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On June 14th Dataram (DRAM) will be acquiring US Gold Corp announced they would be entering into a merger agreement. Dataram intends to divest its existing memory hardware manufacturing business and issue a special dividend to pre-merger shareholders equal to their ownership interest in the company’s existing assets. Shares will be issued by Dataram as consideration for the merger with US Gold. The pre-merger shareholders of DRAM will own roughly 10% and the owners of US Gold will own roughly 90% of the merged company. The surviving corporation, US Gold, will own two main mining projects from which it expects to produce over 2 million in gold equivalent ounces.
Buy shares of Dataram prior to completion of the merger. This is a unique opportunity to invest in a company with tremendous upside. Dataram is still being valued as if it is a computer hardware manufacturer and as a result DRAM shares are trading at a steep discount to other gold miners based on its gold equivalent ounces. The post-merger gold assets are currently being valued at less than $20 per ounce…a steep discount to what will soon be the company’s new peer group.
In part this arbitrage is due to the fact that there are a number of conditions that must be met before the proposed merger is completed. I discuss these conditions and why they do not pose a threat throughout the article. I will also break down what the post-merger company will look like and why I believe DRAM shares are currently undervalued.
Many believe that Gold, or more broadly the entire minerals sector, is in the early stages of a long-term bull market. Gold is up roughly 30% YTD to $1,355/oz. It would need to increase another 35% from here to reach its prior peak of roughly $1,830 in 2011.
The majority of gold miners have doubled so far this year, and some junior miners have more than quadrupled from their lows last winter. DRAM closed at $4.20 the day it announced the merger and its plans to transition into a gold mining company. The stock has traded down roughly 65% since then, currently trading in the $1.50- $1.60 range.
US Gold Corp owns two very promising mining assets, the Copper King and Keystone projects. They also have an impressive and proven management team, starting with Director and CEO Edward Karr. Mr. Karr was a Founder and currently serves on the Board of Directors of Pershing Gold Corp. In 2004, he was named by Futures Magazine as one of the world’s Top Traders.
Mining is a very labor intensive industry. Not just anyone can start poking holes in the ground and hit gold. There is an intricate science to mining, and some managers are better than others when it comes to the exploration and discovery of mining assets. Lucky for US Gold, they have the help of Dave Mathewson, a geologist and explorer with over 35 years of experience in Nevada alone. Mathewson will be heading the Keystone project, which is located in Nevada in the middle of one of the country’s premier gold trends. In an interview from 2011 Mathewson said the following about his exploration and discovery process:
“Successful exploration is all about applying effective and often new ideas, basically geological concepts, in entrepreneurial ways to the rocks for the sole purpose of making discoveries.”
In other words, when it comes to mining, not all managers are equal. So one winning strategy that I have found to work over the years is to invest alongside the best and most experienced managers in the industry. Most of these managers believe in what they are working on and have a considerable amount of skin in the game. According to Karr, Mathewson will own roughly 5% of the post-merger outstanding shares of US Gold.
Dave Mathewson has as impressive a track record as any in the mining industry, especially in Nevada. At Gold Standard Ventures, Dave recently struck gold after drilling only 8 holes in a similar Nevada mine. This is important because drilling costs money and empty holes are worthless. Here are some quick highlights of Dave’s Career leading up to now:
- 1989 – 2001: Worked for Newmont Mining Company (NEM) in Nevada where he held several senior positions including Regional Exploration Manager
- While head of Newmont’s Nevada exploration Team Mathewson made some notable discoveries including the Tess, Northwest Rain, Saddle and South Emigrant projects
- 2001 – 2007: Independent Director, Head Geologist, VP Exploration at Tone Resources
- 2008: Became Founder & CEO of Nevada Gold Holdings
- 2009 – 2014: VP of Exploration and Director at Gold Standard Ventures
Dave’s latest project is working on the Keystone Project for US Gold. Unlike Copper King, there is a high degree of uncertainty when it comes to exactly how much gold Keystone will produce. Management’s initial target is 1 million but they believe the project has a potential for over 10 million gold ounces. Based on Dave’s history, I believe the high end of that estimate is more than possible.
As one of the conditions of the Dataram merger, in June US Gold acquired 100% of the mining claims related to a gold development project in the Keystone district. The Keystone Project is located in Nevada within the Cortez Gold Trend, one of the world’s most lucrative mineral trends.
Keystone is just 10 miles southeast of Barrick Gold’s renowned Pipeline, Cortez Hills, and Goldrush deposits, which combine for over 50 million ounces and produce approximately one million ounces of gold per year. This project is smack in the middle of one of the top mining areas in the country. Over the past 50 years, the Cortez and Carlin Trends in Nevada have produced more than 245 million ounces of gold. As such, the company believes Keystone is a “multimillion ounce discovery opportunity” as it shares so many “geological and gold system similarities to the Cortez District just to the northwest.” The company is targeting over 1 million ounces of gold from Keystone and estimates a total project potential of over 10 million ounces.
