Wake Up and Smell the Gold and Silver

I've caught the market sleeping on this stock before, but this is getting a little ridiculous.

Back in late 2010, when Paramount Gold and Silver (NYSE: PZG  ) made its discovery of paramount importance in Mexico that revealed geological continuity between its high-grade gold and silver veins at San Miguel with the neighboring world-class Palmarejo mine operated by Coeur d'Alene Mines (NYSE: CDE  ) , the stock initially failed to budge after Paramount issued its press release. It wasn't until the next day that traders must have discovered they were fast asleep at the wheel, and the stock closed 41% higher.

I think the market has slipped right back into a deep sleep with respect to Paramount Gold and Silver, failing consistently over the past several months to recognize a veritable flurry of meaningful achievements and value-enhancing discoveries. When I ponder which golden achievements have fallen on deaf ears, I think of Paramount Gold and Silver. And when I seek to congratulate a junior explorer for delivering a mother lode of value creation, my attention is again drawn to Paramount. The market's persistent failure to recognize a fair valuation for Paramount's assets landed the company a spot on my list of the top 10 gold stocks for 2012.

This week, Paramount's delivery of a successful and highly encouraging preliminary economic assessment, or PEA, of its Sleeper project in Nevada poured a fresh layer of shareholder value atop this already-enticing stock. I think it's high time for the market to wake up and come to its senses with a positive adjustment of the share price. While the project's name may connote fatigue, Sleeper has the makings of a resounding wake-up call.

Sleeper has been sleeping since open-pit mining operations ceased in 1996. But with the present PEA, Paramount has built the foundation for a fast-track-ready return to production for this past producer. Completed by a consulting team that previously assessed Allied Nevada Gold's (NYSE: ANV  ) restart of the nearby Hycroft mine, the PEA is conceived as an open pit, heap-leaching operation with an average measured and indicated gold grade that is 77% higher than the heap-leach portion of Hycroft's reserves. Let's highlight some of the key metrics that render this Sleeper PEA a solid success:

  • The Sleeper mine would yield 172,000 ounces of gold and 263,000 ounces of silver per year, on average, over an expected 17-year mine life.
  • Sporting a total cost (combining cash operating costs with initial capital costs, sustaining capital costs, and contingencies over the life of the mine) of $996 per GEO, Sleeper's comprehensive cost structure is well below the industry average.
  • With an estimated initial capital requirement of just $346 million, the project offers a conveniently scaled undertaking for major miners looking to scale back their commitments to multi-billion-dollar projects in the face of skyrocketing capital costs. Since the Sleeper land package connects with Newmont Mining's (NYSE: NEM  ) Sandman development project, I can think of at least one major miner that's not snoozing through Paramount's achievement.
  • Net present value for the Sleeper project alone is estimated at $695 million (using a three-year trailing average of gold and silver prices and a 5% discount rate). That's more than twice the company's present market capitalization, and that's without even considering the San Miguel project where an updated resource estimate is due shortly.
  • Using conservative price estimates of $1,384 gold and $26.33 silver, Sleeper would yield an internal rate of return of 26.8% and generate pre-tax net cash flow of nearly $1.2 billion. Meanwhile, at current gold and silver prices, that IRR jumps to 40%, and net cash flow leaps toward $1.9 billion.

Much like the market's sleepy response to Sabina Gold and Silver's ("SBB" on the Toronto Stock Exchange; "SGSVF" on the OTC market) similarly strong PEA for its Back River project in Canada's Nunavut province, I firmly believe the present share price of Paramount Gold and Silver leaves room for dramatic investment upside as the company's dynamic duo of promising projects progresses through the development cycle.

Like many of my gold and silver picks, my bullish CAPScall on Paramount Gold and Silver has suffered an unkind fate thus far with a 40% underperformance of the S&P 500. But far from throwing in the towel, I have effectively doubled-down by selecting the stock as a top pick. Likewise, I will continue to increase my own stake in the shares until this market wakes up and smells the gold and silver at Paramount.

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Fool contributor Christopher Barker can be found blogging actively and acting Foolishly within the CAPS community under the username TMFSinchiruna. He tweets. He owns shares of Allied Nevada Gold, Paramount Gold and Silver, and Sabina Gold and Silver. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.


Read/Post Comments (2) | Recommend This Article (14)

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Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On August 03, 2012, at 12:38 PM, clawmann wrote:

    Agree completely. I am baffled by the market's failure to value PZG properly. Sleeper alone more than justifies the current pps. Then we add in the bigger prize, San Miguel, and we should be trading at $7+. So what's going on?

    Look at the large amount of intererest in the September $2.50 calls. Someone is going to take a big bath if those end up in the money. I have to asume that the seller of the large majority of those calls was an institution, because that 85%+ of that open interest appeared over a period of a few days. Therefore, I assume that the same institution will try to put downward pressure on the stock through shorting as long as possible.

  • Report this Comment On August 06, 2012, at 4:00 AM, lanceim59 wrote:

    If anyone is into small-cap high growth mining stocks, you should look into Woulfe Mining (TSX-V symbol: WOF or OTCQX symbol: WFEMF). Back in February 2012, Warren Buffet invested $80 million in Woulfe Mining which is one of the largest tungsten producers in the world! Tungsten is one of the hardest metals and is used for the tips of mining drills as well as jewelry. Woulfe Mining is projected to start production in the Sanddong Mine(one of the largest tungsten mine in the world) some time in 2013.

    http://www.moneymorning.com.au/20120613/why-warren-buffett-i...

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