A New Paradigm for Owning Gold Shares
With the crash in the price of silver in April of 2011 and the plunge of gold starting in September of 2011, the junior resource market has been decimated. As many as 500 juniors are so short of money that there is an excellent chance they will step into the sands of time soon taking with them 100% of investor’s money. That’s true of some good companies with excellent projects and real management as well as the also-rans.
As an example of typical insanity, Minco Silver trades by appointment. As of today, with almost 60 million shares outstanding at a price of $.50, in theory you could buy the entire company for about $30 million. Yet, they have $51 million in cash and brilliant management and a big silver project in China that may go somewhere someday. If it didn’t you are still buying $1 bills for $.60.
Something has obviously changed and it’s not just the price of silver and gold. Shares of junior resource companies are trading for less than they were at $5 silver and $500 gold. I met with an analyst with one of the major gold companies and we were chatting about the change in the market. He laughed and said, “It’s easy.”
I wasn’t so convinced it was that easy so I asked, “Easy, how?” His response was interesting and got me thinking. When they came out with the ETFs, they made it really easy for anyone to buy or sell silver or gold. Why should anyone buy penny dreadfuls with terrible liquidity and poor management when they can speculate on gold or silver any time of the day with total liquidity?”
What he said makes sense to me. Something has changed and it’s not a good change. I feel bad for all the investors in the hundreds of companies on their way to lottery ticket heaven but it’s going to create a giant problem for the future.
The majors have chopped their exploration teams entirely. There literally is no exploration being done by major mining companies yet they are in an industry where they constantly and relentlessly eat their young. In their minds, they can always buy assets from mid-tier producers or junior exploration companies.
But the junior exploration companies have had no access to capital for most of the last four years and they are dying like flies. The exploration model has utterly failed. The very few junior mining companies who still exist, and notice I am not saying thrive; the ones that still exist are the production companies or royalty companies.
A new approach is being taken in Peru and it seems to be working. That is a model of toll milling. To give you a little background, much of mining in third world countries is done by artisanal miners. Estimates say that in Colombia 80% of the total gold produced comes from the informal and mostly illegal miners.
The UN is cracking down on the use of mercury and possession in most of South America is actually illegal as well as highly dangerous. Governments ever searching for new ways to tax their citizens are requiring the informal miners in some countries to register and to adhere to safe mining techniques. And to pay taxes.
Peru is leading the charge and that is creating a new paradigm for mining; that of toll milling. A company will buy or build a mill suitable to the types of ore they will be processing and will purchase ore from the now legal miners at a substantial discount. In many cases the local miners get as little as 33% to 50% of the final value of the mineral. But they also don’t have to spend the millions of dollars necessary to permit and build a mill and associated facilities.
The oldest toll milling company that I know of in Peru is Dynacor Gold (DNG-V) with a market cap of $80 million. They just reported earnings of $6.1 million for last year. Inca One (IO) bought a 25 TPD mill in Northern Peru two years ago and is easing into production. Inca One shares were $.08 a year ago and are $.25 today. The market seems to approve of the toll-milling model.
The latest entry in Peru is Standard Tolling (TON-V, GLNCF-OTCBB) with about 55 million shares outstanding and a market cap of about $14 million. The stock is up from $.09 in January to the current $.25. There are another 43 million warrants outstanding that would bring in an additional $8 million. The warrants are between $.15 and $.45 so are essentially non-dilutive.
Standard Tolling is taking all the mining risk out of the equation. They have entered into contracts with local artisan miners to purchase their ore. The local miners have to have government approval to mine but now are assured of a ready market when they are ready to deliver the rock. Grades tend to be in the 15-30 g/t gold range. The local miners will hand cob the ore to guarantee the highest grade.
Standard Tolling has issued a press release showing they have in hand contracts to purchase 80% of the ore necessary to feed their 100 TPD mill. The company anticipates plant start-up in mid-late June. TON has already planned on a phase II expansion of the mill to 350 TPD. Once the bugs have been worked out and they have personnel in place, management intends to cookie-cutter the operation to other locations in Peru.
I like the toll-milling model a lot. I’ve been telling resource companies for years to stop with the pie-in-the-sky exploration model where 1500 companies all believe they can find the mother lode and dump it on a major. In 15 years there have been maybe 100 deals and a mere handful of giant home runs. When you are using the toll-milling model, you take the risk out of exploration and of mining. You are left with the only part of the equation that actually makes money.
Who cares what the price of gold is when you don’t have to mine it? When you don’t have to spend a cent looking for it, people bring it to you? TON can buy gold at a discount no matter what the current price of gold is.
I like the management a lot and have participated in the latest PP. It’s a model that would work in Peru, Colombia and Nicaragua. I have been to all those countries and the governments are begging resource companies to come in and process ore in a safe and profitable way. This model is a win-win for everyone.
Standard Tolling is an advertiser, I own shares and I am biased. Do your own due diligence.
Standard Tolling Corp