Romarco Minerals (R.TO)

Romarco Minerals is a junior exploration company that is working towards moving its flagship Haile deposit into production.  According to its Feb 22, 2011 technical report, the NPV of the Haile project at $1,500 gold is:

$621,143M @ 10% discount rate after tax
$929,839 @ 5% discount rate after tax

At $0.80/share, Romarco has a market cap of $467M.  So if the technical report is not overly aggressive (chances are… it probably is), then you might figure that Romarco is trading at a slight discount to what a senior miner would pay for it.  Maybe around $600-900M+.  (Right now, you might assume that seniors will pay a very high valuation for the deposit because seniors can use their overpriced stock to pay for the acquisition.)

But as with any mining project in the developmental stage… it’s really hard to say what the deposit is worth.  The technical report may be too aggressive and may overstate the economics of the deposit (most technical reports do… that’s just what happens in the shady junior sector).  At a cursory examination, the technical report shows a cash cost of $395.23/ounce (before a $15.96 silver by-product credit).  This seems far too low considering that average grades run around 1.7g/t (0.060 ounces/t).  As it is not extremely high grade or in a country with cheap labour costs, their costs may be a little too good to be true.  However, I am not smart enough to figure out whether or not their cash costs make sense.

Things that really don’t make sense

Romarco needs to raise enough capital to build its mines.  If you read its annual report, Romarco states that the capital cost requirements for the mine has gone up compared to the technical report (surprise!).  The short story is that they sold stock but still aren’t anywhere close enough to funding a mine at Haile.

So what are they doing with all their money?  Instead of saving up to build a mine, they decided to buy up land to do greenfield exploration (some of it in another state).  This makes very little business sense as that spending moves them further away from building a mine.  Without financing, their deposit is valueless.

But here’s how their exploration plans make sense according to junior mining logic.  Suppose you had a deposit that isn’t really economic.  Most of the time when you explore for gold, you aren’t going to find an economic deposit.  You could simply be honest about it and say that your deposit probably isn’t economic.  By that token, 95%+ of the stocks in the exploration space would be saying this.  Obviously, nobody does this.  So, you pretend like you have an economic deposit and do everything that you would do if you had an economic deposit.  Romarco has committed itself by purchasing long lead-time equipment.  (But because they don’t have their financing and permitting in place, their mining equipment will sit in a warehouse and they will pay the dealer for maintenance.  This is what it says in the annual report.)  The problem with this is that eventually people will figure out that your mine is not economic.  So, you spin another story about new exploration so that people will get distracted from the fact that you were supposed to build a mine.  That’s where the new exploration comes in.

Crazy exploration plans

According to the 2011 annual report (it’s very pretty):

During the year ended December 31, 2011, the Company purchased approximately 3,553 acres (1,438 hectares) of land at a net total cost of $25.8 million. Of the $25.8 million, approximately $11.8 million was spent on 955 acres (386 hectares) related to the Haile project, approximately $11.0 million was spent on 1,833 acres (742 hectares) for four regional exploration targets in North and South Carolina and approximately $3.0 million on 765 acres (310 hectares) for land to be used in part as a component of the proposed Haile Gold Mine wetland mitigation plan.

Romarco has acquired new land at a average cost of somewhere around $6k/acre ($11M divided by 1833 acres).  At that price, you could acquire land with shale gas resources.  Or compare that $6k/acre to Contango Ore (PINK:CTGO), which paid less than $2/acre for its land (less than a thousandth of the price).  Yes, at $7k/acre you are buying better land than what Contango Ore bought.  But this is all pretty crazy.  The land that Romarco has bought doesn’t really have a history of past gold production and is not the best place to look for gold (the best place to look for gold is by an old or existing mine).  To pay that much for land for greenfield exploration is crazy in my opinion.

It vaguely makes sense in that Romarco will get to release news regarding its new exploration program.  And hopefully based on that news, Romarco’s share price will go up and they will get to raise capital.  This keeps the game going longer.  With more money in Romarco’s coffers, company insiders can continue to receive fat paycheques.

In any case, for whatever reason, the management at Romarco decided to spend money on the greenfield exploration roulette instead of advancing their deposit.  (Though it is entirely possible that their Haile deposit is economic and that they are just crazy for going off on a tangent.)

Conclusion

Junior exploration companies do crazy things.  Romarco is no exception.  When an exploration company goes off onto weird tangents, I figure it is either because they are crazy/stupid or it is because they know that their flagship project is a dud.

I would simply follow this quote by Warren Buffett: “I have three boxes on my desk: In, Out, and Too Hard.”

*Disclosure:  No position in Romarco.

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