Jayant Bhandari – Deep Value (Jubilee Gold Exploration)

Latest News—31th May 2016

These days what I see among investors in the mining sector is FOMO, Fear Of Losing Out. People are chasing companies that everyone else is. They expect what has gone up to continue going up, confident that they can get out when the market turns. Ironically, in such an environment the concept of value gets forgotten and people end up taking massive risks with their capital.


Perhaps the best thing about the junior mining industry—and other small-cap companies—is the possibility of finding opportunities that not many people know or care about. Even in this bullish environment one who keeps looking does not have to chase the usual companies, or to participate in feeding frenzy and herd mentality.


Funds and brokers have certain institutional imperatives. Funds need liquidity and brokers like companies that will need to be financed. Such needs of Funds and brokers often require a compromise on value; at the very least easy upside is gone by the time major Funds get involved.


Small Funds and retail investors—who can use lack of liquidity to their advantage—can look elsewhere for gold, literally and figuratively. They can go where risk-reward is hugely in their favor. But this requires self-confidence, and the ability to look where not many are looking.


For example, Sunridge Gold, which recently closed shop, about which I wrote about when it was trading at 25 cents made a profit of about 60% for early investors. What most people did not care to pay attention to (and which for obvious reason I did not want to highlight either) was listed-warrants of Sunridge, SGC.WT. It was known for a very long time that holders of warrants would get 2 cents in cash. An observant investor could have done many trades buying the warrants at 1.5 cents and selling them at 2 cents, booking a profit of 33% in each trade—this cycle went on for almost six months.


Or, for example, if you had invested in Magellan Minerals when I wrote about it, you could have booked a profit of more than 125%. Or, for example, if you had invested in Aditya Birla (ASX:ABY) or Starcore International Mines, you would have made more than 50%. Better still, if you had invested in VMS Ventures, you would have made several multiple of your money. In EnerGold and Impact Silver, you would have made about 500% or so. The list goes on.


Of course in retrospect, I made a couple of serious mistakes, errors that I could have seen had I been less emotional. You would have of course lost 50% had you invested in Phoscan. There is another name that I mentioned in my musings—RB Energy—in which had you invested you would have lost most of your money. It is for this reason, when I mention companies here, I strongly suggest that you do your own due diligence.


Moving on…


Going for illiquid, small companies with hidden value that not many give attention to might give you outsized gains.


I recall that my first big-win was a company called Brilliant Mining. Many years back, it was merging with an Australian company, Panoramic Resources. Anyone with primary school math could see that the arbitrage upside in owning Brilliant was about 300%. The only problem was that most of the upside—the non-cash component—was going to be un-tradable for a few months. Should I have cared if the huge-upside that I was getting for free was going to be locked-in for a few months? I thought it would take the market a few days to recognize the value and the arbitrage would disappear rapidly. To my surprise the arbitrage lasted for several months and even increased towards the closing days. I have never really fully understood why so much value can stay unrecognized by the market for so long—but I have experienced this again, and again, and again.


Today I understand fully-well that it can be months before the market recognizes value.


If you are thinking I am in a self-praise mode today…


Usually a back-bencher, I learned a few years back that one has to market himself and network or he gets forgotten. Not that I care businesswise, for I never ever chase clients, and by the time new ones come to me suffering from FOMO, it is often too late.


But you might respond that the market has gone up too much and now your only option is to participate in feeding frenzy. Wrong again. If that were your only option, the rational thing to do is to stay in cash. But there are still many thinly-traded companies that have gone unaffected by the recent market trend and still offer—in my view—huge upsides. I want to mention one such company here, a company you very likely have never heard of…


Jubilee Gold Exploration (JUB; $0.38) has a MCap. of $3 million. Cash and investments that they have are worth more than $3 million. On top, unlike most junior companies, JUB actually generates revenue, from a couple of royalty ownerships. If they did not have to incur overhead costs, which would be the case were it to merge with a bigger entity, the current revenue by itself would more than justify the current MCap. But this is only the start. JUB has a large portfolio of properties and royalty ownerships, which still have to start producing revenue or capital gains.


While the above already offers a very nice upside, I want to talk about only one of the royalties that JUB owns: Its royalty ownership on 5-million ounce Springpole project. Springpole is the flagship—and by far the most important—project of First Mining Finance (FF), a $360 million company. FF’s MCap. tells me that the market believes that Springpole is either much bigger than what it is known to have or that it would sooner rather than later go into production.


Based on my calculations, JUB’s royalty ownership on Springpole, assuming that only 2.2 million oz of gold get produced, is worth about $35 million. And it pays to remember that Springpole’s resources are over 5 million ounces, offering huge extra optionality.


So, based on the above, in my view JUB offers >1,000% upside based merely on its cash-value and royalty ownership in Springpole.


Let’s look at JUB from another angle…


JUB is a product of a merger of three companies that happened in 2012. They did a fairness opinion before the merger summary of which is in JUB’s Information Circular of 12 November 2012—go to sedar.com to download this document. The fairness opinion gave a value of between $23 million and $26 million to what is now JUB. This would equate to about $3 per share of JUB. Interestingly this valuation is not too different from what I arrive to.


My interest has been to show how much unrecognized value can exist in the market even in what is otherwise a very bullish environment. And, again, I strongly suggest that you do your own due diligence before investing.


If you are cynical enough, as you should be, you might be asking why I am talking about a stock that I think has such a huge upside. Despite that my clients and I bought JUB at higher than the current share price, we own more JUB than any sensible diversification policy allows. We are now mere spectators.


In my view, one day JUB will be a part of a major royalty company. And royalty companies, given that they trade for a multiple of what they are worth, will likely pay a premium on the rational-value mentioned above.


There are of course risks. Insiders own about 90% of JUB stock. A hostile takeover of such a company cannot work. And pretty much minority shareholders have no voice in such a company.


If you do give an order to buy after your own due diligence, remember that JUB is extremely illiquid. Give only limit orders.


Lesson, for investors, including Funds: Do not suffer from FOMO (Fear Of Missing Out). Do not participate in feeding frenzy. Look for opportunities where others aren’t. Yes, you can still find value, often great value, even in a generally bullish environment. Linked is a panel discussion from Zurich in which we discuss similar issues.


Although I think in general mining stocks have gone ahead of themselves, I have increasing become very optimistic about the future of gold price. I explain why in the linked speech from the recently held European Gold Forum.


Finally, as you know I run a yearly, philosophy seminar in Vancouver, Capitalism & Morality, which you can register to using this link.


Warm regards,


Jayant Bhandari




Disclaimer: All information found here, including any ideas, opinions, views, predictions, forecasts, commentaries, suggestions, or stock picks, expressed or implied herein, are for informational, entertainment or educational purposes only and should not be construed as personal investment advice. While the information provided is believed to be accurate, it may include errors or inaccuracies. The sole purpose of these musings is to show my thinking process when analysing a stock, not to provide any recommendation. I will not and cannot be held liable for any actions you take as a result of anything you read here. Conduct your own due diligence, or consult a licensed financial advisor or broker before making any and all investment decisions. Any investments, trades, speculations, or decisions made on the basis of any information found on this site, expressed or implied herein, are committed at your own risk, financial or otherwise.


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