Like the Moss Mine? You may LOVE this! Presumably those of you that read this post are somewhat optimistic about the future prospects of the Moss Mine and the ability of the management team at Northern Vertex to develop this US resource into a long life 60k-100k oz per year producer. I share your optimism but i am not invested in Northern Vertex! This is not because I don't believe in their excellent management team and their ability to execute, but rather that I believe that there is a better value out there that will capitalize on the Moss Mine success. That value is a company called Patriot Gold (PGOL). Allow me to make the case that it should merit consideration for some of your investment dollars.
PGOL in its present state, is essentially a one property royalty company. It holds a 3% NSR (net smelter royalty) royalty on the Moss Mine. This royalty will provide Patriot Gold with a rock solid revenue stream for the next 6 years at a minimum.
PGOL does little else at present (outside of some minor exploration drilling), except collect this money. There are few assumptions to make with this revenue stream. The NPV calculation is so straight forward and so de-risked, it is second only to cash in the bank.
As you are aware, Moss Mine is operated by Northern Vertex Mining Corp (NHVCF). Northern built out the mining infrastructure and began mining operations there about 2 years ago. After a slow start Northern has really hit their stride in 2020. This is all the more impressive considering the COVID issues. The mine is now producing between 11-14,000 gold oz/qtr. Combined with the rise in the price of gold to $1800-1900 per ounce, and 90k+/qtr silver production, PGOL is now receiving approximately 700-750,000 per quarter in royalty payments . When annualized this amounts to close to 3 million per year. After subtracting approximately 1 million of expenses this leaves a healthy 2 million net income to PGOL. With a large tax loss carryforward this translates into 2.7 cents per share. At the current selling price of .15 and subtracting liquid assets of .03 cents/share, PGOL currently sells for 4.4 times earnings.
While 4.4 times earnings is attractive to say the least, it is likely to get much better….without PGOL lifting a finger! Northern Vertex is highly motivated to extend the life of the mine and has been investing millions in drilling programs with the stated goal to double the mine resource. The new resource calculation which should be out by late 2021 will almost certainly be 100% inside of the Patriot Gold royalty which extends to a circumference of approximately 1 mile outside of the current mining area (longer term exploration and resources may be partially inside and partially outside of the royalty area). The most current mine resource shows a 360,000 ounce resource with 6 yr remaining mine life. . Drilling results appear to give confidence that they will be able to meet their goal of doubling the mine resource. This translates into a longer future revenue stream for PGOL and a higher NPV result.
The wind also appears to be in PGOL’s sails when it comes to the future price of gold. Of course we should consider the value of PGOL if the future price of gold is lower, however considering the exponential US debt and spending problem, it is hard to envision a 6-12 year future timeframe with lower gold prices.
Below are the NPV calculations of the gross royalty revenue stream, using versions of 3 variables- Annual Production, Mine Life (measured from 1/1/2021) and Gold price. The gross revenue stream is presumably what a third party would pay which is the true value of the asset. The calculations use a discount rate of 2%.
Scenario 1 (Current Value...current gold price and no mine life extension)- Production 50k, Life 6 yrs, Gold Price $1,850
Net Present Value- 17.1 million or .21 cents/sh + .03 liquid book value = .24/sh
Scenario 2 (Worst Value- collapse in Gold price and no mine life extension )- Production 50k, Life 6 yrs, Gold Price $1,170
Net Present Value- 11 million or .14 cents/sh + .03 liquid book value= .17/sh
Scenario 3 (Most Likely Value -current Gold price 6yr mine life extension )- Production 60k, Life 12 yrs, Gold Price $1,850
Net Present Value- 41.3 million or .52 cents/sh + .03 liquid book value = .55/sh
Scenario 4 (Upside- Gold price +40%, with 6 yr mine life extension)- Production 60k, Life 12 yrs, Gold Price $2,660
Net Present Value- 56 million or .69 cents/sh +.03 liquid book value= .72/sh
Analysts in the gold royalty space appear to use 15 times revenue as a metric when valuing gold royalty companies. Applying this metric to PGOL would translate into a value of $45 million or .60/sh
Based on the above I believe that PGOL is currently selling below the current value of .24/sh and way below what i feel is the most likely value of .55 and a standard royalty company cap rate of .60/sh
There is very little operational risk. The mine is already built and operational with a quality operator at the helm.
Balance sheet is in great shape...no debt and no reason to raise additional capital
The Company has one employee...the CEO, who is very aligned with shareholders with his 19 million share ownership level….which will likely grow to 29 million with options and warrants.
The CEO appears to operate the company conservatively and professionally
The CEO does not have a bad track record of diluting shareholders
PGOL has another 2% NSR on the Bruner mine, now owned by Canamex. While it has a good indicated gold resource, Canamex does not appear to be reliable or capable to bring this mine to operation any time soon. The potential Bruner royalty as well as other very early stage mining properties owned by PGOL offer long term upside but i would not give them any value at this time.
It is a fair question to ask why the stock price does not reflect the current value of .28 or even my “most likely” value of .55 cents/share as calculated above. I am perplexed by this. I find it odd that a simple income stream could be so mispriced. I would offer the following possible answers with none of them rising to be a barrier to investment for me.
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PGOL is simply an undiscovered company
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PGOL is not yet valued as a royalty company
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The CEO does not make much effort to market the value of this company to the investment community
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Perhaps Investors don’t like that PGOL is a one mine royalty company. Perhaps PGOL will need a few more royalties before the market prices it like other royalty companies
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PGOL may have to pay a dividend before investors will pay more for shares
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PGOL may have to buy back stock to support and push price higher
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PGOL may need to list on the Toronto exchange as well to get more visibility and demand for the stock.
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Investors don’t trust that the CEO will invest the profits wisely or attempt to get full value of this royalty for the benefit of the shareholders
In the end, i believe the odds favor that the CEO will make the proper moves to realize the full value of his 19-29 million shares.
One final warning to potential investors in PGOL. PGOL is very thinly traded so it could be difficult to acquire any significant position without blowing up the price…and on the back end it could be difficult to exit your position without tanking the price. With that said, I believe that PGOL is undervalued enough that you could pay a significant premium over the current price and still have a handsome return over time as an owner of this stock.