Virginia Mines a buy or hold near current levels: Cook, Casey

It is no easy task to find junior exploration companies these days with tangible assets and a share price that might not drop too significantly should the current market uncertainty be a mere prelude to a wide-scale financial system collapse.

One way to look at it would be to find those companies with share prices that have already held up well through a difficult last half of 2011. Quebec-focused Virginia Mines (vgq-v) is one such example, its shares having hovered between $8 and $10 a share since March 2011, closing at $8.78 on Dec. 2.

Geologist Brent Cook in his newsletter Exploration Insights currently recommends holding the stock, while the Casey Research Group’s International Speculator newsletter said buy last month when it was trading at $8.40, or officially, “Buy under $8.” Cook first recommended buying Virginia Mines in March 2010 at $8.47. The Casey group has recommended it a half-dozen times since February 2007 at prices ranging from $3.89 to $8.94.

Virginia Mines continues to reap the benefits of its 2004 grassroots Éléonore gold discovery in the James Bay area of northern Quebec, now a multi-million-ounce gold deposit being developed by Goldcorp (g-t, gg-n). The senior gold producer paid US$425 million to Virginia Mines (then named Virginia Gold) for the project in early 2006, even though it had no mineral reserves or a resource estimate, only around 200 drill holes of which more than 70% yielded intercepts exceeding 10 grams gold per tonne. As part of the deal, Virginia spun out its other exploration properties into a new company, along with $31 million in cash and a sliding scale 2% net smelter return royalty on Éléonore. At the time, Goldcorp’s director of project development stated, “We honestly believe that we have acquired the core of the best new Canadian gold discovery since Hemlo.”

Last month, Goldcorp announced it had received full environmental approval for Éléonore allowing for mine construction to begin shortly, with a view toward first gold production in late 2014. Éléonore will produce 600,000 oz. gold per year on average at cash costs below $400 per oz. over an approximate 15-year mine life. In a press release about the decision, Goldcorp’s president and CEO, Chuck Jeannes, said, “We believe (it) will be the best new gold mine in Canada.”

With the mine firmly on the track to production, Cook says Virginia Mining’s sliding scale royalty on Éléonore presents an attractive target for gold royalty companies such as Franco-Nevada (fnv-t) or Royal Gold (rgl-t, rgld-q). “Based on my model,” Cook argues, “VGQ’s sliding scale royalty on the deposit (averages about 2.75%) equates to roughly $300 million (or $9.60 per share) at a 5% discount rate and $1,500 gold price.” He notes Macquarie Research estimates a $224-million value for the royalty using similar criteria, and has an $11.65 target price for the stock.

“The Éléonore gold royalty will become one of the most valuable in the industry,” Cook contends. “Gold royalty companies like Franco-Nevada and Royal Gold are valued at a premium to their net asset value. At some point, Virginia’s royalty will be re-rated as well.”

In the meantime, Virginia Mines is receiving $100,000 per month in advance royalty payments and has joint ventures with several partners on close to 20 projects, all located in Quebec and in various stages of development. The partners include Iamgold (img-t, iag-n), QuadraFNX Mining (qux-t), Anglo American (aal-l), Xstrata (xta-l), Goldcorp and half a dozen juniors.

Investment strategies

No matter which way you look at it however, during the 2008 recession, shares of Virginia Mines fell from a high of $8.80 in late 2007 to a low of $2.25 in late 2008. Another strategy might be to find those junior exploration companies that have already seen their share price drop considerably but have cash in the till and advanced-stage projects.

Should the markets bounce back in the new year, investors would stand to make considerable gains. If they drop further, then at least the companies will be less likely to fall near zero since their project will have a tangible value the market can assess. Cook recommends Canaco Resources (can-v), Keegan Resources (kgn-t, kgn-n) and Esperanza Resources (epz-v) for these types of companies. He cautions, “I am uncertain if the current market malaise represents a great buying opportunity or is the precursor to a 2008-like collapse… I prefer to leave those assessments and forecasts to you, and hope the information [I provide] is useful in your financial planning.”