GSL-VEN Analyst UpdateI have pasted comments by a noted and respected independent analyst with extreme knowledge of the Ventana-Greystar explorations. It has considerable bearing on GWY. Once GSL has their permit, this stock will move hard. The analyst's comments follow.
Examining The Greystar-VentanaMarket Cap Disparity In Light Of The Extended Batista Bid
As noted in earlier commentary (The Batista Mystery), aremarkable disparity exists with respect to the market caps of Colombiansiblings, Greystar and Ventana. No matterhow one views this situation, either one company is seriously under-valued orthe other is remarkably over-valued. Let’sexamine a few items that might assist in sorting out this dichotomy,particularly in light of the newly-extended “Batista Bid”.
To clear the decks, let’s admit that since the GSL/VEN propertiesabut each other, one can assume that past concerns relating to Colombia’sformer security problems, are not a factor in the current market valuations ofeither company.
Next, let’s also admit that both companies are plugged intothe same ore body, which resides “near surface” within Greystar’s Angosturaboundaries and continues to the southwest beneath Ventana’s La Bodega and La Mascotaproperties. Please note that the veinswithin this ore body dip rather steeply to the north (which accounts for thedepths at which it has been encountered in Ventana’s drilling efforts). Also note that GSL’s recent deep drillingactivity at Angostura, appears to be providing similar results to those obtainedby Ventana.
There are of course differences in the circumstances andassets of each company. Let’s examinethem in detail.
Greystar’s Angostura ore body is near-surface and isdirectly accessible given its minimal overburden. Even better, GSL’s stripping ratio (2:1) is excellent. Adding additional value is the fact that theAngostura deposit boasts a 20 to 25% oxide ratio and oxides typically provideexcellent extraction ratios when relatively inexpensive “heap leach” extractionprocesses are employed. The Angosturaore body grades out at .75 g/t, which is more than satisfactory for an open pitoperation and an open pit process provides fewer difficulties than are presentin an underground facility. Finally,Greystar’s Angostura deposit includes a “Proven-Probable-Inferred Resource” ofroughly 15 million ounces (which in turn contains several million ounces of “ProvenReserve”, a definition that provides the highest confidence level with respectto actual gold content). By contrast, Ventana’s recent 43-101 report defines thatcompany’s existing deposit as an “Inferred Resource” (a definition thatprovides the lowest confidence level with respect to actual gold content) of 3.5million ounces, grading a modest (for an underground situation) 3.9 g/t.
Ventana’s penchant for providing “down-hole” drill resultsrather than the more conventional “true intercept” drill results, certainlyprovided the market with plenty of reason to become enthusiastic, but this approachcan backfire over time. By way ofexample, few market observers were expecting the modest numbers that were providedin Ventana’s recent 43-101 report. As aconsequence of this, Ventana’s 43-101 inferred resource numbers do not providea solid foundation to underpin its current $1.4 billion market cap (i.e., $385per ounce). Put another way, Ventana’s currentmarket cap appears to rest primarily on the shoulders of the Batista bid price(“Batista did not get rich doing dumb deals”), together with a belief thatcontinued drilling will uncover more extensive/richer ore bodies. Fair enough, but “what if”….
What if Mr. Batista does not consummate the acquisition ofVentana? Not possible you say? Well it must be admitted that his bid priceappears rather handsome in light of the reported inferred resource. Additionally, it must also be agreed that anapparently hostile Ventana management provides him with an acceptable excuse towalk from the deal should he have second thoughts. Finally, if Ventana’s assets are worth thecurrent Batista bid, what might Greystar’s assets be worth to that sameindividual (who has publicly announced that he intends to consolidate the industrywithin Colombia)?
