It also has a recently-released preliminary economic assessment for its Songjiagou gold project located in Shandong province, People's Republic of China. That project now has a resource of 1.24 million indicated ounces of gold and 1.83 million ounces of gold inferred, capped. Uncapped, the indicated number is 1.5 million and the inferred category is slightly higher than the capped figure. Based upon that resource, and after a preliminary assessment done by Wardrop, it also has a plan to make a strip mine out of that project whose net present value, at a 10% discount and $973/oz gold price, is approximately $525 million. That's about four times the market cap of Majestic now.
A sensitivity analysis shows that the project is highly levered to the gold price, as well as to gold feed grade. (Needless to say, leverage cuts both ways.) With a gold price of 30% above $973, a little below where gold is now, the NPV is $774 million or more than $1.50 per share assuming base conditions for all other categories. Majestic closed today at 25 cents, with 25 cents bid and 26 cents asked.
A company at this stage of development makes for a certain kind of speculation. Unlike a company with good drill results, this company has an assessment of the whole project which says "profitable mine" with a value is well above its market cap. Seeing that disparity isn't that uncommon, because there are some barriers each company has to face before becoming a producer. In Majestic's case, the first barrier is known as a "pre-feasibility study" which allows the resources to be converted to economic reserves. Then comes the full-scale mine plan, or "bankable feasibility study." Both of these steps take time.
Once done, Majestic will face the big barrier that keeps many development-stage companies selling well below the net present values of their projects: financing. According to the preliminary assessment, the initial capital costs for Songjiagou will be $62 million. That means the company will have to raise at least that amount, and likely around $70 million. Financing is still hard to get; if a company can't find it, then the value won't be realized.
Majestic actually has a leg up if its stock stays up. At today's closing figure, it has a market cap of about $123.95 million. A private placement for $62 million - the bare minimum - would add 50% to the total shares outstanding, making them about 750 million. 525 million in value divided by 750 million shares outstanding leaves 70 cents per share, or 280% above where the stock closed today. If the capital costs remain unchanged by go time, once the full feasibility study is done, then the stock is nearly a triple at $973 gold. At $1265 gold, or 30% above the $973, the fundamental value would be more than a dollar a share or quadruple today's closing price.
The exploration world is full of paradoxes from the regular shareholder's perpective. Reasonable dilution is good, because it means money can be had to advance a project towards squeezing a dollar out of it, and a (reasonably) high market cap is good too because it minimizes the impact of dilution needed to get the capital needed to open a mine. Had Majestic's market cap been half of what it is, it would have faced much greater dilution - and thus had been more vulnerable to high-cost sources of capital like gold streamers.
As it stands, the always-available option of a private placement is do-able; that makes the financing risk a lot lessened. The chief risks are in the time it'll take to turn the project into a mine. If the bottom falls out of gold in the next two years, this project will be worth a lot less; even a private placement would be difficult due to adverse market conditions. There may be hidden traps making the mine unminable, such as much lower gold (feed) grades, which occasionally surface.
On the other hand, if the gold bull market is going into the mania stage and those hidden snafus don't surface, Majestic would be an attractive speculation. Its leverage factor would amplify the discounting of what would likely be a mine. Also, a mania would get the banks out of their reluctance rut - which would mean less onerous financing than a private placement would afford. Moreover, a rising stock price due to gold's rise would make the dilution of a capital-rising private placment less dilutive.
Of course, to return to the risk, a nasty surprise mine-wise would make the stock implode, and a major correction in gold would leave the compay floundering finance-wise. A repeat of the crisis of '08 would leave it frozen, as capital at any price was very hard to acquire even for solid juniors.
Here's Majestic's one-year chart, from Stockcharts.com:
The Moral Of The Story: Initial finds, great drill-core results and blue sky are exciting, but an advanced-stage project with a preliminary assessment flesh out the potential as well as the risk, making for a cleaner decision process. Strangely, many formerly hot explorers tend to descend at this stage, as the excitement is replaced by sobriety. Case in point: the formerly white-hot Ring of Fire base metal play Noront Resources, which itself has a very good preliminary assessment for its Eagle's Nest project.
Disclosure: None.
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