The 4 plus year bear market in gold mining stocks has created some amazing opportunities to buy into quality assets at a fraction of their intrinsic value. One such situation exists right now in Patriot Gold Corp (OTC: PGOL) which is trading at decade plus lows, yet has made tremendous progress since 2011. Patriot is a Nevada based company that has been exploring for gold in the southwest US since 2003 and currently owns 3 projects. Vernal is the only grass roots project the company owns that has had limited drilling to date. But the Bruner project in Nevada has produced a discovery with high grade drill results and has great potential to become a mine in the future. I believe Bruner has been one of, if not the most, exciting discovery in Nevada in over 10 years. Lastly, the company also owns the Moss project near Bullhead City, Arizona (which I have toured personally with Patriot’s chairman).
Patriot’s development partner, Northern Vertex (TSXV: NEE) has built a Phase 1 pilot plant which has produced over 5,000 ounces of gold to date. Because of the advanced nature of the Moss project, I believe we can deduce a conservative valuation estimate for Patriot Gold based on their interest in Moss alone. Bruner definitely commands value but I am going to limit the amount that we credit to PGOL in our estimates, to come to conservative conclusions about the current and future value of the company. Before we spend some time walking through the details of the Moss mine, let’s look at Bruner so that investors understand that besides the likelihood that Moss goes into production fairly soon, you could also own a very exciting exploration project in Nevada. Vernal is also a Nevada based property and the same group that sourced Moss/Bruner to Patriot, also generated the Vernal prospect. That certainly doesn’t guarantee success. However, Patriot has proven they can make discoveries that turn into mines. For the exercise of this report, we will not assign any value to Vernal and will look at it as an option/bonus only.
As you’ll see with both Bruner and Moss, Patriot secured partners to spend money developing these projects over the past 4 years. When most juniors have been dormant, gone bankrupt, or struggled mightily to do any drilling, Patriot has enjoyed nearly $30,000,000 in development on their 100% owned projects. In both cases, the partner will earn in to a majority 70-30% joint venture once certain milestones have been hit. Neither Canamex (Bruner) nor Northern Vertex (Moss) has officially earned into their 70%, but they are both close. Canamex/Patriot hit some serious high grade holes initially when they hit on drill holefB-1201 including an intersect 118.11 metres of 4.08 g/t gold, including 1.64 metres of 132.5 g/t gold between 455 to 460 feet. That was in 2012, then they nailed close to 7 gpt (grams per tonne) over 44 meters, near surface, in the east zone in 2014. Those results are outstanding and what initially got my attention to dig into ownership details of Bruner.
I believe it’s safe to say that results like that are what got the big mining interests attention as well. Canamex attracted investments from two NYSE companies, Hecla Mining (HL–$1 Billion market cap) and Gold Resource Corp (GORO), to gain exposure to Bruner. Much more drilling needs to be done to determine the ultimate resource at Bruner but it is safe to say that they will continue to find gold and grow from the 239,000 ounce maiden indicated 43-101 resource. Patriot Gold as of today owns 100% of Bruner. Canamex needs to spend a total of $8MM to trigger the 70/30 joint venture. I believe that they are close to hitting that spending requirement but they also are having trouble raising money in this environment. Frankly, they might not be trying that hard because their stock is also trading near 6 year lows at 5 cents. After the initial discovery in 2012, CSQ.V exploded on 70 million shares of volume to a high of 45 cents. Time and a bear market that grind on cause investors to forget how special and valuable this project is and could be.
The details here are that once Canamex informs Patriot Gold that they’ve spent the $8MM, the joint venture kicks in and Patriot will then need to put 30% of the funds up for future development. Or, the worst case for PGOL is that they are diluted down to a 2% NSR (Net Smelter Royalty). Many of you know that royalty companies in the mining sector, such as Royal Gold (RGLD) and Silver Wheaton (SLW), trade at premiums to other companies in the sector. The reason for that is because NSR’s are pretty ideal in terms of profiting from production. The % is taken off the top in terms of sales of gold, so there is not the potential exposure to higher costs eating into profits. Meaning, if $100MM in gold is sold through production at Bruner, Patriot would receive $2MM. But, what if the costs to pull the gold out were $95MM? Canamex or whomever the operator is would get pinched, not Patriot or the NSR holders.
