Compelling PM MicroCaps Series, Volume III: Alexandria Minerals
When I sort my equity holdings by current market value, and scan down the list for the first entry representing a pm microcap (now that Copper Fox and Great Panther have convincingly outgrown the classification), the first ticker I come to is Alexandria Minerals (ALXDF.PK). Since I am constantly meddling to tweak my relative allocations to reflect my degree of confidence in future performance, I perceive no accidents in the sequence of this list. Alexandria is my largest wager in the microcap space for reasons that I think will become clear as this process of collective analysis unfolds below.
MicroCap Explorers are all about real estate
All of Alexandria's properties are located within Canada's Abitibi Greenstone gold belt. While I won't have time to review them here, the company's properties at Gwillim, Quevillon, and Matachewan are at least worth a quick inspection in the course of your due diligence.
Alexandria Minerals' key attractions, however, are located within a subsection of the Abitibi belt known as the Val d'Or ("Valley of Gold"). The company's three properties in Val d'Or are Joannes (optioned to Aurizon), Siscoe East (in a JV with NioGold), and the 100%-owned Cadillac Break (the primary focus of this discussion).All told, Alexandria is the third-largest landholder in this important gold-producing region.
The area's most prolific regional fault zone, which has produced some 100,000,000 ounce of gold since the early 1900’s, is called the Cadillac Break; and Alexandria Minerals has chosen the same name for its exciting land package within that zone. Alexandria's Cadillac Break is close to (and along the same volcanic fault from) Agnico-Eagle's Goldex mine, and Osisko's impressive Malartic property is situated just a bit further along the trend. Alexandria's Cadillac Break is a 35 km long property covering more than 11,000 hectares. The company has already established a 340,000-ounce measured & indicated gold resource at the Orenada deposit within the property, as well as a further 228,000 ounces inferred. Drilling recently resumed at the Sleepy deposit to expand upon the existing inferred resource of 150,000 ounces, but hands-down the company's primary exploration target within the Cadillac Break property remains Akasaba.
[Please see the map of the Cadillac Break property in the comments section below, although a newer version of this graphic is available at the company's website here. This is the kind of picture that can lead one to conclude that owning at least a tiny slice might represent a gamble with better odds that any trip to the casino is likely to yield (please read the prelude post carefully if you have not already).]
Akasaba is the site of an historic gold and silver mine that produced roughly 40,000 ounces of gold, at an average grade of 5.12 g/t Au, and 12,000 ounces of silver, down to 90 m depth in 1961-1963. With that site as their starting point, Alexandria has enjoyed tremendous success expanding the scale of the known deposit in all directions. The company has also discovered a high-grade gold zone just east of the main zone, and positive drill results have come from the area between the two zones as well. The next potential major catalyst for shares of Alexandria will likely come during or after the ongoing 20,000 drill program at Akasaba, when the company will release an initial resource estimate that quantifies the success they've enjoyed to date.As is often the case for successful explorers, continued success in drilling has led to a welcome delay in the issuance of that report.
My shift from passive holder to intrigued acquirer
The smallest microcap stocks routinely elude the market's radar, failing to gain widespread notice, and more importantly failing to adjust value appropriately over time as successive mineral discoveries, successful drill intercepts, and yes, increasing metal prices raise the implied shareholder value. It can take years of steady observation to gain signficant confidence in the degree of the market's disconnect with respect to failing to adjust market value to reflect accomplishments, and after several years of observing Alexandria in this way, I feel it is among the more flagrant examples of the market's inefficiency when it comes to assigning value to these misunderstood and overlooked entities. That is the same methodology I employed when I brought Great Panther and Copper Fox to the community's attention prior to their respective breakouts. The longer the shares remained range-bound as implied or estimated resources expanded, development progressed, and metal prices soared, the more confident I grew in the inevitability of a powerful breakout event.
Often times, I will initiate a small real-life position in a microcap stock that really grabs my attention, if only to ensure that I will invest the time necessary to develop the sort of deep familiarity with the company's prospects that is required before seeking any significant degree of exposure. Thus, I find that my more significant holdings grow organically within my portfolio as due diligence proceeds, and market opportunities present themselves. Some opportunities will undoubtedly get away from me using this approach, but I have been pleased with the results over the long-term. I can recall the precise moment when I really shifted gears from holding only a small, timid level of exposure to ALXDF.PK; to aggressively targeting a sizable relative allocation. As you might have guessed, it was a moment that served to greatly enhance my confidence in the investment thesis I was developing at the time, and as chance would have it, it was almost exactly one year ago!
