Why Treasury Metals Shares Are Soaring

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With the strong rebound in precious metals prices this year, it seems that not a day goes by that we don’t see the shares of some small precious mining company soaring. This signifies institutional interest. While institutions can usually take positions in large mining companies without moving their share prices, it cannot do so in small mining companies. So when I see such price action in a small mining company, I take interest and think to myself, “maybe I should get on board, too.”

On Friday, it was Treasury Metals’ (OTCMKTS:TSRMF) turn to shine; the shares traded up nearly 16 percent, or more than 23 percent on the Canadian Venture Exchange where the stock is more liquid (TSE:TML). What is so special about Treasury Metals, and why might it be a worthwhile speculation stock for gold bulls?

Treasury Metals has a market capitalization of $33 million. It owns the advanced stage exploration Goliath property in Ontario, meaning that the company has devised a mine plan and determined that it is likely economical to carry out — although it still has to retain the appropriate permits, find capital to construct the mine, and construct the mine.

The Goliath property is located near several producing and late stage mines including New Gold’s (NGD) newly acquired Rainy River project and Goldcorp’s (NYSE:GG) producing Red Lake mine. This is usually a good sign for a company that is trying to get permits to mine such as Treasury Metals, especially if the project in question (Goliath) is smaller (implying a smaller environmental impact) than the producing property (Red Lake). This also portends well for the company’s exploration potential, as new gold deposits tend to be found near existing gold deposits.

As of the company’s latest estimate, the Goliath project has an estimated 1.7 million gold-equivalent ounces (gold plus silver expressed in terms of gold), which means that investors are paying about $20/ounce, and it will produce 80,000 – 100,000 ounces annually. While there is cheaper gold out there, it often comes with significant risks that make these investments unsuitable for most investors.

What makes the Goliath project so appealing is its apparent lack of risk. First, the project’s ore has relatively high grade ore of about 1.4 grams per tonne on the surface and 3.8 grams per tonne underground. The surface gold is especially high grade when one considers that there are several profitable gold mines out there with average ore grades of 0.5 grams per tonne. As a result, the mine should have relatively low production costs vis-à-vis the industry average and the current price of gold. Management anticipates that it will have cash-costs of just $700/ounce.

Second, the company needs just $92 million in order to fund the construction of Goliath after it gets its final permits. Furthermore, it has the capital it needs in order to operate until the point at which construction begins. The $92 million is not readily available to companies with $33 million market caps and minimal revenue (Treasury Metals has a small amount of revenue coming from a royalty that I will discuss presently.) However, I asked the company’s Vice President of Corporate Development — Greg Ferron — about this, and he expressed confidence in the company’s ability to find equity financing from RMB Resources Inc. and from Asian equity investors. He suggested that the company would have two equity financings — one at the end of the year and one in 2015 so that all of the necessary capital would be in place so that production can begin by the second- or third-quarter in 2016.

This will be dilutive to existing shareholders, and this is the primary risk to shareholders. However, as the company receives its permits and releases its feasibility study (both scheduled for early 2015), the shares should rise to reflect this progress and the dilution will be less punitive to shareholders. We can also see the shares rise in response to a rising gold price; this is something we have already seen this year with Treasury Metals shares up 63 percent this year.

But despite this one risk, which as we have seen will likely be mitigated, the project has enormous value for shareholders. In the company’s 2012 preliminary economic assessment, we find that assuming a gold price of $1,375/ounce (about 4 percent higher than today’s gold price) the project has a post-tax value of $144 million using a 5 percent discount rate, or for more conservative investors it has an $83 million value using a 10 percent discount rate. Furthermore, it has an after tax internal rate of return (IRR) of 32.4 percent.

While the bulk of Treasury Metals’ value is in its Goliath project, it does have a couple secondary assets. First, there is the company’s 3 percent NSR royalty on the Cerro Colorado project in Sonora, Mexico. This royalty is yielding about $800,000 in cash flow annually. Unfortunately, Mr. Ferron told me that that the mine is not likely to continue operating into 2015. Still, investors could be surprised and an unexpected discovery could lead to more production, or a spike in the gold price could result in lower grade ore being more economical to mine.

Second, there is the Goldcliff property, which is an early-stage exploration project also in Ontario. It currently adds very little value to the company, and given the near-term emphasis on Goliath, it is unlikely that we will see significant developments here in the near future.

Ultimately, Treasury Metals is speculative given that it has minimal revenues, and given that it has a very low market cap. But among companies like this, Treasury Metals appears to be relatively low risk given the low cost of developing the Goliath property, the availability of funding, and the low production costs we should see once commercial production commences. Therefore, I think investors who are bullish on the gold price can piggy-back on Friday’s buying and take a position in Treasury Metals.

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