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 steady share price able to withstand any mighty downdrafts that could accompany a wide-scale financial system collapse similar to the one seen in the final months of 2008.

One way to look at it would be to find those companies with share prices that have held up well during 2011’s difficult last half. Quebec-focused Virginia Mines (VGQ-T) is one such example: its shares have hovered between $8 and $10 a share since March, and closed at $8.78 on Dec. 2.

In his newsletter Exploration Insights, Geologist Brent Cook recommends holding the stock while the Casey Research Group’s International Speculator newsletter recommended buying “under eight dollars” last month, when it traded at $8.40. 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-oz. gold deposit under development 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 did not have mineral reserves or resource estimates – it only had around 200 drill holes at the time, 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 mine construction, 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. gold over an approximate 15-year mine life. In a press release about the decision, Goldcorp’s president and CEO Chuck Jeannes said that “we believe [it] will be the best new gold mine in Canada.”

With the mine firmly on the track to production, Cook says Virginia Mine’s sliding scale royalty on Éléonore presents an attractive target for gold royalty companies, such as Franco-Nevada (FNV-T) and Royal Gold (RGL-T, RGLD-Q). “Based on my model,” Cook argues, “Virginia Mine’s sliding scale royalty on the deposit [averaging 2.75%] equates to roughly three hundred million dollars [or $9.60 per share] at a five-percent discount rate and a one-thousand-five-hundred-dollar 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 that are all located in Quebec, and in various stages of development. The partners include: Iamgold (IMG-T, IAG-N), Quadra FNX Mining (QUX-T), Anglo American (AAL-L), Xstrata (XTA-L), Goldcorp and half a dozen junior companies.

No matter which way you look at it, during the 2008 recession, shares of Virginia Mines fell from an $8.80 high in late 2007 to a $2.25 low 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.

If markets rebound in the new year, investors would stand to make great gains. If they drop further, 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-X) and Esperanza Resources (EPZ-V) for these types of companies, but 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.”