Danny Deadlock/Ticker Trax writeup on Clifton Star
Link: https://www.stockhouse.com/opinion/ticker-trax/insights/2013/07/26/24-cent-cfo-valued-near-$1-20-per-gold-ounce-stock
This report previously sent to paid Ticker Trax subscribers at 25 cents.
Clifton Star (
TSX: V.CFO,
Stock Forum; 24 cents)
www.cliftonstarresources.com
Shares Outstanding: 38 million / Market Cap: $9.5 million
Net Cash at March 31
st financials: $5 million
Quebec gold project with 3.1 million gold ounces M&I + 1.4 million inferred
Average grade 1.5 g/t
As long as investors are dumping gold stocks, it presents the opportunity to take tax losses on lower quality exploration companies and replace them with larger proven reserves for next to nothing.
If we pull out CFO’s cash from their market valuation at 25 cents, we are left with $4.5 million – this is the value the market is placing on their gold resources. If we only give them credit for 40% of the Inferred ounces, we arrive at 3.7 million ounces.
This values the gold at $1.22 per ounce.
I noted last weekend that the average of the 50 junior gold companies I track (minimum one million ounces) was down to an astonishing $12 per ounce heading into July. This has come up marginally but still remains very depressed.
Even for this low number, the market is valuing CFO’s gold at 1/10th this average. If you review my comparables below you will see where this makes no logical sense.
EXIT BY Q1/14
In order to earn 100% interest in this large gold project (less 2% NSR) they need to make staged payments leading up to 2017.
The next payment is not due until December 2014 ($10 million) and by 2017 they must pay $50 million in total.
I have no intention of sticking around beyond Q1 2014 if this gold sector does not properly recover. CFO has an excellent share structure with only 38 million shares outstanding so there is plenty of room for financing. However, this sector desperately needs the price of gold to recover above $1400 by the end of 2013.
CFO traded in the 80 to 90 cent range during Q1/13 even as the sector was under tremendous valuation pressure. The first hard collapse of gold occurred mid-April and CFO held in the 40 cent range.
Six weeks ago it was 50% higher than this current level so this would be our first objective heading into Q4/13. Any moderate recovery in the price of gold or the junior exploration stocks by Q4/13 should generate a gain in the range of 50% to 100% - in theory without assuming a large amount of risk
from the 0.20's.
Only four months ago when CFO traded near 90 cents the sector was depressed and the same staged option payments existed. However now we must face the reality that the sector may not bounce back in 2013. If it does, these larger Canadian gold projects will produce strong gains.
If the sector remains stagnant then you want a low cost average so the stock can be sold in Q4/13 or Q1/14 - well before the December 2014 option payment weighs on the share price.
COMPARABLES
1) October 2012, Argonaut Gold bought Prodigy for approx.
$42 per gold ounce. Prodigy owned 5.8 million ounces in Ontario with an average grade near 1 g/t.
2) June 2013, Rainy River was taken over by New Gold for approx.
$42 per gold ounce. This was an Ontario gold project with 8.5 million ounces at an average grade of 1.2 g/t.
3) July 2013, it was announced that Alamos Gold would acquire Esperanza for $69 million. EPZ owned a Mexico gold project with 1.5 million ounces at 0.83 g/t. This transaction valued their gold close at approx.
$29 per ounce. There was also known permitting issues with the Mexican government.
ESTIMATING CFO FAIR VALUE
Because the market (at 25 cents) values the CFO gold near $1.22 per ounce, we have plenty of room for appreciation.
Taking the three acquisitions into consideration plus the average of the 50 companies I track (shown in the chart above), we could initially
estimate fair value of their gold project at $20 per ounce.
3.7 million ounces X $20 per ounce = $74 million
$74 million - $50 million option payment = $24 million
$24 million / 38 million shares out =
63 cents per share
Because of the higher average grade of 1.5 g/t and location in Quebec,
we might be able to assume fair value is closer to $30 per ounce. Under this scenario:
3.7 million ounces X $30 per ounce = $111 million
$111 million - $50 million option payment = $61 million
$61 million / 38 million shares out =
$1.60 per share
Under either valuation scenario the risk/reward looks attractive from the 0.20’s. The big question is whether or not the sector properly recovers by Q1/14 - or someone steps in with a merger or takeover proposal.
FURTHER DUE DILIGENCE
Corporate presentation (note that their June 28th news release showing a substantial resource increase is not reflected in this report):
https://www.cfo-star.com/wp/wp-content/uploads/2013/06/CFO-June-2013-Corporate-Presentation.pdf
There is also a video on their home page.
Disclosure: Danny Deadlock owns 40,000 shares of
Clifton Star (TSX: V.CFO)