There is no explanation for how crazy Mr. Market has gotten when it comes to the mining stocks. These companies report good drilling results. Who cares? They improve their operations. Who cares? They report good numbers. Who cares? They have good properties. Who cares? They have cash in the bank. Who cares? One of these companies trades for a P/E ratio of 1. Who cares? Nothing matters.
Recently, I was paying attention to Oroco Resources Corporation (OCO) because one of the companies that I own, Goldgroup Mining, came out with a press release stating that they intend to buy one of Oroco’s properties. I don’t own Oroco and I am not planning to buy it but this post is just to show you how crazy things have gotten.
Oroco owns two projects: Cerro Prieto and Xochipala Project. Goldgroup will pay Oroco $18 million for Cerro Prieto Gold Project. Oroco will keep Xochipala Project, which is its flagship property. Now, get this – Oroco is now trading for an enterprise value of $13 million ($9.5 million market cap plus $3.5 of debt). So, Goldgroup is paying $18 million (which is extremely cheap) for Cerro Prieto while Mr. Market is saying that both Cerro Prieto and Xochipala are both worth only $13 million. I don’t even know what to say to this.
“$18 million”
Total consideration for the acquisition will be US$18 million, which shall be comprised of an initial payment of US$4,500,000 on closing and quarterly payments based on a calculation of US$150 per ounce for each ounce of gold produced from the Properties, subject to minimum quarterly payments (the “Minimum Payments”) of US$625,000 (for a total of US$2,500,000 per year) commencing one year after closing. Quarterly payments shall be made until either the full purchase price of US$18,000,000 is paid, representing 90,000 ounces of production, or Goldgroup permanently ceases production from the Properties. If commercial production does not commence at Cerro Prieto prior to January 1, 2014, the first two quarterly payments shall be reduced to US$250,000, with the annual minimum to be fulfilled by the fourth quarterly payment and the minimum quarterly payments maintained thereafter.
So are you trying to say that because the $18 million is not 100 percent cash, then it doesn’t count? It doesn’t matter to me whether it is 100 percent cash or not. I am not interested in buying Oroco. All I am trying to say is that some of the valuations of miners are silly. Actually, I think that even if some miner put the entire moon into gold or silver production, no one would care. In other words, $100 coming out of traditional companies is worth one amount but the same $100 coming out of the miners is worth pennies. Investors are happy to over pay for $100 coming from one source, but when it comes from the miner, they don’t even want to pay $0.10 for it.