BioMS ($0.37)
MS (TSX: T.MS, Stock Forum) released annual financial results last week and fortunately there were no surprises. My initial concerns were around how the company would account for the costs associated with winding up its previous drug trial with Eli Lilly as it came with certain obligations. The cash and investments to year-end were $51.3 million but BioMS accrued all remaining expenses and obligations and show total debt of only $4.8 million.
The company has net cash and investments of $46.5 million going into the first quarter of 2010. It spent $12 million last month to buy 30 million shares of Spectral Diagnostics (TSX: T.SDI, Stock Forum) (the sepsis company) at 40 cents (plus warrants) and that investment is already up 40%. The plan, however, was not to make money on the shares short term but exercise control of the company if desired down the road. BioMS currently controls 39% of SDI, but would control 49.5% if it exercised all of its warrants.
Given the typical monthly burn rate with 15 employees plus office lease, it will likely burn through another $3/4 million in Q1 on administration. However, going forward it has a management agreement with SDI that should more than cover its operating costs.
In effect I estimate MS should be sitting on net cash and investments close to $33 million or 36 cents per share. The investment in Spectral (SDI) is worth another $15 million or 17 cents per share.
Our plan is to roll the dice on the SDI investment. The existing large pool of cash limits our risk and the company could find further investments down the road to build value. If SDI receives FDA approval even in 12 to 18 months, the valuation potential is huge because the U.S. market alone could generate annual revenue of $100 million plus for SDI. On such a small stock this would have a major impact on Spectral's share price.
As discussed March 1st, buying into MS near cash value allows investors to participate in the SDI potential for nothing, and also benefit if it finds other good projects with its $33 million in cash. My concern going forward was that the company manages the burn rate properly - that appears to be satisfied.
Stocks like this take patience but can be very lucrative.
Oro Gold ($0.54)
The following is very applicable to Oro Gold (TSX: V.OGR, Stock Forum), which we briefly introduced to Stockhouse readers on February 22nd at 44 cents.
March 11th Underworld Resources (TSX: V.UW, Stock Forum) became the target of a takeover by Kinross, which valued the company at $2.62/share. We have not followed this company in the past, but it’s important because we need to learn from it.
Underworld's resource estimate (for its property in Canada's Yukon) defined Indicated Resources of 1,005,000 ounces at 3.2 g/t Au with an additional 407,000 ounces of Inferred Resources at 2.5 g/t. Its Golden Saddle Deposit has a footprint of 580 m along strike and up to 560 m down dip. The two deposits are exposed at surface, open at depth and along strike, and may be amendable to open pit mining.
The Kinross transaction values the fully-diluted share capital of Underworld at approximately $139 million.
Just short of $100/oz, this is one of the higher numbers (per ounce of gold) we have seen for an early stage exploration company (in the range of 1 to 2 million ounces).
I typically try to use a minimum benchmark of 2.0 to 2.5 g/t gold for determining if open pit gold deposits are economic. In this case, Kinross saw value in the 2.5 to 3.2 range. This validates the previous grades I have used but the value per ounce (once a company approaches 1 million ounces) is much higher than the $25 to $35 per troy ounce we have used in past years.
The stability of Canada carries value, but operating costs are also higher than other regions of the world. So there is an obvious trade off.
Relevance to OGR
We need to pay close attention now to companies like Oro Gold.
Oro Gold - 64 million shares x 55 cents per share = market cap of $35 million but $8 million is in cash. This values its potential gold deposits at $27 million
OGR has high economic grades and by Q3/10 we will see a 43-101 report to release estimated reserves. Three very promising gold regions are contained within 2500 square kilometres.
Because Kinross saw value at $100/oz., it should be safe to use $60/oz for any deposits near 1 million ounces - where a company is still in the early exploration stage.
Assuming OGR hits 1 million ounces this year, we can assign a potential value of $60 million or approx. $1/share. This number could be significantly higher if a mid or large tier producer takes interest and/or the drill results continue to hit long intersections of high grade gold. This would indicate the potential could move well in excess of 1 million ounces.
If it hits 1 million ounces and its worth $100/oz, the stock is worth $1.56. However, we will target $60 per ounce of gold to establish a realistic (initial) target.
The company has an aggressive drill program running into the summer so we will be watching very closely.
For those in the Calgary region this week, there is a smallcap symposium being held Tuesday night from 6pm to 9pm at the Coast Plaza hotel. Details are available at www.smallcapconference.ca
Disclosure: Danny Deadlock owns 30,000 shares of BioMS and 20,000 shares of OGR
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Danny Deadlock has specialized in microcap and smallcap companies for over 25 years and is a registered member of the Stockhouse community since 1997. You can find his website at www.MicroCap.com - a service which has specialized in TSX and TSX.V penny stocks since 1998. You can also email Danny at microcap@telus.net