For those comfortable with the inherent risks of a micro-cap stock, resource sector expert Adrian Day — editor of Global Analyst — looks to Evrim Resources (Toronto: EVM) as his top speculative idea for 2019.
Evrim Resources (Toronto: EVM) is a gold exploration company that employs the “prospect-generator” model. The means the company does early exploration, generating projects, and then seeks to bring in a partner to spend the big bucks in exchange for a majority of the project.
The advantage of this model is that bring in partners, the company avoids the major disadvantage of the typical exploration company, namely heavy and ongoing dilution in issuing new shares just to keep going. In the event of failure, the prospect generator can live to fight another day. For the investor, it’s like owning parts of several lottery tickets rather than all of just one.
Thus, Evrim has joint ventures on several projects with several different companies, including Newmont (which owns 19.9% of Evrim), Yamana and some juniors. There is active or near-term drilling on three different properties. And the company has a pipeline of other projects it could option out.
The buying opportunity comes to us courtesy of a nervous market that grossly overreacted to some disappointing drill results on the Cuale project in early December. It’s a long story; there was great anticipation about the drilling and many investors had bought shares ahead of the results.
We don’t need to go into too much detail since we are interested in the company and its business plan rather than any one project. But the weak results and stock tumble came as tax-loss selling seasons go underway, adding to the pressure of the stock.
Cuale is by no means dead, though the market is acting as though it is. Extraordinary high-grade trench results, plus reasonable gold and copper grades in drilling—just not rich enough nor frequent enough nor deep enough to satisfy expectations — nonetheless provide reasonable justification for continuing work on the project.
But without any consideration for Cuale, the current price discounts other assets in the company. The market cap is now C$26 million. Evrim has cash of about C$11 million, plus a royalty on Ermitano, which I estimate has a value of up to $30 million.
Even at a discount, the royalty and the cash together are more than the market cap of the entire company. The numerous joint ventures and earn-ins, including some with drilling underway, come free. If Cuale had never entered the picture, we would be buying Evrim at this price.
