Compelling PM MicroCaps Series, Volume V: Tyhee Gold
With my apologies for an extended delay between the Barkerville post and this one, the time has come for this community to put its collective head together, play devil's advocate, and dive beneath the surface for any reasonable explanation for the paltry $40 market capitalization that the market has assessed to Tyhee Gold (TYHJF on the pink sheets). I have not identified one, and I personally consider the stock one of the premier examples of a deep and persistent market disconnect from anything approaching a reasonable valuation for an expanding in-ground precious-metal resource. In that respect, it reminds me of Alexandria Minerals, and perhaps it is no accident that Alexandria and Tyhee both rank among my top-five equity holdings overall.
Particularly in cases like this where I have amassed a core long position as a result of that value-based assessment, I am always keen to play devil's advocate and attempt to poke holes in my own investment thesis in an effort to ensure that my degree of confidence is well justified. That is where you come in. To conduct such an exercise, there is no power in the financial universe greater than Motley Fool CAPS, and the community of intelligent and gifted investors residing herein. I am hopeful that, as a collective, we can discern an appropriate degree of confidence in what I contend is a bullish outlook for the stock based upon ample due diligence and our expanding collective expertise on this high-octane segment of the precious metals sector.
To get us started, I will aim to lay out the foundations of an investment thesis, and tell the story of how I came to select Tyhee as an overweight selection among pm microcaps from among the many hundreds of junior resource plays out there.
Before we begin, however, as a prelude to any discussion of microcap resource stocks, I must be sure that everyone has read, re-read, and committed to rote the important concepts and caveats laid out in my prelude post to this series. This is a very high-risk space by nature, and allocations must be very carefully considered. I don't want anyone to take on more risk than they are comfortable with, and I certainly will not accept any backlash for speculations turned sour. With that in mind, let us proceed with our assessment of Tyhee Gold.
Tyhee Gold, formerly Tyhee Development, trades on the TSX Venture Exchange under the ticker TDC, or on the pink sheets under TYHJF. If memory serves, I first began accumulating shares back in 2005 at about $0.25 per share, and as so often happens in the slow-motion world of exploration-company invesments, we can fast-forward 6 years to the present day and find the shares trading beneath my initial entry price. It's nothing out of the ordinary for me: I waited at least as long for Great Panther and Copper Fox to break-out, and I am content to wait for the market to hone-in on Tyhee accordingly. In the meantime, the resources throughout Tyhee's Yellowknife properties have grown substantially in scale, and significant development milestones have been achieved that the market has completely failed to adequately account for in my view. First during the precious metals correction in 2008, and then in a more concerted way more recently, I proceeded to amass shares at these reduced share prices, with the result that my overall cost basis is now right around where the shares presently trade, and Tyhee is my fourth-largest equity holding overall.
As with all the other junior plays that have earned my considerable confidence, my continuous survey of each and every press release over the years has revealed an unmistakable pattern of consistent exploration success. At yellowknife, this success has been achieved across multiple gold discoveries, at highly attractive grades, over a sizeable area north of the town of Yellowknife, in Canada's Northwest Territories. The Yellowknife project spans across a 40-kilometer swath!
With mine construction permit applications and an environmental assessment study already submitted to the appropriate regulatory agencies, and the initiation of a feasibility study just around the corner to follow-up on the company's positive pre-feasibility study from July 2010, Tyhee stands at an extremely advanced stage of development with multiple potential catalysts for significant upside moves. As you'll recall from our discussion of a draft scorecard system for assessing resource microcap plays, a company's advancement through the range of "life-stages" between initial staking and production serves as one of the most important de-risking factors for a potential investment in the space. Tyhee's obstacles to achieving production at this stage are few: they have already proven the economic viability of the proposed mining operation, requested permission to build the mine, and continued to expand the resource with fresh rounds of discoveries (particularly at the very alluring Clan Lake mineralized structure). Fool's looking to track the permitting process closely may wish to bookmark this link to the related page at the website of the regional regulatory authority: the MacKenzie Valley Review Board.
Before we get any further along, let's take a look at the known resources at Yellowknife so you can get an idea of the value proposition. As of July 2010 when the pre-feasibility study came out, Tyhee boasted Measured & Indicated resources of 1.95 million ounces of gold at a sweet average grade of just under 3.5 g/t! Including inferred resources of 269,000 ounces at that time, Tyhee had a global resource under its belt of 2.22 million ounces. Now, recalling our conversation with Eric Owens from Alexandria Minerals, and using the middle of the range of valuations that analysts routinely place upon total 43-101-compliant resources in the ground ($100 per ounce), that would imply a value of $222 million versus the present market cap of $40 million. But it gets better! Unlike Alexandria, Tyhee has a PFS in place that assessed the economic viability of the proposed mine, though it's important to note that the PFS excluded inferred resources and excluded two of the company's gold zones (Bruce Lake and Goodwin Lake Vad). Based solely on the resulting Proven and Probable reserves which correspond to the recoverable gold as envisioned by the July 2010 PFS, and using a gold price of $1,150 that is looking mighty conservative at this juncture, the project implied a net present value of $217 million (or nearly a precise match to the more crude metric described above). Where it really starts to get fun is when you consider the NPV for the project as proposed using a more current trailing gold price like, say, $1,450. At $1,450 gold, the project carries an NPV of $437 million (5% discount rate). That's more than 10-times the present market cap! If you then start to insert bullish long-term gold price projections, and the unmistakable likelihood of continued exploration success enhancing the duration and perhaps the scale of the mining operation, the full breadth of potential upside becomes truly enormous. I won't touch a gold or silver stock unless I think it has a good chance of doubling, but when I find a stock that I think could be a ten-bagger in the making, I am inclined to give it ample consideration for inclusion among my core holdings.
