Chris Berry � Morning Notes 2013-07-05
�Terraco Gold Update (TEN :TSXV, TCEGF :OTCBB)
Significant drill results at Midway Gold�s Spring Valley JV with Barrick Gold confirm potential for Terraco�s royalty interest
Last week, Midway Gold (MDW :NYSE.MKT, MDW :TSX) updated their investor base with news highly significant to Terraco Gold, their neighbor to the south of the JV�s Spring Valley project. MDW reported several results from development drilling underway at Spring Valley. Two intercepts were of note:
- Hole SV13-621 returned 361 meters of 1.47 grams per tonne (gpt) gold starting at 35 meters depth. The interval included 21 meters of 7.54 gpt gold and 23 meters of 3.02 gpt gold
- Hole SV13-620 returned 120 meters of .75 gpt gold including 18 meters of 2.43 gpt gold; 35 meters of .79 gpt gold including 1.5 meters of 4.08 gpt gold and; 21 meters of 1.20 gpt gold including 1.5 meters of 5.59 gpt gold
Furthermore, MDW�s joint venture partner on the project, Barrick Gold (ABX :NYSE), has completed its requirement for a 60% earn-in on the project (by having spent $30 million on the property) and will be spending at least an additional $8 million in 2013 to attain a 70% share of the project. It appears to us that these drill results indicate a major structure at Spring Valley.
We offer our congratulations to the team at ABX / MDW for their many successes, particularly Ken Brunk. We want to draw your attention to the potential benefits this news has for TEN and their royalty interest in Spring Valley. As a brief refresher, TEN has up to a 3% NSR on the Spring Valley property, so as the resource grows, so, too, does the value of the royalty. This is a crucial point of potential wealth creation to remember. Make no mistake, we believe these new intercepts may significantly increase the potential for wealth creation Below we include a map of the Spring Valley deposit (outlined in black) showing TEN�s royalty interests. The drill results mentioned above are located in the red shaded area.
What is important here is that the two holes we mentioned above, SV13-620 and SV13-621 are located right in the middle of the claim block where TEN holds the net smelter returns royalty interest. The implications of this are straightforward � as Spring Valley continues its development and ostensibly becomes a larger more valuable deposit, the royalty interest TEN has on the property also increases in value.
In an era where junior mining finance is more than challenging, to say the least, a royalty such as this provides TEN CEO Todd Hilditch flexibility (we have called this �optionality� in the past) in terms of how he and his team choose to push forward with their two properties � Moonlight in Nevada and Nutmeg Mountain in Idaho.
Based on our conservative �back of the envelope� math, the royalty interest could be worth as much as $80 million to TEN today. We want to stress that we are using data provided from MDW�s NI 43-101 on Spring Valley and adding our own assumptions to arrive at this number.
The Disconnect
What is notable is the value of the royalty interest ($80 million) versus the current market capitalization of TEN: ($19.22 million fully diluted). We believe there is a very clear disconnect between the intrinsic value of the company and its market value.
The Rationale for Considering TEN as an Investment
We view the rationale for owning TEN as straightforward. As the global economy struggles to get back on its feet, Central Bankers are adamant in fomenting economic growth and inflation through expansion of their balance sheets. As we have demonstrated in recent editions of Morning Notes, this policy has not had its intended effect.
Recent discussions of �tapering� quantitative easing programs in the US are likely just Chairman Bernanke �jawboning� the markets and do not appear to be realistic. As a result, additional balance sheet expansion and printing of money seems likely which means a weaker dollar in the long run. This bolsters the case for gold in a portfolio as a hedge against eventual inflation and as a store of value.
This would include ownership of gold junior mining shares where the possibility exists to profit from share price leverage. Those juniors that can demonstrate financial sustainability and profit from production in a non-dilutive manner should be given consideration by you in your own due diligence processes. We continue to believe Terraco Gold is one such opportunity and have valued it thus on the DiscoveryScoreboard. It is a true contrarian play at this point because we think it is sustainable.�
Chris Berry, MBA � Morning Notes 2013-07-05
Chris Berry Bio:
With a life-long interest in geopolitics and the financial issues that emerge from these relationships, Chris founded House Mountain Partners LLC in 2010. House Mountain firmly believes that the emerging Quality of Life Cycle emanating from Asia is a "game changer" which will affect every one of us throughout the world for decades. With that in mind, the firm focuses on the intersection of three topics: the evolving geopolitical relationship between emerging and developed economies, the commodity space, and junior mining and resource stocks positioned to benefit from this phenomenon. Chris spent 13 years working across various roles in sales and brokerage on Wall Street before founding House Mountain Partners. He also co-authors a newsletter with his father Dr. Michael Berry, "Morning Notes by Dr. Michael Berry ". He holds an MBA in Finance with an international focus from Fordham University, and a BA in International Studies from The Virginia Military Institute.
The reader is invited to view a recent video interview by Jeremy Naylor of Proactive Investors and Terraco President & CEO Todd Hilditch: