A gold mine gets put on the discount rack...

Golden Lever

As we enter what appears to be gold’s next big run, Ecuador’s largest gold producer, Core Gold Inc. (CGLD.V), is positioned to deliver significant leverage on rising prices.

Dear John,

Regardless of the sector, the key to investment success is to spot undervalued assets before the broader market catches on.
When it comes to the precious metals sector, junior explorers and developers can be undervalued for any number of reasons.
The market may not appreciate the potential of a project. Conventional wisdom may turn against a particular story. Or the company may be the victim of weakness in the broader market.

In the case of Core Gold, which until recently existed as Dynasty Metals & Mining, it had the ill fortune to experience a labor dispute in summer 2016, right as gold hit a weak patch.

With its operations at its Zaruma mine in Ecuador thrown into disarray, a company with a profitable gold mine and millions of ounces of untapped resources suddenly found itself on the discount rack.
Fast-forward to today, and we find gold trending upward, the labor dispute long since settled and the company in its new incarnation as Core Gold, a financially stable story under new experienced management with that same portfolio of high potential assets now being efficiently operated and monetized.

Simply put, Core Gold is a company tailor-made for the value investor — it’s a profitable producer with a ton of exploration upside, one that has been largely overlooked.

But given the advantages it offers investors, it’s not likely to stay that way for very long.

Profitable Production —
PLUS Almost 6 Million Ounces Of Resources

It starts with the gold the company is producing from its newly commissioned Dynasty Goldfields operation, a project that the new Core Gold management put into operation within just four months of assuming control of the company in September 2016.

This flagship operation is estimated to propel Core Gold to produce 21,500 ounces of the yellow metal at cash costs of $800 in 2017 and 47,500 ounces at cash costs of $725 in 2018.

You read that right. Production is expected to double while profitability increases. Those estimates will include ore from the Dynasty Goldfields and Core Gold’s other mining units.

Along with Core Gold’s Copper Duke and Linderos properties — all in Ecuador, and all within the Dynasty District (more on that below) — the company controls 5.9 million ounces of gold resources from prior 43-101 reports, including 2.2 million ounces at Dynasty Goldfield (corroborated by current mining), 2.54 million ounces at Zaruma and 1.29 million ounces at Jerusalem.

In other words, based on in situ value alone and not even considering its status as a producer, Core Gold should command a market cap that is some multiple of its current valuation. Add in the exploration upside of the 50,000-hectare Dynasty District properties, and you have, in Core Gold, an investment bargain of the first order.

The Dynasty District — Big Exploration Upside

Core Gold’s Dynasty District holdings cover a 30-kilometer by 90-kilometer copper-gold belt that extends from Ecuador’s border with Peru northeast toward Zaruma. The 100%-owned project includes five known production and exploration targets, with well known gold-copper porphyry and epithermal vein potential.

Drilling and trenching results are on the way from the Copper Duke and Linderos targets. Copper Duke is a large copper-gold porphyry target. Linderos is host to multiple showings of high-grade surface gold mineralization and is underlain by a gold rich porphyry.

Significant results from either could add to Core Gold’s already substantial resource in Ecuador. And they will add to the production already emanating from Dynasty Goldfields, which is currently generating around 90% of the company’s gold production.

Severely Undervalued…For Now

Companies with comparable, or even lesser assets, are trading at multiples of Core Gold’s current market cap.

Consider this: While Core Gold’s valuation hovers around C$30 million, a range of junior miners and explorers with similar in situ resources are trading anywhere from C$75 million to over C$400 million.

Looked at another way, Core Gold is trading at a C$40 million enterprise value (EV) or 1.75 times 2018 Estimated EV/EBITDA. This compares to a group of peer Latin American producers that trade at 6.0 times 2018E EV/EBITDA.

Or consider the in situ valuation discrepancy. The market is currently according $16 in EV per measured and indicated ounce to Core Gold’s resource portfolio. Its peers, meanwhile, are trading at $64 EV per measured and indicated ounce.

Any way you slice it, Core Gold is a company trading at a fraction of its inherent value. But that’s not likely to last. Gold is heading up. Investors are on the lookout for leveraged ways to play the trend, and a hidden gem like this won’t stay hidden forever.

The numbers tell a compelling story to the clear-eyed value investor. Core Gold’s shares are currently trading at a severe discount to the value implied by the company’s asset portfolio.

With production expected to double next year and exploration likely to add to Core Gold’s already prodigious gold resources, now is the perfect time to build a position in this undervalued gold play.

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