Three Resource Companies: Drilling, Waiting and a Rebirth

October 16, 2018

By The Gold Report

Source: Adrian Day for Streetwise Reports   10/15/2018

Money manager Adrian Day looks at three resource companies in his portfolio, one the latest addition with lots of activity; the second, a waiting game; and the third, a re-emergence.

Evrim Resources Corp. (EVM, CN, 1.49) received this past week its eagerly awaited permit to drill the Cuale project, and has already got crews on the property ready to commence the drilling. Evrim is planning a minimum of 3,000 meters comprising 10-15 holes.

Initial drilling will focus on the La Gloria deposit which was the site of the spectacular trench results in the spring, to test the depth of the high-grade mineralization. Drilling will also test four step-out areas.


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It could be big!

High-sulphidation systems such as Cuale can grow rapidly. If drilling confirms the high-grade results of the trenches, if the mineralization continues to depth, and if any of the step-outs suggest another high-grade deposit (the last two adding volume to grade) then Cuale could attract interest very quickly. Many senior miners are watching closely. Given the excellent infrastructure and strong political jurisdiction, the 100%-owned project (subject to a 1.5% royalty on precious metals and 1% on base metals) would be worth a multiple of current value if the drilling is successful. We should have results before year end.

Before the permit was received, Evrim has released additional trench results that extended the La Gloria zone both to the northwest and east with consistent mineralization. Soil sampling indicated a larger footprint. All these results were very positive; the “truth machine” (aka known as the drill) now takes over!

Lots of activity on other fronts

Separately, Evrim has been busy on other fronts. Initial drilling has begun at an under-explored project, Cerro Cascaron, in Chihuahua, Mexico, which hosts several gold and silver mines. Junior Harvest Gold is earning into the project by paying for the program.

The company has also reached an agreement with First Majestic on its Ermitaño and Cumobabi projects whereby the options have now been exercised with First Majestic owning 100% of both projects, while Evrim owns net smelter royalties, 2% and 1.5% respectively. First Majestic paid Evrim US$1.5 million as part of the settlement. Drilling at Ermitaño has proven an inferred 40.8 million silver-equivalent ounce resource very close to the mill on First Majestic’s Santa Elena mine, where ore is running out. First Majestic said Ermitaño “has the potential to become a near-term source of production.”

Evrim remains a buy particularly if you do not own it or on any dips. Remember, exploration is by its nature speculative; if the drill program were a complete dud—highly unlikely—the stock would fall back rapidly to its pre-Cuale price, losing half its value overnight. However, the C$125 million market cap is backed by C$14 million cash, the royalty on Ermitaño (with a back-of-the envelope valuation of around $30 million), plus other joint-ventures and wholly owned properties giving Cuale a valuation of C$60 million at most. Success would value it much higher.

Waiting until the fat lady sings

Nevsun Resources Ltd. (NSU, NY, 4.41) and prospective acquirer Zijin Mining have mailed circulars to shareholders in connection with the latter’s tender offer for Nevsun at C$6 per share. Closing has been set for December 31. Under certain conditions, the closing period can be significantly shortened. Absent that, we have requested that the company extend the closing date into 2019 so U.S. shareholders can postpone their tax bill.

If you need the funds for some other purpose, by all means sell now (though I’d wait for a bounce back to the mid-C$4.40s). But, though the possibility of another bidder is remote—and becomes more remote with each passing day—the shares are below the tender price (C$5.73 vs C$6), with minimal risk of the transaction not closing. So there is upside in holding, particularly if the closing date can be extended into next year.

The phoenix arises

Reservoir Capital Corp. (REO, Toronto, 0.03 x 0.04) has resumed trading following an eight-month halt following a restructuring. At the beginning of the year, Reservoir withdrew from its Serbia hydropower projects and entered into an agreement with a company owning part of Nigeria’s leading hydro company. The net result is that Reservoir now owns a 1.3% economic interest in the company owning two operating plants on the Niger River. Reservoir’s CEO said the company’s focus was on producing hydropower investments in frontier regions and that this transaction represented “an important first step” in this strategy. Hold for now.

Top buys following recent market turmoil: Gladstone Investment Corp. (GAIN, Nasdaq, 10.56, 8.8% yield); Ares Capital Corp. (ARCC, Nasdaq, 16.37. 9.5% yield); Loews Corp. (L:NYSE); Franco-Nevada Corp. (FNV, NY, 66.01); Royal Gold Inc. (RGLD, Nasdaq, 77.55); and Lara Exploration Ltd. (LRA, To., 0.57).

Adrian Day, London-born and a graduate of the London School of Economics, heads the money management firm Adrian Day Asset Management, where he manages discretionary accounts in both global and resource areas. Day is also sub-adviser to the EuroPacific Gold Fund (EPGFX). His latest book is “Investing in Resources: How to Profit from the Outsized Potential and Avoid the Risks.”

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Disclosure:
1) Adrian Day: I, or members of my immediate household or family, own shares of the following companies mentioned in this article: Evrim, Nevsun, Lara Exploration, Franco-Nevada, Royal Gold, Gladstone Investment, Ares Capital. I personally am, or members of my immediate household or family are, paid by the following companies mentioned in this article: None. My company has a financial relationship with the following companies mentioned in this article: None. Funds controlled by Adrian Day Asset Management hold shares of the following companies mentioned in this article: Evrim, Nevsun, Reservoir Capital, Lara Exploration, Franco-Nevada, Royal Gold, Gladstone Investment, Ares Capital, Loews. I determined which companies would be included in this article based on my research and understanding of the sector.
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( Companies Mentioned: EVM:TSX.V,
NSU:TSX; NSU:NYSE.MKT,
REO:TSX.V,
)