Value investing never goes out of style. I am always willing to consider a company when I can pay less than a dollar for every dollar of assets held. But a market discount alone is not enough to get my interest.
I need to see a case for growth and a corporate strategy to unlock that value for shareholders. Add in a significant insider ownership position and an experienced management team, and New Jersey Mining Co. (US:OTC-NJMC) seems to have all the pieces in place to make it happen.
The background conditions during the last five to six years have been extremely challenging for companies operating small mines. This has driven the price down for mining projects and sharply reduced the pool of companies on the prowl to make acquisitions.
The difficult environment, however, has led to some bargain transactions for exceptional projects. This is where the value investing part of the story comes into play.
The flagship asset under NJMC's control is the Golden Chest mine project. The company also manages and operates the nearby New Jersey mill, which is currently processing ore from the mine.
These assets were recently acquired at the bottom of the market cycle for a fraction of the replacement value, resulting in minimal dilution to shareholders. NJMC and previous operators of this gold mine have invested more than $15 million in exploration, development and infrastructure expenses.
A fresh approach to reviewing historic exploration and production data, plus the application of modern exploration methods, often contribute to building a much-larger resource when a new management team takes on a mine.
One of the first things that NJMC geologists investigated was the potential that some of the ore shoots encountered underground actually extended right through to the surface. Building on historical work, they completed surface sampling and analysis to establish several attractive new gold mining zones that had been overlooked or misunderstood by the previous operators of the mine.
Near-surface gold showings are appealing because they can be accessed cheaply using open pit mining techniques. At Golden Chest, the setup is even better since the gold veins outcrop along a hill. In effect, this means the company only has to dig half a pit to get at the gold, and follow it to lower elevations of the vein system down slope.
A second positive factor is the grade. While narrow vein gold averaging between four and five grams per tonne of ore is marginal for an underground mine, it is robustly economic for a shallow open pit mine.
NJMC launched its open pit late last year and has been able to continue mining all winter with minimal disruptions. Meanwhile, the company has been moving ahead with work to dewater and rehabilitate the underground mine workings.
Located in the heart of the prolific Coeur d'Alene mining district, NJMC has been able to recruit from a large pool of highly skilled mill and mine workers that are happy to work close to home.
Even at this early stage the plan is progressing on schedule and beginning to generate positive cash flow from operations. The first shipment of gold concentrate from the plant rolled out in January, with several more in process.
This is a huge advantage for an emerging producer as cash flow is critical during the start-up phase of a mine. As production increases, this money can fund additional development work without the need to issue more shares or take on significant debt.
Ongoing exploration work has outlined several additional surface outcrop zones that may also be developed to provide additional low-cost mill feed while the underground mining is getting up to speed.
This also opens up the attractive possibility that these new zones may extend further to depth and eventually a drilling program may define new underground resource zones in close proximity to the current mine development.
The company has set an achievable initial objective of processing 3,000 tonnes of ore per month through the mill, with annual production in the range of 8,000 ounces to 10,000 ounces of gold. Even this modest production level should furnish attractive cash flow from operations and build a cushion of working capital.
In the longer term, NJMC has set the bar high. Golden Chest is situated among several mines within a trend producing significant volumes of gold. It is common for the productive gold resource zones in this district to continue much further to depth than the lateral extension. Therefore, the potential for a much larger deposit is at hand in addition to attractive lateral targets that remain untested.
I expect NJMC will eventually outline the resources to establish at least a five-year mine plan with production at much higher volumes.
And the story gets even better. The company also holds a 50 per cent interest in a larger, fully permitted gold property located in Montana that has a significant historic resource with the potential for a much larger discovery.
Management envisions a gold mining plan that can deliver 35,000 ounces of gold during the first five years of production from this advanced prospect. There is further discovery potential for additional resource growth.
This deal sits on the back burner now but it's just another iron in the fire that was acquired very cheaply at the bottom of a long bear market, and represents further potential growth in the pipeline.
An application is in process to secure a listing on the Canadian Securities Exchange, and this should increase NJMC's liquidity and strengthen the shareholder base. NJMC currently has a market cap in the range of only US$10 million and this represents just a fraction of the value of its producing flagship mine asset.
The rapid advance to achieve production allows this little junior to punch much higher than its weight class. As an emerging gold producer with a tight share structure, if the company successfully delivers sustainable production while proving up a larger gold resource - both of which are very achievable goals in my opinion - then this is a bargain stock that is headed higher.
Michael Kachanovsky is a freelance writer who specializes in junior mining stocks. He can be reached at mexicomines@gmail.com.
This is an edited version of an article that was originally published for subscribers in the April 28, 2017, 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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