“A rich grade overcomes many problems” is a well-known axiomwithin the mining industry, but is Ventana’s 3.9 g/t current grade rich enoughto suggest economic viability? Consideredthe following. To begin with, Ventana’sknown ore body will be difficult to access, primarily because of its geographiclocation. To understand this, note thedrill angles and plot the drill hole intercepts in 3 dimensions. What one finds is that Ventana’s deposits residebeneath a great deal of rock. Note thatthe company must build an access tunnel that exceeds two miles in length, to accessits deposits (see Ventana’s recent scoping study). Underline that distance….. two miles. In its scoping study, the company suggeststhat this tunnel will be built at a cost of $20.0 million. This appears to be a remarkably optimisticnumber, particularly given local conditions.Just for starters, bringing in the required heavy equipment will requiresignificant and expensive new roads and road upgrades. More importantly, and above all else, whatdoes the company do with the staggering amount of dirt and rock that must beexcavated to create a 4 meter by 4.5 meter tunnel that is more than two mileslong? Certainly there is no localarea where it can be dumped (The valleys are populated by indigenous miners. Placing even a fraction of this material onsteep local slopes would see it thunder down hill in any rain). Truck it out?To where?.... and, at what cost?Local geography and the rules of physics strongly suggest that thistunnel would cost an order of magnitude more than the suggested price tag. Add in environmental concerns and it becomesa dream. The reality is that Ventana hasa significant and serious “access problem” with respect to its current deposits. It is difficult to believe that a 3.9 g/tgrade is sufficient to overcome this problem
Nor is the above-noted problem a singularity for Ventana. An obvious question…. where will the companyconstruct its production infrastructure?A geographic fact of life for all gold exploration companies in thisregion is that GSL’s high land plateau represents the only viable flat landthat can be economically employed as a foundation for large productionfacilities. Yes the use of this land isin question at the moment (above the 3200 meter recommended Paramo altitude),but even a cursory perusal of the territory suggests that it does not qualifyas Paramo, particularly given the many mining-related scars it bears from pastuse/misuse). Greystar’s large landholdings provide the company with the ability to “horse trade” alternative (andmore Paramo-like) land for access to its already “company-owned” flat highland. If this particular piece of realestate does not end up supporting production facilities, it is difficult toenvision any alternative location within the region. Geographic realities can be harsh. They must also be dealt with.
Ventana’s recent scoping study provides a production figureof $322 per ounce. Given the above, thisfigure appears optimistic. Additionally,the company’s scoping study suggests a required total capital cost of $342.0million. This also appears optimistic(especially compared with GSL’s expected $1.0 billion total capital cost). Most knowledgeable mining experts suggestthat an underground mine requires an order of magnitude better grade than doesan open pit mine (0.5 g/t is considered viable for an open pit mine). Ventana’s “inferred resource” grade of 3.5 g/tappears to be somewhat shy of a minimal(say 5 g/t) grade required for an underground mine. Unfortunately, the above-noted conditionssuggest a significantly richer grade will likely be required to provideeconomic viability.
Metallurgy has been cited as a concern with respect to GSLin the past but the known facts do not suggest that metallurgy is an importantfact respecting the disparate market caps.To this point in time, Ventana has provided a single metallurgy reportthat examined a small (1 ton) cross sectional sample. The report was noteworthy in its reference to“challenging” metallurgy” and “copper involvement”. Greystarheld a day-long, detailed “Metallurgy Teach-in” in Toronto,which addressed both the metallurgy of its Angostura deposit as well themethods the company will employ in treating its ore. Few have cited Greystar’s metallurgy as aconcern since this event.
While both companies appear to be plugged into the samegeneric ore body, there are subtle differences.To begin with, Greystar’s ore body contains roughly 20% to 25% oxides,which equates with expected excellent (75%) yields from relatively inexpensive heapleach extraction processes. Ventana’sore deposit is relatively deep, hence the occurrence of oxide ore isunlikely. The available metallurgy datarelating to each firm, does not support the large market cap disparity.
