This post continues the series on Open Pit Gold miners begun here, continuing here and now profiling another open pit gold miner that I consider undervalued and hold as a significant part of my portfolio.
Castle Gold (CSG.V) is very comparable to Capital Gold (CGC.TO). Up until its recent doubling it was clearly way undervalued relative to Capital Gold. I got lucky and got in near the end of the year in the low twenties before the breakout happened.
I believe that Castle Gold is the result of the merger of two gold mining companies. I was not following the company when this occurs, so there may be errors in this company history. One had a project, El Castillo in Mexico, with a lot of open-pit heap leachable gold, but without the financing to get it into production. The other had a little cash and a short mine-life, high-grade open pit mine in Guatemala. The strategy was to use the cash-flow from the Guatemala mine to get the big long-life open pit mine into production.
This makes Castle Gold pretty similar to another gold miner I hold, New Guinea Gold (NGG.V), click here and here for more. The risk of going to zero has receded for NGG as they have closed financing and seem to be getting decent production from their starter mine. In my opinion, there is still more pop to come for NGG.V as the next quarter's production results confirm that the company is no longer in danger.
Castle Gold became extremely undervalued because getting the starter mine going in Guatemala took a lot longer than expected. As a result, during the height of the commodity crash and credit crunch last fall it became really unclear whether Castle Gold would run out of money and fail to get El Castillo into production and "Go To Zero". The stock price touched $C 0.15 multiple times in Q4 2008.
Finding similar companies (in danger of running out of money but with genuine assets) has been a path to quick profits recently. If you know of any such companies, please leave me a comment.
Castle Gold has apparently turned the corner having announced (click here) December 2008 production 6928 oz of gold. That's 80K oz of gold annualized. The Guatemala mine runs out in the forth quarter and so does not factor into my 2010 projections. Even so, El Castillo, produced 5386 oz which annualized is over 60K oz. Castle Gold is projecting 50K oz/year annualized going forward from El Castillo after having increased production by increasing its fleet of mining vehicles. The fleet increase will have to be financed. More about that later.
Comparing Castle Gold to Capital Gold, I find that even with Castle Gold's stock price doubling (with Capital Gold's stock price rising 50%) that Castle Gold remains the most undervalued of the Open Pit Miners discussed so far (see chart below) in terms of all three of our key metrics: price to annual oz, price to operating cash flow and price to resource oz in the ground.
Castle Gold is so nicely undervalued that even another 50% increase in stock price (or as takeover premium) leaves Castle Gold clearly an accretive acquisition to any of our three reference gold miners: Alamos Gold, Western Goldfields and Minefinders with the side benefit of moving them from a single mine story to a multiple mine story. Companies with multiple mines have lower risk and are typically awarded higher valuation.
The main thing I don't like about Castle Gold is that, at 50K oz/year, it isn't really big enough to be a clear takeover target. Castle Gold currently doesn't have a clear story about how it will "grow up" big enough to be a take over target (to say, 100K oz/year). It has enough oz in the ground to increase production beyond 50K oz/year, although some of it is sulphidated and will have to be run through a mill (CAPEX needed). They also have a decent exploration project, La Fortuna, which might also be used to increase production. The lack of a clear timetable on either forces me, as a conservative mining company analyst, to value Castle Gold at 50K oz/year.
At this point I'm planning on holding my Castle Gold position at least until another 50% gain is received relative to its peers. The chart below shows that Castle Gold's train has left the station. Technically it looks overbought in a parabolic rise and is not at the resistance coming from its recent high in Aug 2008. It took me a week to edge into Castle Gold with my current position of roughly 100K shares. Its expensive to get in and out of these small stocks, so I'm going to ride Castle Gold for a while. I'm expecting a bit of a pullback when the financing needed to increase El Castillo's fleet is announced. You might want to look for that as an entry point. Of course, if gold keeps rising I expect Castle Gold to continue its parabolic rise and there may be no better entry point that the current price.
I think Castle Gold still has an easy 50% value increase relative to its peers based on valuation and the relative low-risk associated with executing its El Castillo to 50K oz/year expansion plans. Of course, there is more upside in the form of the overall revaluation of gold mining stocks relative to the current price of gold (e.g. the XAU/Gold ratio argument) and from further upward revaluation based on possible further price increases.
Once again, show me any other business where you can find a sub 2.0 price to operating cash-flow ratio. These junior gold producers are in position to flat-out print money at $800 gold. Castle Gold seems undervalued to the rest of the gold miners and gold miners seem undervalued relative to the rest of the market by quite a few multiples.
Of course, everyone should do their own due-diligence and make their own investment decisions. All of the above material comes from my own amateurish reading of the company website and related financial documents. As you know, I am a software engineer, not a financial advisor.
Finally, as an individual investor in illiquid stocks you cannot expect me to announce when my sentiment changes about a stock or announce when I am entering or leaving a stock. There's only room for one at a time to enter and leave these stocks.
Best wishes to you.