Trading many junior mining stocks is a risky game, with volatile swings due to everything from commodity prices to new geological surveys. Diversified ETFs like Global X’s Junior Miners ETF (NYSE:JUNR) may be trading down more than 16% over the past 52 weeks, but there are many unique opportunities for discerning investors. For instance, General Metals Corporation’s (GNMT) recent agreement that could significantly push forward the timetable towards permitting and production on its Independence gold and silver mine in Nevada.
Background on the Deal
On January 31, 2013, General Metals announced that it entered into a Letter of Intent (“LOI”) with Open Gold Corp (CVE:OPG), a Canadian junior mining company listed on the TSX Venture Exchange, to raise capital and provide better access for future capital needs. Under the terms of the agreement, $2.35 million will be raised to advance the development work on the General Metals’ Independent gold and silver mining project, initiate exploration of Open Gold’s Mitchell Project near Goldcorp Inc.’s (NYSE:GG) properties, and provide working capital.
The transaction itself calls for Open Gold to issue shares of its common stock to General Metals such that it will own 64% of Open Gold’s issued and outstanding shares, including the shares issued to raise the $2.35 million in capital. These shares will then be issued to General Metals’ shareholders and the Independence project will be transferred to Open Gold. The new board of directors for Open Gold will consist of two General Metals directors, two former Open Gold directors, and a fifth director that’s independent and acceptable to both companies.
Doing the Mathematics
With one million ounces of gold and four million ounces of silver resources, according to a NI 43-101 report, the net present value of General Metals’ Independence mine could be nearly $50 million using conservative discount rates. The company’s mere $8 million market capitalization suggests that investors saw a lot of risk in commercializing the mine, particularly in securing the capital necessary to move into production. The aforementioned agreement removes a lot of this uncertainty and could bridge the gap between market value and intrinsic value.
General Metals shareholders also benefit from a great deal structure. They will acquire 64% of Open Gold’s shares, whose promising Mitchell Project is located in the Birch-Uchi Greenstone Belt just 10km southwest of the former South Bay Mine that produced 1.6 million tons of ore at 2.5% copper, 14% zinc and 3.5oz per ton silver. The addition of the Independence mine could create a company worth in excess of $20 million; while shareholders would also retain their original stake in General Metals, which could pursue additional opportunities.
Potential Investment Opportunity
General Metals represents an attractive potential investment opportunity ahead of the Open Gold transaction, given that its valuation could double afterwards. With only an additional $15 million or so needed to bring the Independence mine into production after final permitting which is in the final stages, the $50 million in net present value could be realized sooner than later for shareholders, while it’s possible that a commercialization partner could come onboard and assume these costs, too. As a result, there’s a lot of potential upside for shareholders to ponder.
Looking ahead, these shareholders can also look forward to potential additional resources being found on the Independence property when drilling begins. The property is located in the prolific Battle Mountain mining region, where the Phoenix Mine flanks it on three sides, producing 250,000 ounces of gold and 900,000 ounces of silver, with proven and probable reserves worth more than $20 billion. Similar reserves, if discovered, could position Independence alongside companies like Allied Nevada Gold Corp (ANV) that operate in the state.
Disclosure: The subject security is a client of Emerging Growth, LLC. For full financial disclosures for all Emerging Growth, LLC clients, please visit http://secfilings.com/Disclaimer.aspx