That said, it is too early to tell whether it will be better for Patriot to remain the 30% partner in developing Bruner or not. Ideally it probably would be, but it will depend on the cost of capital. I could make a case that a 2% NSR on Bruner is worth at least $5 million. It definitely will take more drilling to see where Bruner goes. However, I have spoken to a couple of highly respected mining engineers and geologists that are extremely confident that Bruner will become a mine. The beauty of the Patriot Gold model is that we can enjoy significant upside in Bruner and just received almost $8 million in drilling/development. Additionally, we will see next that Patriot has even better terms with regard to Moss and their partner, Northern Vertex (NEE.V).
Before diving into Moss details, take a moment to study the chart above. This goes back ten years and shows a very clear channel that PGOL has essentially traded within. Only during the first part of 2012 did PGOL trade down to 3-5 cents per share but it then erupted on the Bruner discovery trading to 25 cents very quickly. The share price stayed in the .20’s for most of the second half of 2012. There are 3 long slopes downward in this long term chart, each lasting 3 years. 2006-2009. 2009-2012, and 2012-2015 (today). After each and every 3 year consolidation, the share price took off quickly back to or above the top of the channel (blue line). Investors that bought shares below the middle line and above the bottom blue line, were extremely profitable within 6-12 months. Extremely profitable means being up 400-500%. Interestingly, in 2009 there was no Moss/Bruner activity, just a better market for gold juniors into 2011. 2012’s run to 25 cents was mainly based on Bruner, while Moss was slowly being drilled and developed into one of the most attractive future low cost producers in the Southwest.
I posted this chart to put things in perspective. For anyone that can be a little bit patient, this is a home run investment just based on historical patterns. Keep in mind, there has been nearly $30 Million spent on Bruner/Moss development the past 4 years, so the future channel may break upwards. Once in a new gold bull cycle, Patriot will surface having a considerably bullish story. Buying under 7 cents per share has regularly provided investors an opportunity to triple their money in PGOL. Buying now at 5 cents enhances the return profile to a 4-5X return, and we aren’t even basing this on fundamentals, which you’ll see, could command a much higher valuation.
Above is a nice view of the Moss leach pad. However, the photo doesn’t do justice to the amount of development that has already occurred at Moss. Even if only for a couple of minutes, check out Vertex’s video to get a better understanding of the scope of work already done here.
In regards to the terms of the partner agreement Patriot Gold has with Northern Vertex, it includes the following requirements:
-$500k cash payment upon commencing the agreement (done)
-Spend $8 million in drilling/development (done)
-Complete a bankable feasibility study (not done)
Based upon financial data released by Northern Vertex, the amount of capital they’ve spent up to this point at Moss is closer to $20 million than $8MM. In fact, the number is in excess of $25MM CDN, or over $20MM US based on conversion rates the past 4 years. This is an additional benefit to Patriot and anyone considering investment in the company because we have had nearly $30 Million of drilling and development done on Bruner/Moss combined. It is probably higher going back to previous owners but I used $20MM Vertex at Moss, $8 million Canamex at Bruner, and $2MM Patriot’s initial drilling(it’s higher). One way to look at this is all of this work usually produces value well above and beyond the amount of capital spent. Particularly if the cumulative effects are moving towards a future payoff. Yet, if we only take the cash deployed into the projects, and assign 30% of the value to Patriot as a company (and zero to Vernal), that would be just under $10 Million.
Again, that would be giving no additional value to the cumulative work and future cash flow of production, just paid in capital. Amazingly, Patriot Gold currently trading at 4 cents, with 50 million shares or so issued and outstanding, is being valued at $2MM. Not even, because they have about a quarter of a million in cash in the bank as well. A side note before discussing Moss value and economics. I stood above the project in person early 2014 and marveled that at that time, Patriot which owns the project, was valued at only $3.5MM (it was about 10 cents then). We must understand that when we buy stock, we are owners of the businesses behind the “screen”. In this case, we can get on a plane and go “kick the tires” on the assets in the desert and see with our own eyes how much work has been done, particularly at Moss.
