The Mother Lode of Value Creation

Paramount Gold & Silver (AMEX: PZG  ) is generating shareholder value like it grows on trees … by digging in the dirt.

Late last year, the company scored a discovery of paramount importance at its San Miguel project in Mexico, creating strategic value by positing geological continuity with a portion of Coeur d'Alene Mines' (NYSE: CDE  ) world-class Palmarejo deposit next door. While San Miguel continues to deliver encouraging drill results, the company's Sleeper project in Nevada has now awakened in style.

Paramount paid a piddly sum of just C$32 million for X-Cal Resources last year, acquiring a 30-square-mile land package around a former open-pit mine that had yielded 1.7 million ounces of historical gold production. X-Cal had already established an indicated resource of 750,000 ounces of gold and 5 million ounces of silver, but it was Paramount's discussion of "outstanding exploration targets" identified on the site that really piqued this Fool's interest at the time.

I ask Fools to take very special note of what Paramount has achieved at Sleeper since the company closed that painless acquisition just over 12 months ago. With its updated resource estimate released earlier this week, Paramount has grown the gold resource at Sleeper from 750,000 ounces to a whopping 2.6 million ounces (measured and indicated). Expansion of the silver resource has been even more astonishing, with a rapid quintupling to 25.3 million ounces!

The valuation equation
Here's where it gets exciting for investors: I believe the market has clearly failed to properly value Paramount's latest achievement. I recall feeling uneasy when the stock surged over $4 on the momentum generated by that San Miguel discovery, but this time around I see a surprisingly muted response creating an exciting opportunity for investors to participate in Paramount's ongoing value creation.

Even if we were to ignore for a moment Paramount's inferred resource at San Miguel of 74.6 million ounces of silver and one million ounces of gold -- and there is absolutely no valid reason to ignore it -- Paramount's recent market capitalization of $324 million represents an unmistakable bargain. That's less than 7% of the current market value of measured and indicated gold at Sleeper; or a mere $125 per ounce of gold estimated thus far at this one project. Add in the 25 million ounces of silver, and the value equation grows sweeter still. For reference, consider that Newmont Mining's (NYSE: NEM  ) acquisition of Nevada-focused explorer Fronteer Gold earlier this year valued those shares at $538 per ounce of measured and indicated gold.

Delivering on a promise
Paramount Gold & Silver seeks to occupy the "sweet spot" of shareholder value creation -- which it defines as the stages of development between discovery and production -- by "expanding and upgrading known, large-scale precious metal occurrences in established mining camps, defining their economic potential and then partnering them with nearby producers." I believe that Coeur d'Alene Mines cannot ignore the adjacent resources that Paramount is busily amassing at San Miguel, just as Nevada bigwigs Barrick Gold (NYSE: ABX  ) and Newmont Mining must both take notice of the rapidly expanding scale of resources at Sleeper. Since the strategic interest of nearby established producers forms a critical element of Paramount's growth strategy, I see the company's business plan coming together like a musical crescendo.

Paramount is not done generating shareholder value at either of its principle projects. Not by a long shot. Discussing the enormous value still waiting to be unlocked by the likes of Primero Mining (NYSE: PPP  ) , Brigus Gold (AMEX: BRD  ) , and Great Panther Silver (AMEX: GPL  ) , I suggested that "nothing delivers shareholder value to gold investors quite like the exploration drill." Successful exploration continues at both of Paramount's projects, developing multiple high-grade vein deposits at San Miguel, and establishing an above-ground mineral inventory left by historical mining operations at Sleeper. Additionally, the company recently acquired a smattering of 606 mining claims bridging the gap along trend between the core property and the nearby Sandman project that Newmont Mining consolidated via the Fronteer deal. The company intends to produce preliminary economic assessments for both of its projects during 2012, and I strongly encourage my readers to examine the current valuation of this proven value generator.

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 Brigus Gold, Coeur d'Alene Mines, Great Panther Silver, Paramount Gold & Silver, and Primero Mining. We Fools don't 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 (10) | Recommend This Article (21)

Comments from our Foolish Readers

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 September 19, 2011, at 11:36 AM, branshew wrote:

    I've been saying the same thing since last year. The current stock price does nothing to factor in the recent report on indicated San Miguel estimates given where the price was last year when they were just inferred. Now add the Sleeper (not Sleepy) project.

