. The first is with Alexandria Minerals, who have the right to earn an 80% interest in Golden Valley's Centremaque property. While Alexandria has yet to report assays from the final five holes drilled at Centremaque in the winter 2018 program, it seems that Alexandria likes what it is seeing. In a December 6th news release, Alexandria announced that "planning is underway for a 2500m drill program at its Centremaque property".
The second of these partner-funded JVs is with Battery Minerals Resources, who have the option to earn an 80% interest in Golden Valley's Island 27 property by spending C$5m over 4 years. In August, BMR completed a full drill program of 10 holes at Island 27. Assays are still pending.
The third of these agreements is with Bonterra, who recently earned an 85% interest in Golden Valley's Lac Barry by spending C$2m over a 3-year period. In late 2017, Bonterra discovered the Temica Gold Zone at Lac Barry after drilling 2.7m of 4.7 g/t Au and 44.6 g/t Ag. It is expected that Bonterra will return to Temica for a follow up drill program in 2019 - now that the merger with Metanor has been completed. Golden Valley has a free carried interest to production for its 15% stake in the project as well as a 3% NSR (with 1% of the NSR subject to a buyback for C$1m).
I've provided below the Golden Valley catalysts that can be expected over the next two years. I've also included some milestones pertinent to Abitibi Royalties and its NSR exposure to the Canadian Malartic Mine, given the relevance to GZZ shareholders.
Abitibi Royalties announces 3-year production schedule for its Canadian Malartic royalties by end Q1 2019 Drill results (10 holes) from Battery Minerals @ Island 27 by end Q1 2019 Maiden Resource from Sirios @ Cheechoo by end Q2 2019 Drill results (2500m) from Alexandria Minerals @ Centremaque by end Q2 2019 Drill results from Bonterra @ Lac Barry's Temica Gold Zone by end 2019 Drill results from Val-d'Or Mining @ Oregon, Magoma, and/or Ducros Sill prospects by end 2019 Canadian Malartic Group breaks ground on exploration ramp to access Odyssey South and East Malartic zones by end 2019 1-2 new partner-funded option agreements announced by end 2019 Abitibi Royalties announces first production @ Norrie, Odyssey & East Malartic by end 2020The Golden Valley share price needs to rise roughly 40% before the company achieves a positive enterprise value. Given the company's three active partner-funded joint ventures and the 2.5-4% sliding NSR at Cheechoo, there is no reason why this shouldn't be the case.
In fact, one could also argue that Golden Valley deserves a takeout premium given the 7% position established by Osisko Royalties in early 2018. Abitibi Royalties is a prime takeout candidate for a larger royalty player given its substantial exposure to the world-class Canadian Malartic operation. Any suitor for Abitibi Royalties would have to enter through the front door by buying Golden Valley first. I'm thrilled to have been able to increase our exposure to GZZ, while lowering our cost basis, in the second half of 2018.
Disclosure: I am/we are long GLVMF. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
Editor's Note: This article covers one or more microcap stocks. Please be aware of the risks associated with these stocks.
Follow Matt Geiger and get email alerts