Monday, March 21, 2011

Treasury Metals: A Triumph Of Hope Over Numbers

Treasury Metals' flagship project is the impressive-sounding Goliath project in northwestern Ontario near the town of Dryden. The associated deposit is decently sized, with 390,000 oz. of gold at the indicated level in 3.4 million tonnes of ore. Moreover, it has a favourable preliminary economic assessment (PEA) of that same deposit.

Although the gold doesn't break the 1 million ounce level, the project has an important redeeeming feature: low capital costs. Estimated initial costs are $38 million, which is well below the mid-nine figures quoted for many mammoth deposits. It might be low enough to field entirely with a private placement, thus easing the major risk that explorers face. At $1,200 gold, the project has an high internal rate of return of 43%. The NPV at $1200 gold is an estimated $91 million using a 5% discounting rate.

Treasury has only 42.763 million shares outstanding. Using the $91 million, its NPV per share is approximately $2.13 per share. Almost unbelievably, Treasury stock was only at 34 cents per share when the PEA was released.

There are good reasons for exploration companies' shares to sell at a deep discount to their NPV when a preliminary economic assessment is released. A PEA is not the final stage of the exploration process. Next comes a preliminary feasibility study, the final feasibility study, and the necessary permitting. In addition, special environmental reports have to be produced; the project has to be okayed by a typically skeptical environmental authority. Morover, there's the capital-cost barrier that always has to be surmounted. From the PEA stage, the whole process takes at least a few years and likely several. That's a long time to wait for the payout even for a project destined for success. Seen from this angle, a 66% discount from the company's NPV isn't that much out of whack. Not only does the risk have to be taken into account, but also the shareholders have to be paid for waiting.

But a discount of 84% from NPV value holds out the promise of a sextuple if everything works out as forecast. That's quite the profit for waiting, particularly for a company with a low capital-cost barrier to surmount.

That discount prevailed at the time of the report's release. As fate would have it, Treasury is way above that 38 cents now. As of the time of this post, it was at $1.50.

Now, the risk-reward potential has changed considerably. Instead of a sextuple, Treasury now offers less than a double. That's for only a somewhat lessened waiting period and the same risks. Apart from gold going up, the reason why it's rallied so is because of new drill holes that post-date the PEA. The most recent ones show 11.84 g/t of gold over 5m of drill core and 7 g/t over 9.4 m. With results like these, it's a fair bet that the resource will be expanded from its 390,000 oz.

But, at this stage, that bet's still a hope. There's no indication of how much the resource will be expanded; nor is it known whether a bigger resource base will bump up the capital costs. Through discounting a future mine to the point where there's less than a double for assuming the risks and waiting time, Treasury at this price is a triumph of hope over numbers. It's one of those "I wish I knew about it at the time" stocks.

Below is a one-year chart of Treasury, encompassing its quintuple from its last-year lows, from

The Moral Of The Story: Sometimes we miss the bus. Although a huge rise in a stock with a good preliminary economic assessment can be the handicapping of the project's probability of becoming a mine, it's quite possible for optimism and hope to result in overanticipation. Speculating on hopes is fine, especially if there's good reason for the hopes, but having a huge discount on your side is better. Sad to say, today isn't yesterday.

Disclosure: None.

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