Robertson property highlighted on the Cortez Trend map showing the Cortez Hills Mine, Cortez Mine, Pipeline Mine

Now that we are 7 months into a bull market, it is difficult to find extremely undervalued exploration and mining related companies. The profits we all made make us even more eager to find our next winner - not really contrarian - but that's how it works. The Ceo.ca chat really helps in finding interesting stories, but sometimes there are still companies that seem to be overlooked.

Today I was going through some monthly reports of small investment funds specialized in exploration and development companies. That's where I found Coral Gold $CLH, a company that I screened earlier this year but it was not interesting enough for me at the time to further investigate. On June 21 the Company announced the sale of their flagship project Robertson in Nevada to Barrick Gold $ABX for the consideration of:

  1. The payment to Coral of US$15.75 million (Cdn $20.17 million based on the current exchange rate) in cash (the "Cash Consideration") on closing;
  2. The return of 4,150,000 common shares of Coral held by Barrick (which represent approximately 8.7% of the Company's basic common shares outstanding as of June 20, 2016) for cancellation by the Company (the "Share Reduction"); and
  3. A sliding scale 1% to 2.25% net smelter returns royalty (the "NSR") on the Robertson Property, payable quarterly, subject to potential advance royalty payments as outlined below, as well as a right of first refusal enabling Barrick to acquire the NSR in the event that the Company wishes to sell the NSR to any third party (the "Transaction").

The share price moved from 0.20 (close June 20) to 0.34 (close June 21). On Friday the share price closed at 0.355 and I will try to summarize this story for you in order to determine if there is still value and/or speculative upside.

Coral Gold's 7 year chart


Share structure

A good share structure is a often key to get an steady upward share price response. Coral Gold definitely has a good structure, and with the cancellation of 4,150,000 Barrick owned shares this will only get better. The downside is that all recent financings were completed at 0.05 per share with a full warrant at 0.10. CEO David Wolfin was the main subscriber and he seems to believe in much more upside. Therefore this may not really become an issue. David Wolfin owns 4.317.800 shares (private and through his Intermark Capital Corporation company). Later in this article I will provide a link to an interview in which David Wolfin explains the upside in more detail.

Share structure


Working capital and expenses (burn rate)

For companies that do not generate income (yet), it is important to consider their spending behavior. Coral Gold will soon have more than CAD 20 million of cash, and another CAD 2 million if all warrants and options get exercised. In that case the amount of cash per share will be: CAD 22.000.000 / 49.685.549 = 0.44. Please note that Coral still has CAD 800.000 of total liabilities after Barrick provides replacement security for the reclamation bond.

Overview of working capital and expenses over the last 3 years

The company's expenses suprised me in a positive way, with $68.008 in the last quarter and an average of $212.872 per quarter over the last 3 years. Liabilities (current + non current) went down from $3.44 million to $1.37 million over the last 3 years. Some further details about Coral's spending behavior can be seen here: 

Detailed expenses 2014 - 2016


CEO, President and Director David Wolfin

David Wolfin grew up in the industry. His father was a stock broker in the '50s and '60s and according to David he was part of a small Vancouver based retail-oriented firm with a focus on resource companies in Western Canada that ultimately became Canada's largest independent investment dealer Canaccord Genuity under the leadership of Peter Brown.

David worked as a trader on the floor of the Vancouver Stock Exchange and since 1990, he has worked for the Oniva Group of Resource companies, including Avino Silver & Gold Mines (CEO, President & Director); Bralorne Gold Mines (CEO, President & Director); Coral Gold Resources (CEO, President & Director); and Levon Resources (Former Director).


Cortez Trend

I assume most of you know the importance of the Cortez Trend in the gold industry. If not, please search on Google and you will find out. The following 2008 Barrick news release and a slide out of NuLegacy's $NUG will give you a nice start.

Barrick $1.695 billion take-over in 2008
NuLegacy Gold Corporate Presentation slide showing the Cortez Gold trend


Sliding scale Net Smelter Royalty

Instead of writing a large piece as to why I believe David Wolfin thinks this is just the beginning for the company and the royalty, you can better use the following link to an interview he did with Jay Taylor in July in which he shows a lot of enthusiasm. He believes that the sliding scale 1% to 2.25% net smelter returns royalty could be a "company maker" and made a comparison to what the South Pipeline Gold Mine royalty did for Royal Gold $RGLD. 

Royal Gold from 1999 - 2011 with 1999 news release about the Pipeline Royalty


Interview Jay Taylor - David Wolfin - https://www.youtube.com/watch?v=5g9RiXrI_hk


Other properties

Coral Gold has some other properties as well. JDN (100% owned), Norma Sass (100% owned) , and Eagle (100% owned) are surrounding the area. The Eagle claims are located between the Robertson property and Klondex' $KDX Fire Creek, the JDN adjoins Hilltop which is a ~2 - 3 million ounce deposit that Barrick is drilling. The Norma Sass is near to the old Pipeline open pit mine.

Coral Gold's 100% owned projects strategically located in the Cortez Trend


Recent royalty transactions

It is difficult to value the new royalty at this point, but Coral managed to get an interesting clause into the royalty contract. In the event that the Robertson Property is not placed into production by December 31 2023, Barrick will have to make annual advance royalty payments to Coral Gold of US$0.5M, which will be non-refundable and fully credited against any future obligations under the NSR.

I think the royalty has the potential to become "World Class" and "Company Making" as it is not capped, but this is far from a certainty. To get a feel for current royalty valuations, I have compared a number of recent transactions in the overview below. Please note that these royalties may not be comparable to Coral Gold's royalty, but give an impression of what a number early and late stage royalties were valued at.

Comparison of recent royalty transactions


Conclusion

I hope this made you interested enough to listen to the interviews yourself, read the Barrick Technical Report and think about the royalty potential. Since it is difficult to value the royalty at this point, I will leave that to you as speculator. With Coral Gold's market capitalization lower than the net cash amount on its balance sheet (if the deal closes), I think there is enough downside protection to take a relatively safe bet on their royalty and 100% owned properties. 

- Looking forward to CEO.ca chat member's input on the Coral Gold channel - 


Sources:


Disclaimer

  • I am not a (registered) investment advisor
  • I am not a professional writer
  • I am not sponsored by any of the mentioned companies
  • I have no relation to any of the mentioned companies, other than a long position in Coral Gold shares ($CLH)
  • I encourage you to check the facts yourself