The 300 Club

http://dollarvigilante.com/blog/2014/8/26/a-rising-junior-gold-stock-to-watch.html

Tuesday,August 26, 2014

[Editor's Note: The following post is by TDV Senior Analyst, Ed Bugos]

You’ve barely heard from me in The Dollar Vigilante (TDV) Blog for the last few years in terms of my picks for gold and silver stocks. If you aren’t a TDV newsletter subscriber, where I comment nearly weekly on the markets and on precious metals stocks you’d think I’d all but disappeared.

However, Jeff Berwick and I have been on the same page that the market wasn’t ready for a heavy focus the last few years, and I’ve been helping our subscribers maintain and manage their portfolios and develop their broader macro-economic outlooks (which included a bullish call on stocks up until the end of 2013 that was not popular with most subscribers). Meanwhile, Jeff has done a great job in focusing on other areas that have had massive growth including bitcoin (up from $7 to $500 since he began talking about it in 2011) and now medical marijuana stocks, one of which, Organigram, just delivered a double since it was brought to TDV and TDV Golden Trader subscribers just a few weeks ago and went public yesterday at more than double the price our subscribers got into it at.

But, as Jeff has recently stated, we believe now is the time to buy gold and silver shares, if for no other reason because they’ve been abandoned by even the value investor. In the TDV portfolio, we have about 18 companies, and we are working towards rounding it out at 20 names.

Two of them have disappeared in takeovers in recent months: Osisko Mining and Papillon Resources.

The buyers are companies that are already included in our portfolio (i.e. Agnico Eagle, Yamana, and B2Gold) so we have not lost the assets altogether. But it gave investors a bit of liquidity and nice gains for those who bought along with us, as we suggested, and it left room for us to bring in a couple of new picks. I will be telling you about them soon . Importantly, the timing is good. What we see now is that most gold/silver shares have been bottoming for over a year. Some have been rallying through the year, like Agnico Eagle.

But most have been bottoming.

Still others are trying to get some lift off.

One of the latter is Merrex Gold (V.MXI), one of our junior picks.

Is Merrex Gold …into something good?

Ever since I tripped over Merrex at a conference in San Francisco a few years back I felt they were on the right track – having acquired a large contiguous land package of over 900 square kilometers in the southwest part of Mali, West Africa, adjoining both Senegal and Guinea – as part of a thesis that the Falémé river was related to the mineralization on the southern extension of the 200km long north-south trending shear zone that hosts most of the mines in Mali. That bet paid off right away with the discovery of a 600,000 oz 2.2 g/t gold deposit about 20 kilometers east of the main shear in 2006.

The only other deposit in the area then was Robex’s 1.6Moz low grade Nampala (mostly sulphides and less than 1 g/t gold). Merrex’s Siribaya oxide resource is the same size but twice as rich in grade.

Since then other deposits have been discovered in the area, notably Papillon’s 5+Moz Fekola and IAMGOLD’s 1.1Moz Boto – both gold deposits within 20km of the Siribaya gold project.

In April, the Merrex/IMG joint venture made a new discovery (Diakha – see graph below) just 10 kilometers south of IAMGOLD’s Boto discovery that may just be part of one large system.

In anticipation of this possibility Merrex has applied for a permit in Guinea on trend in between Boto and the current discovery (Diakha). Merrex and IAMGOLD have a 50/50 JV on the Siribaya project – with over $40 million spent to date – but Merrex is applying for a 100% interest in the Guinea claims.

The company has yet to drill some of its best targets to the east where it has strong termite mound based geochem readings coincident with north-south trending lineaments (possible shear zones).

But right now the big question is, how big is the current system at Diakha?

Keep in mind this point too. Merrex’s shares suffered like the rest of its peers for the same reasons – the bear market – but it also suffered unduly due to a general misapprehension of the political reality of the 2012 coup. What has changed is the realization that mining in Mali has been and will likely continue to be relatively unaffected as long as the government is itself mining friendly, whomever the government. The second thing that has changed is the high probability now (given B2Gold’s entry) that an actual mining operation will be formed in the region, which increases the value of every satellite deposit in the area. In other words, Merrex’s 600,000 ounces of 2.2 g/t gold oxides are worth more if there is a plant next door than if the joint venture would have to build its own plant and mine.

The third thing that has changed is the Diakha discovery on trend with Boto and Fekola.

The discovery also confirms their exploration methodology, which is driven by sophisticated geochem.

The Diakha discovery was the first of seven high priority targets uncovered by the method.

It’s too early to tell how big the system is or whether it is connected all the way up to Boto, but Merrex has most of the ground covered if it is that large. All we can tell you is that they are hitting good grades at shallower levels than either IAMGOLD or Papillon did up north, and that the rock type and visually identifiable minerals are the same as Boto (based on the core presented on their website).

We can tell you the exploration geologists are excited, and so is Merrex’s management. The stock has been consolidating in the $0.10-$0.15 range pretty much as expected, as the shareholder base continues to turnover. But liquidity appears to have been drying up at this level, leaving only a residual offer of about 500k shares remaining at the 15 cent level. I have a feeling that if someone took that out it would be 20 cents bid quickly! But we’ll see. An upset in gold could change that!

However, the story is getting out, despite a market all but abandoned by retail.

Last week’s BNN interview with CEO Greg Isenor brought in some fresh buying accentuating the tight liquidity situation, and there has been a steady drum beat about the war chest of Yuan ready to buy up African deals.

With B2Gold soon to be raising capital for the Fekola project I can’t imagine this story will remain quiet for much longer. This region is quickly becoming the fastest developing undeveloped mining region in the world. In my opinion there’s the potential for many discoveries on Merrex’s very prospective block.

At the moment we feel safe putting a $0.25 valuation on the stock.

It has the potential for a takeover by IAMGOLD or B2Gold (or the Chinese!), and ultimately if we can compare its potential to that of Papillon’s (which I very much believe is plausible) it is a $2-3 stock.

It is definitely a speculation and not something you should be putting your life savings into.

But this is the first exploration stock that we have publicly featured at TDV and I believe in the potential of this stock to realize significantly higher values. For those looking for maximum speculative leverage in this brutally beaten down sector Merrex is one of our current favorite ways to take advantage of it.

[Editor's Note: Read more about Ed's and the Dollar Vigilante's take, recommendations and outlook for precious metals in the TDV Newsletter.]

Mr. Bugos in the Senior Analyst at the Dollar Vigilante newsletter. He has been a dedicated investment professional since 1989, initially performing as a financial advisor, then stockbroker (with a focus on exploration and venture finance) and futures trader through 1999. Although not a geologist, he was mentored by one of the best exploration, venture, and mining analysts in the industry throughout the nineties at one of Vancouver's leading brokerage firms.