The Name of the Game
With $1400 gold, the name of the game is production. A company that absolutely intends to be in production is buying out a company I have been trying without success to nudge into production for years.
I genuinely enjoy going back and rereading pieces I wrote years ago and seeing when I get it exactly right. A long time advertiser on the site that I have written about half a dozen times is being bought out by another company that recently took over yet another company that I wrote about in the past.
20 months ago I wrote a short piece about a mining company named Castle Gold with an interesting project in Durango Mexico called El Castillo. They were producing 30,000 ounces and wanted to increase production to over 50,000 ounces. I compared them to another Mexican based junior named Capital Gold that was taken out for $150 million. At the time Castle Gold was valued at about $40 million.
Lo and behold, Castle Gold got taken over by Argonaut Gold (AR-T) and now Pediment Gold is (PEZ-T) being taken over by Argonaut. Pediment has been a long time advertiser and I have followed the company for years, having written half a dozen pieces about them.
Gary Freeman, President and CEO of Pediment, is a long time Vancouver promoter. He teamed with Mel Herdrick, the VP of Exploration for Pediment, years ago to advance San Antonio (1.25 million ounces Au) in the Baja and La Colorada (1.187 million ounces Au and 11 million ounces Ag) near Hermosillo.
The team has done a wonderful job of advancing the projects but Gary makes it clear that he is not a production guy. He stood on the edge of the pool for the last three years and every once in a while he would put his toe in the water for a second or two but rapidly snatch it back.
I thought he was nuts and I’ve beaten on him every time I've seen him for years. La Colorada is a mine with most of a mill left. When it was shut down in 2002, the operator just turned the power off. There are tens of thousands of tons of ore sitting on leach pads that still have all the gold and silver left in them. I have visited the project three times and each time I pointed out that there was probably $30 million dollars worth of gold and silver on the pad waiting for someone to be smart enough to invest $5 million putting it back into operation.
Everyone needs a core competency. Gary Freeman and Mel Herdrick don’t want to put projects into production. They want to drill and advance them and let others develop the skill set necessary to go into production. As a result the stock got whacked from a lifetime high of $3.60 in early 2008 to a low of $.40 in late 2008 during the bloodbath. It has only lately recovered to $1.80 before a takeover offer was made by Argonaut Gold three weeks back.
Argonaut is a gold producer run by the same brilliant management team that hiked Meridian Gold into a $3.6 billion dollar giant before it got taken out. They are production people. They bought out Castle Gold and have that tiny mine in production and offered a 50% premium for PEZ.
It’s the best of all possible worlds for Pediment shareholders. If they want the cash, they can cash out. But if they think that $50 an ounce for gold is a little too cheap, they can bet on one of the top mining teams in the business.
La Colorada is an easy call. There is gold and silver sitting on the pads, waiting for the mill to be brought back on line. That can be done inside a year. And San Antonio is ready to launch. I think Argonaut could have it in production of 80,000 ounces or so a year in about 24 months.
Pediment has been quiet for three years without much progress but that’s about to change. Gary Freeman and Mel will move on to their new exploration company called Ethos.
Buying gold in the ground for $50 an ounce and getting one of the top production teams in the business is about as difficult as stealing candy from a baby. I didn’t see much upside for PEZ for the last couple of years. They were only going to trade with gold unless and until they got into production. The production decision has now been made. I see a whole lot of upside for the combined company.
Until the deal is closed, there is still a chance of making some money on the spread. If you take the current price of AR at $3.85 and multiply it by the conversion of shares at .625, you come up with a theoretical value for PEZ at $2.41. You can buy the same dollar amount of either stock and you will end up with about the same number of shares in the end. But at times PEZ will be cheap and at times AR will be cheap.
Pediment was an advertiser and we used to own shares but we sold out early in 2008 and haven’t bought back. I am biased; I like the management of both companies.