Tyhee commands a huge land package within a district that produced more than 14 million ounces of historic gold production, but since a new gold mine has not been commissioned in the area in more than 20 years, the district has not garnered the attention of the industry the way well-known Canadian districts like Red Lake and Abitibi have done. Tyhee proposes to build a 3,000 ton-per-day milling operation fed by both open pit and underground mining. Tyhee envisions a single mill processing ore from its various gold zones, and this approach lends itself well to organic expansion of the project with further exploration success. That factor alone makes-up a key tenet of my investment thesis.
And speaking of exploration success, it just keeps rolling along! Since the PFS was released, Tyhee has achieved meaningful expansion of the key Clan Lake Main zone, and discovered two new zones nearby called the Spud and the Bear zones. The spud zone featured some particularly solid grades and intercept widths, and notably included some decent concentrations of silver which are not a typical feature of deposits in the Yellowknife district. More recently, Tyhee encountered up to 43.4 g/t of silver alongside 6.68 g/t gold across a 2.5m interval in a drill hole at the Clan Lake Main zone. If silver ultimately proves recoverable at either the Main Zone or the Spud zone, that "could be material to the economics".
Here is an image of visible gold in a core sample from the Clan Lake structure. When you see this in your core, you know you have a find!
You all know I like to see geologists at the helm of these junior resource plays, and Dr. Webb has been at this for more than 30 years, including with the Geological Survey of Canada and major mining names like Cominco (now part of Teck Resources). But the entire team is similarly well qualified. The project's chief geologist also has 30 years of experience, including -- very significantly -- a nine-year stint as an exploration and production geologist for the Yellowknife region's Con mine. The Con Mine was located just South of Yellowknife, and produced more than 5 million ounces of gold between 1938 and 2003. The VP of operations was a mine manager for Claude Resources' Seabee mine (another core holding of mine). Their VP for environment and community affairs possesses the sort of vast region-specific experience that you'd like to see. They have just brought in someone as VP of engineering and project manager for Yellowknife who recently banked a successful feasibility study for a project of Geovic Mining in Cameroon. For a $40 million pre-feasibility-stage resource company, there is a serious concentration of well prepared talent in place to see this project through.
With an initial capital cost of less than $200 million as of the PFS, though likely subject to a bit of upward revision by the time we get a full feasibility study banked, I do not view construction financing as a significant obstacle to development. Once the feasibility study is complete, I expect the company to carry a substantially higher market cap than it does today, at which point I will become supportive of some additional share dilution to cover part of the cost. Bank debt will also become readily available with the feasibility study in place, and as an alternative I am sure the Sprott's of the world will be approaching Tyhee at that juncture with all manner of private placement offers and proposed financing solutions.
This slightly dated 8-minute video will give you a nice synopsis of the company's story straight from CEO David Webb. Unfortunately, Dr. Webb will not be able to join us here on the blogs, but I will make every effort to find answers to any questions that you may have about the company as you perform your own due diligence. I don't have sufficient time to chase down filings to check insider ownership, etc., so please be proactive about finding your own answers through self-directed research wherever possible, and when you find interesting information over the course of your research, please consider posting your findings here for the benefit of your fellow Fools.
Scanning the categories of my draft scorecard, Tyhee looks like it could demand the highest score so far in this series. The company is strong in every category, and after several years as an attentive shareholder, I remain amazed by the extent to which a company with this much profit potential and organic growth potential can remain subject to such an unreasonably miniscule market capitalization. I like the jurisdiction, the property, the region's historic production, the 2.2 million-ounce high-grade global resource with ample room for expansion, the advanced stage of development with the most powerful catalysts yet to come (permitting, feasibility, etc.), the well qualified executive team with plentiful region-specific experience under their belts, the developing silver story, and the deep value disconnect in the shares that has only grown deeper as the gold price has risen and the resource-base has expanded meaningfully. That, in an oversized nutshell, is the basis for my bullish outlook on the stock. I invite you to look over the company in your own way, and with a fresh injection of skepticism and objectivity that I am potentially lacking after all these years of waiting in complete confidence for the powerful break-out event that I anticipate from the shares at some point.
Thank you for taking the time to assess the company for yourself rather than simply adopting my own assessment as your own, for sharing your findings with the community if you are so inclined, and for either challenging or corroborating my bullish assessment as your own examination warrants.