I see that Auryn put out a notice that they’re going to PDAC in Toronto in about 10 days. I like the tease “it promises to be an exciting time”. Perhaps it is finally TIME TO TELL THE STORY. Maurizio doesn’t know how to do anything “half way”. He’s probably prepared a “roll out” in front of the entire mining community. If anybody deserved his day in the sun, it would be him.
SO, WHAT EXACTLY IS “THE STORY” WITH AURYN?
For me, “The story” here centers on FORTUITOUS TIMING. According to “The Lassonde Curve”, the sweet spot for investing in the junior miners is immediately before they go into production. More precisely, it is when they enter into the “CONSTRUCTION PHASE”, typically after successfully landing a financing. The reasoning here is pretty straightforward. Approximately only 1-in-1,000 mineral prospects will ever make it into PRODUCTION. For the “lucky” 1-in-1,000, it now takes an average of 17 to 24 years from the commencement of exploration until the first day of PRODUCTION.
It becomes a relative no-brainer to hold off investing in a junior miner until it has already spent those 17-24 years and is IRREFUTABLY at the brink of commencing production. Once into PRODUCTION, “The Lassonde Curve” illustrates what is referred to as a “MARKET RE-RATE” in which the share price of the now “junior producer” typically explodes to the upside. The trajectory and extent of the upward movement in the share price will be highly dependent upon EARNINGS PER SHARE and therefore “TOTAL EARNINGS” as well as the number of shares issued and outstanding at the time of going into production. The ultimate goal for any junior miner is to not only defy the odds and get your mineral prospect into production BUT TO DO SO WITH AS FEW SHARES ISSUED AND OUTSTANDING AS POSSIBLE.
The first component of this “FORTUITOUS TIMING” would be holding off on investing in a junior miner UNTIL it has irrefutably proven that it is entering into PRODUCTION, it has already landed any necessary financing to make that happen, and the junior has not yet received its “MARKET RE-RATE”.
As far as “FORTUITOUS TIMING” goes, if a junior miner can somehow time all of the above accomplishments with the price of the metals being mined and sold trading at or near their all-time highs, then that would obviously be the ideal. If a junior miner can pull off all of the above accomplishments while having only 70 million shares issued and outstanding and 7 million shares in the “float”, then this accentuates the concept of “FORTUITOUS TIMING”. That’s an awful lot of stars to align at the same moment in time.
What if we were able to layer upon all of the above accomplishments the fact that the grades of the ore being mined are pretty much off the charts when compared to industry averages? The mining of extremely high-grade ore tends to drive down the ALL IN SUSTAINING COST (AISC) to mine each ounce. This in turn increases the “MARGINAL PROFIT” per ounce produced. The extremely low number of shares outstanding when combined with the low AISC and high “MARGINAL PROFITS” per ounce of gold produced, increases the all-important “EARNINGS PER SHARE” (EPS). Stocks within the mining industry tend to trade at an industry-standard “multiple” of EPS. In mining, the average “multiple” is 30.1. Those young producers able to generate a robust growth profile in EPS or production rate, can expect th market to award it with an above-average “multiple”. Investors award “multiples” and they want GROWTH.
The focus for prospective investors needs to be on EARNINGS PER SHARE. All of these various components that are nicely co-aligning for Auryn, tend to maximize EARNINGS PER SHARE. Some of these components tend to act in a SYNERGISTIC fashion with other components in a 2 plus 2 equals 8 fashion. Thus “THE STORY” on Auryn is basically “FORTUITOUS TIMING”. If there was a key component, it might be the low number of shares issued and outstanding at the time of entering into PRODUCTION. After all, this is the “ULTIMATE GOAL”. In Auryn’s case, the low number of shares outstanding can be DIRECTLY attributed to their CEO being willing to advance all of the cash needed to make it all of the way into PRODUCTION while charging no interest. This bypassed the need to sell hundreds of millions of shares in order to fund exploration and development.
If another junior miner were to attempt to emulate what Auryn has achieved, I would wish them all of the luck in the world especially in finding a CEO willing to advance all of this cash while charging no interest. So, that’s “THE STORY”, good luck in trying to replicate it. Now the onus is on management to tell “THE STORY”.
SO, ONCE YOU KNOW “THE STORY” WHAT’S THE NEXT STEP ALONG THIS JOURNEY?
I think the next step is to model the potential earnings at play here. I mentioned the presence of SYNERGIES here, in order to get a feel for just how powerful they are, a prospective investor needs to create a list of conservative “input variables” and see how they interact with each other in modeling potential earnings. It’s one thing to model potential top line earnings and then it’s quite another to calculate the EARNINGS PER SHARE, factoring in the microscopic number of shares outstanding i.e. 70 million, and then multiplying that EPS figure by the 30.1 average “multiple” for this sector in order to EXTREMELY ROUGHLY determine an “appropriate share price” (ASP).
If the ASP comes out to a figure that is approximately 8- to 12-TIMES the current share price, then I think that maybe I can talk you into rolling up your sleeves and doing a deep dive into this situation. How large can these “MARKET RE-RATES” be for a junior miner to do what is necessary to get into PRODUCTION? Pretend for a minute, that the odds for a junior miner to get its mineral prospect into production was 1-in-2 instead of 1-in-1,000. You wouldn’t expect much of a “MARKET RE-RATE” would you, because the accomplishment wasn’t that significant? Similarly, if it took the “lucky” 1-in-1,000 an average of 17 days to put its mineral prospect into production instead of 17 years, the accomplishment, and the expected “MARKET RE-RATE”, would be lessened. Because of the actual statistics, the NET PRESENT VALUE (NPV) of a junior miner that did get its mineral prospect into production and has already put in the inordinate amount of time needed to accomplish this, goes up parabolically. The majors that annually need to replace the number of ounces mined per year by drilling out new “in-situ” ounces, don’t have the TIME nor the desire to take on statistical odds like that. There’s a saying in this industry, the “NEW JUNIOR PRODUCERS” don’t stay in that category for very long. They either get taken out by a major or they rapidly become “MID-TIER PRODUCERS”.
