I’ve been asked about Columbus Gold and its recent spin-out, Allegiant Gold. I don’t own either stock, but the story makes for an interesting quick case study. For more in-depth guidance on what I’m actually buying, please subscribe to the Independent Speculator.
Columbus Gold (CGT.TO, C$0.29, 158.8M shares, C$46.1M enterprise value)
Allegiant Gold (AUAU.V, C$0.35, 46.7M shares, C$15.8M enterprise value)
Summary
Columbus started out as a prospect generator, following the “joint-venture (JV) model” of getting other companies to pay for exploration on a large portfolio of highly prospective gold projects in Nevada. These were put together by legendary Nevada gold explorer Andy Wallace. The plan started out well, with major companies stepping up to pay for the highest-risk stage of exploring, but then the market turned bearish and JV partners became scarce.
As this was happening, Columbus came upon an opportunity to buy into a large gold deposit in French Guiana called Montagne d’Or. This didn’t fit the JV model, but that wasn’t going so well, and the option was relatively cheap. Plus, the team was sure the deposit was much larger than official estimates indicated. They were right. Today Montagne d’Or is a 5.0-million-ounce gold project in a new JV with experienced Russian gold producer Nordgold—which has been paying all the bills.
The Nevada properties languished while the company focused on its successful exploration in French Guiana. By the time the gold bear gave way to a new bull market in late 2015, the market had all but forgotten about those properties. Management was concerned that if Nordgold or another company bought them out for control of Montagne d’Or, Columbus shareholders would get nothing for the Nevada assets.
So management started working on the Nevada projects again, and lo and behold, Andy made a new discovery just east of Reno, now called the Eastside project. But the market still didn’t give Columbus much, if any, value for its Nevada assets. That’s when the company decided to spin them out into a new company that would again be focused on just gold in Nevada.
That transaction closed last January, with Columbus shareholders getting free shares in Allegiant gold (AUAU.V).
It’s interesting that for years the market gave Columbus absolutely nothing for its Nevada assets. But as soon as the Allegiant spin-out was locked in, Columbus share prices started falling—hard—in February and March, while Allegiant held on at over C$0.55. Mr. Market seemed to suddenly see greater value in the Nevada prospects, not the five million ounces of gold in French Guiana.
The prices of both stocks have fallen more recently—but so has gold.
Key Analytical Points
+ Montagne d’Or looks like a winner. I can’t say I know much about Nordgold, but I do know it has been successful at building profitable gold mines in difficult places to work. The company wouldn’t have spent tens of millions of dollars over the years and would not be advancing the project now, if they didn’t believe it would work. The deposit has an estimated NPV-5% of US$433 million, generating an after-tax IRR of 18.7% at $1,300 gold. Columbus owns 49% of this.
- Columbus is boring. Montagne d’Or has a full bankable feasibility study and should be ready for construction as soon at the partners get all the necessary permits. French Guiana is a poor place that could use the tax revenue, but it is a department of France, so there’s no telling how long the bureaucracy will take. Nor is there any guarantee that it will grant the permits. That means that while there is quantifiable value in Columbus, the story is likely to be boring for an unknowable length of time, and not without risk.
+ Eastside could easily double this year. Management has a stated goal of doubling the Eastside discovery—and a plausible geological theory for doing exactly that. With almost a million ounces of gold already in hand, that would be a substantial addition of value. The stock should respond if the results deliver.
- Allegiant is spending its own money. I like the Eastside project a lot, as well as other targets the company plans to explore this year—but there’s no partner paying the bills here. This adds significant risk to the play.
Conclusion
History: Back in my Casey Research days, I recommended shares in Columbus based on the original prospect generator premise. I held on when the play mutated into self-funded advanced exploration, because I visited Montagne d’Or and was sure it would get bigger (which it did). Then I held on because I liked the idea of the Allegiant spin-out unlocking value (which it has done).
My current take: I’m not a buyer of either company—for now.
CGT: Now that the Nevada assets have been carved out, Columbus has become a one-trick pony, with a much larger JV partner calling the shots and dictating the rate of news flow. I’ve written that boredom is a silly reason for selling, but it happens all the time. There’s been no loss of value underpinning the company. But it will be a while before the show really gets going in French Guiana. Personally, I’d look to buy Columbus if market conditions justified it when construction of the Montagne d’Or project starts. I could understand investors with limited funds reallocating capital from Columbus to other stocks they believe have more imminent upside.
AUAU: Allegiant is an unknown to many investors—but it shouldn’t be. Great people, great projects, and a bird in the hand at Eastside. Why would anyone sell? Well, if they got shares for free and had something else they liked better, I could see it. Columbus spending other people’s money was a very different beast from Allegiant spending its own.
That said, the company is on my radar. If Allegiant were to get JV partners to cover the high-risk costs of exploration, it might rise closer to the top of my shopping list. If the company releases great drill results and the market yawns, I could see that creating a great speculative opportunity, pushing the stock to the top of my list. Or, if the company offers new shares to the market in a private placement on attractive terms, I would definitely be interested in participating.
But again, for now, I’m watching both companies.
Important Reminder: I am not making any recommendations in this service. I’m simply saying what I would do.