Northern Vertex (NEE.V) is currently being valued in the market at approximately $20 million CDN. Mackie Research, a credible investment research/banking firm in Toronto, initiated coverage of NEE in March 2014 with a .90 price target. They argued that NEE should be valued at $50MM CDN (therefore Patriot’s interest in Moss at $16.5 million?) and that there is significant upside to that assessment. NEE is now trading at 20 cents as the bear market for miners has grinded onwards since the Mackie report when it was trading at 52 cents. But Mackie’s interest and vote of confidence is welcomed, in addition to the investments in Bruner by Hecla and GORO. I think it is interesting and telling that 2 separate public companies entire existence and futures are based on Patriot Gold’s properties. Canamex and Northern Vertex have no other projects of substance besides Moss/Bruner.
We have the benefit of a completed PEA (Preliminary Economic Assessment) on Moss to evaluate potential production, CAPEX, and profitability once in full production. I will be quoting Mackie on some numbers which were derived from the PEA but they also added their own color and beliefs around the project. We know that Moss is in a mining friendly jurisdiction (Arizona), is amenable to open-pit heap leach, will cost approximately $24MM in upfront CAPEX, and produce about 45,000 ounces per year at cash costs under $500 an ounce. This is why the project is so attractive right now because it can be very profitable even in a low priced gold environment and the CAPEX is not extreme by any means. Vertex has met 2 of the 3 requirements to earn in and begin the 70/30 JV. However, they have not completed a bankable feasibility study yet which is the final requirement.
It is important to address that Patriot Gold initiated arbitration proceedings with Vertex over a couple of issues. You can read Patriot’s press release here.
As I am an advisor to the board of directors at Patriot Gold, I will limit my comments on this matter. However, I will say that I think it is clear that Patriot’s position can only be improved. For example, NEE produced over 5,000 ounces of gold (approximately) in Phase 1 of the pilot plant operation equaling over $5MM in gold sales. Patriot Gold contends that some of this revenue is theirs. Vertex contends that it was not “operating profit” thus no money is due. As of now, I expect nothing to come from this in my analysis for PGOL, but if by chance the arbitrator deems monies owed to Patriot, it could be a significant catalyst due to the low market cap of the company. The other element of the arbitration is the requirements around the bankable feasibility study. You can read the releases and determine whether or not this outcome is significant to either company. But, I am basing our analysis on the “worst case” for Patriot Gold, which is basically status quo and does not take into consideration any potential benefits from the arbitration process.
For those that would like to read the Mackie report on Northern Vertex you may do so here.
Based on PEA information, Mackie Research estimates 8 years of production without any expansion drilling. That includes 46,809 gold equivalent ounces for 4 years followed by 4 years of 41,462. Our examples of potential cash flows to Patriot will only need to use the first few years of production to gather potential value. Mackie used an 8% discount rate to give them a net present value (NPV) of $51 million, over 1 year ago. Additional work has been done since then but it has not been considerable. Is it fair to carve out 30% of the NEE NPV and assign it to Patriot? Maybe not fully, but I think it could be, depending on what happens once the JV is triggered.
I would like to look at Patriot’s potential value in a worst case scenario, assuming PGOL cannot or will not raise the $8 million or so it will take to finance their portion of the CAPEX (to build the mine). There are several reasons I prefer owning PGOL to either/both NEE/CSQ. One is because we have diversification by owning Patriot, exposure to two terrific projects. Two, is the valuation. Patriot is valued at a measly $2MM while Canamex is at $7MM and Northern Vertex is near $20MM. Even though the ownership will be minority not majority for PGOL, we are trading at a fraction of the value assigned to the other companies. Last but not least, Patriot has benefitted from nearly $30MM spent on their projects yet has diluted their share structure very minimally. How many juniors have an annual burn rate of $250,000? That’s less than my burn rate and it is a public company!