One does not have to dig very deeply to discern the maincauses of Greystar’s current minuscule ($288.0 million) market cap. It exists primarily because investors areworried that GSL will not be granted the required environmental permits. Additionally, some investors fear that thecompany may not be able to raise the large (up to $1.0 billion) sums requiredto construct its production infrastructure.Let’s examine the known facts for guidance on each issue.
Environmental permits
GSL was one of the very earliest exploration companies toenter Colombia. It has been drilling there for over 17years. During that period, it has paidall required fees, taxes etc, that relate to its activities. It has also endeavored to be viewed as anexemplary corporate citizen. It paysgood wages and its work force is largely composed of Colombian citizens. In particular, it has endeavored to adhere toall (known) Colombian environmental regulations. To its credit, Ventana has also endeavored toact in a like exemplary manner, although for a much shorter period (threeyears). The fact is that both companieshave acted responsibly and neither can be accused of creating any consequentialpollution or of defiling the land.
The obvious question?...what has created the currentenvironmental hysteria? The answer is bestunderstood by examining the geography and history of the region. Bucaramunga, a city of 1.2 million Colombiansouls, is located 46 kilometers downstream from the location of both companies. The rivers that drain the area provide 16% ofBucaramunga’s water supply.Unfortunately, most of these rivers are indeed polluted! The citizens of Bucaramunga are worried that aproducing Greystar might add dramatically to the water pollution levels withwhich it must deal.
Adding to the current drama is the fast-maturing (andaccurate) perception held by most South American citizens that their highlands (“Paramo”)require protection if decent water supplies are to be assured. Of course, one must also add the fact thatmany environmental organizations tend to sensationalize any and all pollutionthreats and some of them are not above ignoring reality.
How bad is the water pollution situation in the area? In fact, it is serious. That said, there are positiveconsiderations. The vast majority oflocal water pollution emanates from asingle generic source, that being the ancient gold extraction methodsutilized by the populous local indigenous miners. The fact is that these ancient methodologiescreate a great deal of pollution, indeed far more than several modern goldextraction plants would produce. If thissource of pollution could be reduced, water quality would improve quickly anddramatically. Before it entersproduction, Greystar will construct a very sophisticated and very modern processingfacility. This facility will produceminimal pollution. Now let us supposethat Greystar’s modern facilities were also employed to treat the modest oremined by the local indigenous miners?The result would likely be a serious reduction in water pollution, abetter yield for the indigenous miners, and an improvement of the health (andlife spans) of these miners. This wouldbe a win-win for all involved and it is not a difficult thing for Greystar toorganize.
In December of 2009, Greystar submitted its environmentalplans,…. before the new Paramo regulations were introduced. In so doing, the company was assured by thegovernment that it would be “grandfathered” with respect to these new rules. In April of 2010, the company was essentially“sand-bagged” by the Ministry of the Environment when a request was made thatit submit a revised environmental plan that adhered to the newregulations. As one might recall, GSL’sstock price was instantly cut in half. Duringthe ensuing three weeks, Greystar’s stock traded very large volumes atremarkably low prices. Meanwhile rumorsabounded. Apparently, very few (if any)high-level Colombian ministers or mandarins were aware of the “request letter”and government lawyers were concerned that Greystar might inaugurate a well-founded(and expensive) suit. In short order,the Ministry of the Environment “changed its mind” and accepted GSL’s initialenvironmental plan. Unfortunately, “thedamage was done” and Greystar’s stock price languished.
In November of 2010, the long-anticipated environmentalhearing took place. Per the Ministry’sguidelines, a one day meeting was held in GSL’s local jurisdiction. It lasted for more than 9 hours and all attending,accredited speakers had their say. Theresults of this meeting were outstanding for Greystar as support for itsproject was virtually unanimous. Unfortunately,the environmentalists boycotted the meeting.Later, “bad roads” were blamed for their non-attendance (a fact thatlocal authorities denied) and a campaign was mustered to force a second meetingin Bucaramunga. The Ministry consultedwith Greystar and both agreed that such a meeting would allow all involvedparties to have their say. A firm date ofMarch 4 has been set.
