Paul Beattie is the CEO of BT Global Growth. He is also a contributor to Capital Ideas Digest, a weekly compilation of investment ideas based on a variety of research reports. The Globe and Mail provides marketing services and receives compensation from its parent company, Capital Ideas Research. Try it now to get a special one month free offer, and the free daily Morning Need to Know e-mail.
In my 30 years of investing, I have never experienced a situation like this.
It may be a first: a Canadian-listed precious metals company has started producing at a mine, without a Bay Street research report having ever been written about it.
Red Eagle Mining (R-T) is commissioning its Colombian operation, the San Ramon Gold mine. It’s pouring gold as we speak – it announced on Nov. 7 that it had poured its first gold at the mine in Antioquia, Colombia – but Bay Street hasn’t noticed and doesn’t seem to care. I think analysts will eventually have to pay attention to Red Eagle, if for no other reason than it just graduated to the Toronto Stock Exchange from the Venture Exchange. (In fairness, I understand some analyst reports on Red Eagle may finally be in the works.)
The Narcos effect
The reason there is little to no interest in Red Eagle is that too many financial professionals watch the show Narcos. I’m not joking. Many of their opinions and attitudes toward Colombia are shaped by the Netflix series, which examines the infamous Medellin drug cartel run by the notorious Pablo Escobar, and the Drug Enforcement Agency officials who were trying to track him down.
So, in other words, there’s scant attention paid to Red Eagle in 2016 because of a television show set in the 1980s. In addition, investment managers also have an aversion to Colombia because it’s not perceived to be mining friendly. It’s only in recent years that the government has started to allow new mining projects after decades of restrictions.
The Spanish empire left a lot of gold behind
The truth is, if you’re in the gold business, it’s probably a good idea to go where the gold is. The Spanish empire mined gold from what is now Colombia for nearly 300 years. Given they couldn’t build mines deeper than 20 metres, we think it’s a good bet they left some of the yellow metal behind.
My team and I at BT Global Growth are also prepared to bet that Bay Street is going to go from ignoring to adoring Colombian mining opportunities.
The case for Red Eagle
We’ve met Red Eagle’s operational management team and visited the construction site in Colombia. The chief operating officer, Bob Bell, and his team are impressive, having brought this project forward on schedule and on budget.
They tell us production of 70,000 ounces are doable for 2017 at cash costs of below $600 (U.S.) an ounce. Red Eagle benefits from a low Colombian peso, low labour costs, and reasonable energy expenses.
The operation should be able to achieve $1-million (U.S.) in earnings per week before interest, taxes, depreciation and amortization (EBITDA).
Red Eagle CEO Ian Slater says the company will likely have a tax rate in Colombia in the low 30s in terms of percentage. The company will also pay the government of Colombia a royalty rate of 3.2 per cent of revenue.
“The cheapest gold stock in the world”
Red Eagle has a market cap of about $197-million (Canadian) and $60-million (U.S.) in term debt, which puts the enterprise value-to-earnings before interest, taxes, depreciation and amortization (EV/EBITDA) ratio at four times. This compares to mid-cap listed gold companies at seven-to-eight times, and the big players, like Barrick Gold, at 12-times plus.
Red Eagle also owns 92 per cent of CB Gold Inc. (CB-V) which has a market value of about $57-million. Deduct that and Red Eagle’s EV/EBITDA drops to about three times. This is simply too cheap to ignore.
Like any miner, Red Eagle is not without risk. One of our concerns is the quality of the company’s ore grades. But recently, two new drilling results were issued and the grades look to be much better than the mine plan of 5.2 grams per tonne. It appears management has been conservative in their assumptions.
It’s not complicated
Most mining analysts in Canada have warned us that opening a new mine is complicated, risky, difficult and so on, and we agree. But when we spoke to the specialists who are building the Red Eagle plant, including the mining construction company Peru-based Stracon GyM, which owns an equity stake in the company, we got the picture the mine is not as complicated as it seems.
Quick turnaround time
There are similar operations to Red Eagle’s all over Mexico, Peru and Ecuador and they all seem to work. The timeline at San Ramon between extracting ore and producing gold bars is only a matter of days, not months. That led us to the conclusion that this management team is highly likely to deliver.
There have been hiccups along the way to production for Red Eagle such as a transport workers strike, and there will probably be more, but they’ll likely get resolved. That’s because the entire operation was designed with redundancy in mind. It actually has capacity for twice the expected annual production. There is basically two of everything on site.
Will Bay Street take notice?
Here is our investment thesis on Red Eagle Mining through two scenarios: Bay Street wakes up, turns off Narcos, and realizes that the company is the first new, cash-flowing, gold producer in the centre of Colombia, a country that is sure to yield more exciting projects.
Or, the San Ramon Gold Mine will not live up to expectations.
I’m betting on the first scenario.
Full disclosure: The BT Global Growth Fund and its management team own shares in Red Eagle Mining, and have been advisors to the company’s management team.
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