But the best part of all is that a proven and experienced geologist in Dave Mathewson will be leading the project for US Gold. Here is what Mathewson had to say about the Keystone project in the June Press Release:
“Keystone is a true district-scale opportunity. In the past 40 years, I have been on and off various portions of the Keystone property. This is the first time that one company has controlled the entire Keystone District, and this control will be conducive to comprehensive, systematic, and modern-day exploration applications. We are looking forward to advancing the 2016 exploration program”
Most recently, Mathewson was VP of Exploration at Gold Standard Ventures (GSV) where he helped consolidate the Railroad-Pinion district and the North Bullion & Bald Mountain discoveries. The Railroad Project was a blockbuster discovery for GSV.
When asked about Keystone, Dave Mathewson said it is “the best exploration project I have seen in my career… reminds me of the Railroad project on steroids.”
According to CEO Ed Karr, Mathewson has had his eyes on this project for years and believes it has the “potential for multiple world class deposits.” Mathewson believes that Keystone is a geological extension of Barrick’s Pipeline and Cortez Hills.
According to CEO Ed Karr, Mathewson has already begun working on the project and is using the same discovery plan that he used at Gold Standard Ventures. Here is an illustration of the company’s planned timeline from their website.
Copper King Project
Unlike the Keystone project which is just in early stages of exploration and discovery, US Gold’s other mining property is more or less a “done-deal.” The Copper King project is an advanced exploration and development property located in the mining friendly location in the Silver Crown Mining District of southeast Wyoming. According to Karr, Copper King “has a prior completed Preliminary Economic Assessment (PEA) by Mine Development Associates (MDA) showing measured, indicated, and inferred resources of 1.1 million oz. of gold and 285 million lbs. of copper. Karr went on to explain that “the PEA was completed in 2012 at a lower gold price and shows a Net Present Value (NPV) of Copper King of $160 million at $1,100 gold.” I spoke to Karr about a month ago after the planned merger was announced and he estimated the NPV at that point was “$175 to $180 million.” Gold has increased a lot in the past month. Based on my estimates, at the current gold price of $1,360 today these resources have a NPV of roughly $200 million. The fact that the entire 1.1 million ounces are “indicated” means that they can be reasonably estimated with confidence. The fact that Copper King is an advanced stage project with a high probability of producing over 1 million ounces should provide investors some comfort.
Transition from Technology to Precious Metals
Let’s spare ourselves the argument as to whether or not DRAM’s existing business, that of memory hardware manufacturing, is a growing industry or not. All we need to do is focus on gold which right now has a number of fundamental factors working in its favor. I will name a few below:
- Global political and economic uncertainty continues to increase the demand for Gold
- Worries over Brexit and the global economy are creating a risk-off trading environment
- Market expectations for tightening by the Federal Reserve have died down, which tends to underpin gold.Now rate hikes are not expected until next year
- Low to negative interest rate policy from Central Bankers around the world will continue to weaken global currencies and investors will turn to gold as an alternative store of value
- Exchange Traded Funds are incredibly underrepresented by the precious metals sector
- According to Citi, ETF holdings of gold are increasing by about 100 tons per month and they expect this growth to remain “robust” throughout 2016
- Uncertainty about economic growth and lofty asset valuations will continue to support the price of gold as a hedge
Smart Money Moves into Metals
Many big money managers including George Soros are taking bearish stances on the equity market and building their gold positions as a hedge for uncertainty. Stanley Druckenmiller recently said at an investor conference to “get out of the stock market,” blaming the fed’s continual dovishness for creating a “myopia” that “causes reckless behavior.” Druckenmiller recommended owning gold and stated it is his funds “largest currency allocation.” Druckenmiller has averaged annualized returns of over 30% during his investment career. His advice may be worth listening to. Especially considering he is just one of many renowned managers echoing the same rhetoric.
The merger is still subject to DRAM’s shareholder approval as well as the closing of a financing of roughly $3 million by US Gold. Neither of these are intended to be an issue for the proposed merger to be completed. Management expects the proxy to be filed the first week of August and is targeting the end of September for the close of the deal. Current DRAM shareholders will own roughly 10% of the post-merger company. This means current DRAM shareholders will own 210,000 ounces or 10% of the 1.1 million ounces from Copper King plus 1 million initial target from Keystone.
DRAM has roughly 2.5 million outstanding shares and a market capitalization of about $3.75M. This means the post-merger gold assets are currently being valued at less than $20 per ounce based on DRAM’s current stock price of $1.56. Even if you only take the 1.1 million of indicated ounces from Copper King, the gold is still valued at just $34 per ounce. It is often difficult to compare miners based on their gold equivalent ounces because the quality and grade of gold deposits as well as the probabilities of producing the estimated amounts can vary widely among companies. Nonetheless, this table should paint a better picture of the potential value US Gold offers relative to some of its junior miner peers.
Keep in mind that this does not take into consideration any of the 9 million-plus “potential” ounces from Keystone.
Based on the valuations of other gold miners, DRAM is trading at a significant discount per ounce of gold. Instead of paying $50 to upwards of $100 per indicated ounce of gold, which is the valuation range most junior miners trade at, DRAM is only being valued at $34 per indicated gold ounce. Not to mention you have the added bonus of up to 10 million potential additional ounces from the very promising Keystone project.
I believe the market is significantly undervaluing DRAM’s post-merger gold assets and as a result, DRAM represents a special opportunity to buy some gold on the cheap.
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