Let us now examine the broader politicalcontext within which this tempest brews.
Certainly the locals want the mine to move forward and theyhave annunciated their views in no uncertain terms. At the provincial level, attitudes are lesssanguine and a certain amount of concern has been voiced. Behind provincial requests for a closerexamination of GSL’s environmental situation, worries about royalty revenuesharing may be the actual problem. Undercurrent law, all royalties flow to the national government but 93% of thesesums are supposed to be spent in the local (think county) level. Given the size of the expected royalties,this may appear unrealistic to provincial leaders.
The final decision resides at the national level, inparticular with President Santos. In hisinaugural speech, Santos (Uribe’shand-picked successor and former Minister of Defense) commented that his jobwas to continue the remarkable economic progress that commenced under Uribe’sleadership and that mining and resource exploration/extraction would continueto be the “engine of growth” in this endeavor. For the last few years, Colombiahas expended serious money and human resources in an effort to encourage minersand explorers to come to Colombia. It makes little sense that Santoswould curtail Greystar’s progress at this juncture, particularly given the factthat GSL is the first junior explorer to move through the hoops towardsproduction. He is well aware that thissituation is being watched with serious interest by the global miningcommunity.
Further facts suggest that GSL will eventually be rewardedfor its patience. In particular, anexamination of the new Paramo regulations is eye-opening. The new regulations state that Paramo is tobe defined at the local/provincial level.The regulations further specify that a series of studies (relating to present-dayconditions, flora, fauna, etc. of the local highlands) must underpin newly-definedParamo borders. The new regulations alsoprovide specific guidance relating to lands that have been previously defiledthrough past mining or agricultural activity.In fact the regulations specifically recommend that such land should notbe defined as Paramo. Note that much ofGreystar’s high territory fits this latter description.
In recent weeks, certain high level bureaucrats within the Colombiangovernment’s legal hierarchy have referred the current Paramo regulations tothe country’s Constitutional Court,requesting a ruling pertaining to the constitutional aspects of theseregulations. The expressed concerns aretwofold: The indigenous peoples were notconsulted before the regulations were promulgated (as required by law) andthese same regulations may not be “enforceable”, particularly given the factthat none of the required prerequisite studies have taken place. (put another way, defining Paramo should not takeplace in a knowledge vacuum….. nocompleted studies equals no Paramo borders.).As these studies have NOT taken place to this point in time, the expressedconcerns have considerable weight.
On balance, the above-noted facts suggest that Greystar willlikely be granted its approvals, although not before all involved organizationshave been seen to have completed their duties nor before some “horse-trading”takes place.
Raising Infrastructure-relatedCapital.
Given the shear size of the required capital ($600.0 millionto $1.0 billion), investor concerns related to this required future effort arelegitimate. It is a very big sum. That said, certain facts do appear tomitigate the situation.
Large producers are hungry.They may wait as long as possible to bid a junior explorer, (hoping it experiencesfinancial difficulties that would render it an inexpensive purchase), buttheir need for new reserves is a strong motivator and there are fewunexploited “proven” deposits available.They will do more than “kick tires” as GSL emerges from the shadow ofenvironmental permitting issues. Keep inmind as well that Greystar is not under any financial duress, hence the companycan afford to be patient.
Nor should we forget that The World Bank, (GSL’s largestshareholder) will likely provide significant loans ($150.0 million) to thecompany and will likely bring other associated banks to the party. Even better, it is known that South Americanfunds are interested in investing in the company, once it commences trading onSouth American bourses. Then too,royalty deals, particularly related to silver, offer a legitimate alternativemethod for raising large sums (say another $150.0 million). It is also wise to note the increasinglyaggressive nature of Chinese investment organizations. They have lots of US dollars that theirgovernment wants to see converted into harder assets. Note that the passage of time is erodingtheir dollar assets at an alarming rate.More importantly, gold (and energy) production assets rank very high on China’sacquisition list.