So, Patriot Gold has maintained a very tight share structure and not needed to raise much equity to continue moving forward. NEE has diluted considerably to get to this point. Once a final bankable feasibility study is in place, financing for the mine buildout could come from equity and debt. Even though many people aren’t taking Patriot seriously in terms of funding their 30% portion of Moss, including Northern Vertex and comments by Mackie Research, I feel they may be underestimating Patriot. As an example, another advisor to the board of directors and over 10% owner of PGOL, is Bob Kopple. Kopple has seriously deep pockets and, if he chooses to, could finance Patriot’s portion of development quite easily. Patriot wouldn’t have to raise the money all at once and could raise additional equity and debt along the way, if they choose that as the best path.
However, we are analyzing PGOL based on that NOT happening. If Patriot does not fund their portion of the CAPEX once the JV is triggered, the worst case scenario, is they will be diluted down to a 3% NSR. Let’s look at the economics if that occurs. 46,809 ounces of gold equivalent, at $1,200 gold, is just over $56,000,000. 3% of that number is $1,700,000 annually to PGOL. At just 10X earnings, and zero value for Bruner/Vernal, Patriot would be valued at $17 Million. That would be just over 800% more than PGOL is valued today, equaling approximately 32 cents per share. Not only that, but considering that Northern Vertex could more easily raise money to build the mine if they owned it outright, they could entice Patriot with an increased NSR, shares in the company, cash, or all of the above, and it would be worth it to them. That possibility exists but as you can see, that isn’t necessary for this to be a successful investment.
Also consider that what if Patriot ends up with NSR’s on Moss and Bruner? They would essentially become a very cash flow positive royalty company and own pieces of two very sexy projects in the US. For the sake of exploring all scenarios, how much would Patriot take in owning 30%? Well, there would definitely be some sort of dilution raising the $8MM or so to pony up for 30% of Moss. But, with all in sustaining cost (AISC) of just over $500 an ounce, and $1,200 gold, now we would be talking almost $10,000,000 per year in cash flow to Patriot Gold. There’s huge leverage to all of this if gold goes higher as well.
Above: Me about to tour Moss with Vertex’ mining engineer and Patriot Gold chairman, Trevor Newton.
One last example of what Moss and therefore Patriot could be worth right now. Look at Pershing Gold (PGLC-just upgraded to NASDAQ global market), which is a similar asset to Moss, although it is located in Nevada. It’s also open pit heap leachable but with fairly significantly lower grade cut offs. If Vertex used the .685 GPT cut off for their PEA (NEE used .87 GPT), I’m fairly certain we would have a quite similar resource at this stage. But, let’s just say that we have a more appealing project in terms of grade than Pershing Gold’s Relief Canyon (RC). RC just increased their resource to 739,000 ounces measured and indicated with the .685 cut off. Moss has 435,000 ounces M&I at the .87 grade cut off. That’s 60% of PGLC’s resource in terms of ounces but we’ll give zero consideration to the much better grades.
Pershing Gold is currently trading at a $110 million market capitalization, based primarily on the RC asset. 60% of that number is $66,000,000. 30% of $66MM is just under $20,000,000. Take that example and cut it in HALF and, again, Patriot Gold would justify a $10MM valuation, or 20 cents per share. Every single way I slice the numbers on PGOL, just in terms of Moss, I get a minimum ballpark value of $10 million. Keep in mind folks, this analysis is based on today’s gold prices and today’s crappy environment. In a higher gold price scenario and/or a better market for gold miners, these numbers could go up 5 or 10 fold. There’s huge upside to these analogies and examples. None of this even takes into account PGOL’s Bruner stake/value, which I believe is significant.
At some point in the next 3-5 years, when Moss is in production and Bruner has advanced considerably, I bet PGOL trades over $1. But, just look at the chart pattern over the past decade and very conservative scenarios outlined above, and PGOL is a no brainer bet for patient investors. Patriot is a strong buy up to 6 cents per share with a 12-18 month price target of 18 cents. That is at least a triple from 6 cents and over a quadruple from current prices. Patriot Gold has enough cash to last at least 12 months. The only reason for new financing would be to participate in maintaining the 30% interest in Moss (or Bruner). This stock is being overlooked but will get a lot of bullish attention in a better gold market. Bare minimum, this stock should be trading at 10-12 cents right now.
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Disclaimer: I am an advisor to the Patriot Gold board of directors and own 2.2 million shares of the company.
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