Hi Tom,
I posted a note to JRHana about True North Gems (TGX), and he suggested that I post it here. I note that silver and uranium get a lot of attention these days, in addition to regular followings for gold, oil, tech stocks, and increasingly base metals. Canadian diamonds have been popular at other times. It seems that True North Gems, with emeralds, rubies, and sapphires in the Canadian north, does not fit any slots that people have tuned into. At this point it is being almost totally ignored, in spite of a long string of very impressive news releases this year. My own take on the stock is that on a risk/reward basis, it is dirt cheap when compared to the much more followed gold juniors and diamond juniors (not that I'm knocking gold -- I think that prospects for gold are fabulous). Anyway, here's my note for anyone who might be interested in something that is NOT currently considered hot and sexy by any group of investors.
Hi JR,
I wonder if you have any recent thoughts on TGX? I understand that you used to follow it earlier. I thought that I would compare notes with you, and see if you have noticed anything that I have missed, because I continue to be surprised at how low a valuation the market is giving to the stock, and how it continues to yawn at or completely ignore news out of the company. I had a small stake last year, but since this summer have added a very large stake based on the depressed prices and continue to add.
I can only assume that the market is focused on negatives. These are the negative spins that I can see. I hope that I am not missing any others.
NEGATIVES:
1) Management was put in a bad light earlier this year when it used Bernie's [former president's] private company to try to cut the emeralds themselves, a possible conflict of interest. The emerald cutting failed disasterously and based on results left the impression that the emeralds were worthless.
COUNTER: Bernie has since left the company. With him goes what might have been the "promoter" element of TGX that anyone who saw the 2002 promotional video might have recognized. The company is now sending the emeralds to qualified outside sources to be cut, and is now driven by a more bland, heads-down management that is making steady progress but not much noise.
2) Andy Smith [CEO] moving over to do work at Galantas could be seen as a vote of non-confidence in the economic potential of Regal Ridge and True North in general.
COUNTER: Andy was specialized and highly experienced in managing the development of narrow-vein gold deposits, and felt that coloured gemstones were not his area of expertise. He received an incredible offer with Galantas -- an economically viable deposit ready to be developed soon, and the first gold mine expected to open in Ireland.
3) The company has failed to demonstrate any really high value on cut emeralds from Regal Ridge.
COUNTER: Regal Ridge has an absolutely massive area of mineralization to draw from, and one could hardly expect them to be picking out large perfect emeralds so early when they have quite literally been scraping the eroded surface, digging material out of trenches with caterpillar tractors. Progress was made this year in A) finding emeralds at depth (at a depth I believe is outside of erosion) and B) understanding the geological co-determinants of the emerald mineralization. With this in hand, their chances of reaching the goal of extracting large emeralds is much closer, at a time when the market is expressing total disbelief of the possibility of high value emeralds. Note also that the emeralds are plentiful enough that one should not scoff at what is near the surface, even if it is eroded and emeralds small.
4) Little news from "True Blue" or Ghost Lake -- as a result, market assumes these are a bust.
COUNTER: It is a bit too early to assume this. Management has been very busy, and perhaps overstretched this year, dealing with totally new and exciting developments on other fronts. They seem to be doing little to promote the company, and are willing to let the news come out at a gradual pace, so it cannot be assumed yet that news is particularly bad -- just that nothing spectacular can be said at this point.
5) Warrants priced at $1.00 were extended to next year, and this makes it appear that management does not expect a stock price bonanza right away (ie. don't expect spectacular news).
COUNTER: They do appear confident that the stock will go over $1 and spare them the effort of doing a financing at a time that they are very busy doing other things. A price of $1 represents more than 50% appreciation from the current price of .63 Cdn.
POSITIVES:
1) This year, two new potentially lucrative properties have been added, both acquired at surprisingly favourable terms. These have apparently not broken the threshold of getting the market's attention, especially when people tend to be so focused on particular areas of the market -- gold, oil, base metals, diamonds, etc, with coloured gems not fitting into anyone's "slots".
Greenland "Fiskenaesset" -- a reasonably-sized ruby mine that appears to have high value rubies easy to find in the samples taken.
Baffin Island "Beluga" -- beautiful multi-carat sappires found and already cut, just picked out near the surface from "friable" ground that is easy to extract the gems from.
2) Howdy Ridge emerald mineralization was just found this year, and appears to demonstrate better mineralization than Regal Ridge /Tsa Da Glisza, although investors seem to have judged the properties based on preliminary Regal Ridge results. Much progress has been made mapping out the mineralization, and the groundwork has been set to make significant progress next year.
How do you value TGX? It is extremely subjective, because there are no peers to compare it to, but it is apparent to me, at least that it is worth much more than it is trading for, and with a proper understanding in the broader investment market it could be trading at significantly more.
The latest press release shows bulk sampling produced a total of 4119 carats of gem quality and 36768 carats of near-gem from 582 tonnes of material, or 7 carats gem quality per tonne. Obviously this is not representative of the full deposit, but note that the deposit stretches over at least 1.4 km by 700 m to a depth of 30 m or more -- which would be 29 million cubic meters, at typical rock density 2.6 g/cm cubed being 76 million tonnes. Compare this to Aber and Rio Tinto's Diavik
( see www.aber.ca/business/pr_may16_2000.html ). Diavik, including inferred resources, was average 3.7 carat per tonne, for 37.4 million tonnes. Aber's 40% share of this mine was enough to command it a current market cap of 2 billion dollars!!!!! True North's market cap is less than 13 million US, 0.66% of the amount, and Regal Ridge is only one of three major properties (not even mentioning True Blue).
To look at this another way, open pit mines are generally quite profitable at 2.5 g/tonne. The value of 2.5 g of gold is about $35 US. Based on the results of the mini-bulk sample recently reported, they got approximately $650/tonne (assuming $200/gram for rough gem, $20 near gem and $5 non gem)... |