Yes, Greystar willhave to work diligently to raise these large sums but under the currentcircumstances, a large partner (or partners) will likely lighten the company’sload sometime in the near term. Itshould be noted that if Greystar attracts a large or well-known partner,shareholder dilution would be much more modest than if this does not takeplace.
Coming back to Ventana, it has to be admitted that VEN isyears away from having to deal with these nasty issues,……. which may be ablessing for the company currently, but which does not provide reason for investorsor analysts to push the company’s market cap to such a lofty altitude. That said, older siblings are always the“pioneers” and pioneers risk arrows. Ventanawill benefit for being the younger sibling.“It was ever thus”.
A final consideration is important, especially in view ofthe recently-extended Batista bid.
Let’s examine the possible/probable share price action ofeach stock, in light of this event and in respect of market caps.
The main point of this commentary is that the facts do notappear to support the current market cap of Ventana and that its current shareprice is underpinned primarily by the Batista bid. It also makes the point that Greystar’smarket cap appears to be under-valued. Let’stake things a bit further. If Batista’sbid is accepted a few weeks from now, Ventana’s share price will fall(modestly) to that bid price, and the stock will subsequently disappear. If an investor holds this view, he willlikely sell the stock into the (mildly higher) current market now. On the other hand, investors may believe thatMr. Batista will raise his bid. Mightthis occur? Perhaps, but it doesn’tappear probable, as the current fundamental asset value of Ventana does notsupport such a move. Finally, what if theBatista bid is pulled? Ventana’s shareprice would almost certainly crater. If Batistawere to reject Ventana, might he move to acquire Greystar?
Now let’s consider the situation if Batista successfullyacquires Ventana. Is it not reasonable toexpect him to quickly make a bid for GSL?Even if Mr. Batista provides a significant stock price premium (say $10per share), he would garner much more for his dough in acquiring GSL,including:
-Lots of cash.GSL’s treasury currently holds roughly $100.0 million.
-Much more gold….. a combined proven-probable-inferredresource of at least 15 million ounces of gold.
-The opportunity to convert the market’s current worriesto personal profits (how long would it take Mr. Batista to sort out Greystar’senvironmental problems, given his South American political clout?)
-The only piece of relatively flat land in the region…on which to locate production facilities
-The opportunity to dominate the entire region. (He who first installs productioninfrastructure can influence/dictate “production costs” with respect to otherregional players. More than one megaproduction plant in the region makes little economic sense).
-Near term actual gold production (via GSL), which wouldvault his new company into the “Producer” ranks.
-The opportunity to “average down” his overallcosts. Mr. Batista will have investedclose to $1.5 billion in Ventana (roughly $385 per known ounce of “inferred”,deep-in-the-ground gold). Even if hepays a significant premium ($10 per share or $900.0 million) for Greystar, heacquires an additional 15.0 million ounces of “near-surface” gold at a fraction($60 per ounce) of his Ventana gold purchase.-
-Lots more land for further gold exploration…. (Greystarhold by far the largest land assembly in the region).
From a Batista point of view, “What’snot to like?”
In summary, it appears to this observer that the risk-rewardratio is heavily weighted towards GSL and away from VEN, given the respectivemarket caps and currently accessible data.
It also appears thatcurrent events might change this state of affairs over the near term. How so?Delightfully, investors currently have a modest “window” through whichto gauge Colombia’sdeveloping attitudes concerning Greystar’s environmental trials. A major Colombian TV network is currentlyairing a series of 4 “prime time” television programs that examine theissues. The first program has alreadyaired. It provided theenvironmentalists’ point of view. Thenext program is devoted to allowing the company to provide itsperceptions. Following this, a programwill be aired that provides various government ministers and/or top officialswith an opportunity to provide governmental perceptions relating to theGreystar situation. Finally, a “scrumsession” is planned that will include representatives from the above-noted“interested parties”. Sounds like a “don’t-miss-it”opportunity for exposed investors.