On March 23, 2010, Alexandria announced that Agnico-Eagle Mines had acquired a 9.9% equity stake in the company by way of a private placement priced a few cents above the market value at the time. As Alexandria explained: "Its investment at a premium is a powerful endorsement of the potential of our projects, and we look forward to initiating our relationship with Agnico-Eagle and benefiting from its expertise".
With Agnico's Goldex mine located just a few kilometers along the defining fault line from Alexandria's impressively contiguous block of claims that make up its "Cadillac Break" property group, I did indeed interpret Agnico's interest as a significant strategic development for Alexandria. Given Agnico's track record of cultivating acquisition opportunities in this gradual way, the mid-tier's stated intention to pursue multiple small-scale acquisitions, and the extremely high regard in which I hold Agnico CEO Sean Boyd and the rest of Agnico's management team, the miner's move to acquire shares of Alexandria served as something of a green light for me to follow suit. I do not recommend that investors blindly mimic the microcap investment disclosures by larger mining companies, even from mining companies they know and respect, without being able to forge a solid investment thesis in the absence of such an investment. In the case of Alexandria, I already had my investment thesis for why I thought it had uncommon potential, and the AEM purchase merely validated the thesis.
A case study in persistent market disconnects
To illustrate the process by which I detect those meaningful market disconnects between micro-cap share prices and implied shareholder value over time as discussed above, let us consider the example of Alexandria Minerals in the timeframe since AEM purchased its stake at CDN$0.20 per share. For starters, gold was trading for $1,100 at the time, and has since appreciated 30%. The next month, Alexandria encountered visible gold at Akasabe with an ultra high-grade 17.33 g/t gold over 1.5 meters. In May, Akasaba's high grade zone continues to extend eastward with results including a shallow intercept (only 60m deep) of 36.4g/t over 0.5m. In June, the company reported an impressively thick (revised) 86.3m interval of solid 1.97g/t gold at Akasaba. Another hole that month returned 2.81m at 7.41g/t. By July, the consistent success of their efforts led to a second exploration drill being dispatched to Akasaba. Later that month, the company hit 1 meter of 23.89g/t. September brought the highest grades encountered to date, with 85.89g/t over 0.5m; that is, until October saw 121g/t over 1m. The latter was suggestive of some continuity in the mineralized structure between the Akasaba main zone where the historical mine site was, and the East high grade zone. When six drill hole assays were reported in November, four returned significant gold concentrations featuring grades as high as 11.65g/t and 60.11g/t. By December, drilling beneath the historic mine site in the main zone returned a wide 25m zone of 0.73g/t from about 260m of depth. A few days later, the deposit grew deeper still with strong gold and silver concentrations between 320m and 450m below surface. This also suggested that a 100m width of the deposit near surface remained consistent with the width of the deposit at depth. In January 2011, deep drilling at the East high grade zone found 19.74g/t over 2.4m. In February 2011, Alexandria announced a 20,000 meter drilling program at Akasaba, representing roughly a doubling of all prior exploration effort on the property by the company. Soonafter announced two major finds of 1.69g/t over 36m and 1.38g/t over 31.5m. Meanwhile, at the Sleepy project, where a 150,000 ounce inferred resource has already been established, Alexandria found 3.81g/t over 9m in a deep drill hole designed to test potential at depth. Last month, more promising shallow intercepts from Akasaba like 38.5g/t over 0.6m continue to confirm the continuity of the site's shallow potential.
I know the above paragraph may be a lot to take in, but I took the time to compile those accomplishments to prove a key point. While one does not expect every single successful drill result to spur share price appreciation in isolation, a record this impressive and consistent of remarkable exploration success within one of Canada's prime gold-producing regions certainly warranted some upward market adjustment. Throw in the 30% increase in the gold price, and the fact that Alexandria shares sit below where they were when AEM bought them begins to border on ridiculous. When you've put you time into DD on a particular company, and they never let you down with successful result after result after result in their exploration work, then a stagnant share price in a rising gold price environment can itself become a glowing neon sign indicating the presence of a significant market disconnect. All that without even considering the strategic nature of the company's contiguous land holdings in the Cadillac Break.
Alexandria Minerals' corporate presentation is required reading, pure and simple!
I look forward to hearing your initial thoughts and reactions to Alexandria Minerals, and encourage Fools to use this post as a compendium of collective due diligence on the stock. I remind Fools to exercise patience and restraint when considering or acquiring microcap om plays; not only because of their speculative nature, but also because I intend to cover more than 30 companies over the course of this series. As the series rolls on, many of you I'm sure will wish to keep some cash on the sidelines in case subsequent offerings also strike you as opportunities not to be avoided. :)