While most market analysts tend to focus on the energy or technology sectors, the mining sector has experienced a bit of a revival that hasn’t gone unnoticed. Columnist Mike Kachanovsky narrows in on one junior gold mining stock for speculative investors who want to participate in the early stage of a renewed gold bull market.
Resource stocks are coming back to life again, in what may be considered a stealth bull market since few investors are even paying attention to this sector right now. However, some junior mining stocks have been exceptional winners in recent months even at the early stages of this revival.
Earlier this year, U.S. Gold Corp. (NASDAQ—USAU) issued an updated preliminary economic assessment (PEA) for its wholly-owned Copper King project in Wyoming.
Undervalued gold stock
Just considering the higher-grade portions of Copper King’s defined deposit, the PEA envisions mine development that would support continuous operations for 17 years, producing a total of 182 million pounds of copper and nearly 700,000 ounces of gold.
The estimated capital expenditure amounts to US$113.7 million to establish production, hardly an insignificant sum.
However, the PEA presented an attractive internal rate of return (IRR) above 33 per cent, indicating the development capital could be repaid in as little as 2.5 years of mine operations.
At the moment, the estimated net present value for the project is US$178 million. To put this in perspective, Copper King is just one of the active projects held by U.S. Gold, and the entire market capitalization for the company is less than US$40 million.
Still considered a bargain mining stock
Suffice to say the stock may still be considered a bargain, even though the share price has surged over the last couple of months. Work continues at Copper King to optimize its development potential. A review of geophysical data has revealed new targets for copper-gold mineralization that had been overlooked in prior drilling work.
U.S. Gold quickly followed up with a drill program of four holes to test these target areas, located to the south and east of the main zone of the deposit. Assay results were pending as of press time.
There is also potential to increase the magnitude of the overall deposit at Copper King by including a larger tonnage of lower-grade resources that have been outlined but were not part of the latest PEA study. Combined with any further discovery success, this could bolster economic expectations and enhance the projected mine life as well as net copper and gold production targets.
Digging deeper for value
Even with the work underway focusing on Copper King, the company has not been idle in Nevada. Last fall, drill programs were completed at the Keystone gold project that amounted to nearly 3,200 metres of drilling in seven holes. A scout hole was also drilled at the nearby Gold Bar North property. Visual inspection of the drill core confirmed that the company had encountered target formations, and assay results there are pending too.
These attractive Nevada properties are considered early-stage exploration prospects. While promising geological structure and host rock formations have been identified, as yet there has not been a breakthrough gold discovery to focus speculative attention on, beyond the concept stage. But achieving at least one drill core interval with high gold values from these initial drill holes could be a transformative event in the evolution of the discovery process.
Speculators have demonstrated many times in the past their willingness to engage in a buying frenzy when a junior explorer delivers tangible proof of a new gold discovery.
In the Cortez Trend of Nevada, where numerous large-scale gold deposits have been outlined during the last 20 years or so, this speculative appeal could be a catalyst to drive the share price higher.
It is entirely possible this round of drilling may not encounter anything beyond anomalous values, and that is not to be interpreted as a failure. Both Keystone and Gold Bar North cover large areas of unexplored property, and there are many targets to investigate.
The lessons of history include many significant gold discoveries that required several rounds of drilling work before geologists were able to track down the deposits. This is the reality of the exploration business.
However, the proximity of known deposits elsewhere along the Cortez Trend should offer encouragement. The successful track record of Dave Mathewson, U.S. Gold’s head of exploration, is another factor that suggests patience and perseverance is warranted.
The company is well-funded and committed to a systematic approach that ensures all data will be carefully reviewed from each program. Subsequent rounds of exploration may lead to a breakthrough, even if this current round is not productive.
Does not put all its gold in one basket
I like the fact that U.S. Gold has been able to advance work at two core project areas, of which either may be considered a flagship prospect individually. This builds a measure of security given that the outcome of further exploration is unknown; if one project does not ultimately merit further activity at some point along the process, the company has a second shot at achieving success without the loss of momentum.
As for the ongoing work in progress, the timing could not be better. The positive fieldwork at both of the core operating areas has contributed to moving these projects further along the value curve. Meanwhile, gold and copper are in the midst of bullish market cycles with the price of these metals gradually rising for several months. This has put a tailwind behind the mining sector, and U.S. Gold has benefited from the trend as investors establish positions in junior mining stocks.
The resource sector is in the midst of a period of seasonal strength and U.S. Gold will be reporting assay results soon that could focus a lot more attention on its story. Meanwhile, on Jan. 22, the company closed a financing that raised net proceeds of about $4.9 million that will underwrite the next phase of exploration work at its core holdings.
In addition, a dividend payout was announced in January from U.S. Gold’s legacy technology holdings. Those holdings were sold off last year as part of the company’s reorganization to become a pure junior mining story.
U.S. Gold is now forging ahead with its agenda to achieve shareholder value at the end of the drill bit. The company represents a strong candidate for speculative investors to participate in the early stage of a renewed gold bull market.
Mike Kachanovsky is a freelance writer who specializes in junior mining stocks and also covers technology companies.
This is an edited version of an article that was originally published for subscribers in the February 9, 2018, issue of Investor’s Digest of Canada. You can profit from the award-winning advice subscribers receive regularly in Investor’s Digest of Canada.
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