The Great FDR Tailings Mystery – Solved or Not?When I read back in June about the potential from the artisanal miners’ tailings on our property, my double-checked math still seemed wrong. ~ 500,000 oz extracted historically – *despite* only a ~ 25% recovery rate? Did that really mean another ~ 1.5 million oz were conveniently pooled in low-lying areas, on the surface no less(!), waiting merely for more advanced methods of extraction? ~ US$3 billion of gold?!
Even if the recovery rate of this remaining (tailings) gold is only 50%, FDR’s 75% share of a 20% (?) processing profit margin would still work out to over Cdn$4 per share. (Assuming 75M FDR shares F/D.) And yet, here we are, barely over $1 per share, with all our promising drilling results to date apparently thrown in for free. If we discount that $4 per share at 12% for 6 years, we still get $2.02.
And how conservative are my inputs here? The profit margin for gold tailings processing is probably a lot higher than 20%. It will likely take only a few years to finish processing all those tailings in as pro-mining a country as Suriname. And how many more ounces were extracted historically but never reported?
Colin Padget himself just estimated the (presumably present-) value of only 30% of the tailings as equal to our entire current market cap. Meaning $3.67 per share for all the tailings? Perhaps I’m too conservative with my figures.
Then what explains our supposedly undervalued share price? Maybe the long battle between academics’ staid Efficient Market Hypothesis and Value/Growth/Active Trader investors. Some of my fellow FDR shareholders were probably taught EMH in business school, as I was. Put briefly, it argued trading the market was needlessly dangerous, as everything is already priced fairly.
Fortunately, you and I *have* dirtied our hands (and bloodied our noses) trading the markets, so we have the confidence to act when an attractive investment offers itself up. Many EMH proponents probably do profit from buying and holding index funds – just not as much profit as us. And they definitely have less fun.
One of my favorite Warren Buffett quotes is “sometimes the decision to buy a particular stock is as obvious as picking gold up off the sidewalk”. His figurative language accidentally described FDR’s tailings situation literally as well.
It is possible we have run out of new retail investors for the moment, and the CFA-holding, EMH-believing fund managers can’t psychologically afford to pull the trigger and buy FDR just yet. But eventually people notice the gold on the sidewalk.