    The official resource report on Sleeper is due out in mid 2012. They currently have enough cash on hand to continue operations through next year. Once they have the Sleeper resource estimate in hand, I anticipate that they will be the target of an acquisition (or will look to sell). Even if they only achieve $400/oz for indicated gold resources, you're looking at a multiple bagger.

  • Report this Comment On September 19, 2011, at 12:43 PM, silverminer wrote:

    branshew ... Thanks for pointing out the slip. Another favorite explorer of mine has a project called "Sleepy", hence the unintended swap.

    Terrific follow-up news out today!!

    http://paramountgold.com/News/NewsRelease.asp?ID=100215

    Paramount Gold and Silver Corp. (NYSE /TSX: PZG) (Frankfurt: WKN: A0HGKQ) ("Paramount") announced today new core drill results from its 100% owned Sleeper Gold Project in Nevada that (1) have likely increased the grade of the Facilities Zone resource and (2) confirmed the presence of gold mineralization in a new area, the Sleeper South Extension Zone located south of the historical pit and under the south waste dump, which is expected to add to resources. These results (reported below) were not included in the NI 43-101 resource estimate prepared by SRK Consulting (www.srk.com) and released last week but they will be incorporated into a re-estimation of the Sleeper resource expected later this year.

  • Report this Comment On September 19, 2011, at 9:03 PM, skypilot2005 wrote:

    Sinch,

    You know I've read your articles for a long time. Your unique titles always stand out.

    I am confident that out of 100 articles in the financial arena, by 100 different authors, I could select your article.

    That being said, I feel this is the best title, yet!

    I scrolled right down here to type this comment before, reading the article.

    Fool On.

    Your Web Link Assistant

    Sky Pilot

  • Report this Comment On September 20, 2011, at 8:05 AM, XMFSinchiruna wrote:

    Thanks Skypilot! I'm glad you enjoyed the title, and hope the content delivered. :)

  • Report this Comment On September 20, 2011, at 11:26 AM, jesusfreakinco wrote:

    Chris,

    Great article. I've been in and out of PZG over the past few years. I picked up a nice chunk of PZG a few weeks back when it dipped into the low 2s and have been rewarded with a $1 (46%) move already. Timing couldn't have been better :-)

    Having said that... any thoughts on when M&A activity will pick up? PZG seems like an ideal candidate for the reasons you state in this article. Just waiting for the big payday to arrive here. The buyout, as you imply, could be multiples of the current stock price.

  • Report this Comment On September 20, 2011, at 11:35 AM, richthegeek wrote:

    Chris,

    Also - I'd be interested in your take on what happened at SVM. Hard to tell if the mine's canary died or if it was indeed manipulation.

    Thanks, as always, for your great articles.

    Rich

  • Report this Comment On September 21, 2011, at 7:15 AM, skypilot2005 wrote:

    September 20, 2011, at 8:05 AM, TMFSinchiruna wrote:

    "Thanks Skypilot! I'm glad you enjoyed the title, and hope the content delivered. :)"

    Excellent content, as usual. I started accumulating shares in October due to your on-going coverage of PZG.

    Thanks, again.

    Sky Pilot

    Your Official Web Link Assistant

  • Report this Comment On September 27, 2011, at 1:00 PM, skypilot2005 wrote:

    http://paramountgold.com/News/NewsRelease.asp?ID=100216

    Paramount Gold reports new high grade drill intercepts at its San Miguel Project in mexico

    Winnemucca, Nevada - September 27, 2011 - Paramount Gold and Silver Corp. (NYSE/TSX: PZG) (Frankfurt: WKN: A0HGKQ) ("Paramount Gold") announced today new high grade assay results from 10 core holes drilled on its 100% owned San Miguel Project in northwestern Mexico.

  • Report this Comment On October 05, 2011, at 7:10 PM, MajorBob04 wrote:

    This analysis is excellent. And I'm always impressed by your clear and thoughtful explanations of your rationale for investing, but you always help readers understand that there are risks. Thank you!

    And I am not an expert on PM, but I have some doubts about how soon and whether they would actually be acquired in the near future.

    Here's my thinking - can you help by refuting or explaining what would make these hypothesis invalid?

    1) At some point global production (the supply) of gold and/or silver may be high enough that producers would not need to buy more gold and/or silver reserves from companies like Paramount Gold. They could wait until Paramount Gold needs to sell because they cannot continue to operate unless they sell, or they build up too much debt trying to keep operations going until they can sell.

    2) Although I think it's a relatively small risk at this point, I think there's a possibility that we could end up going into a downward deflationary spiral. That would drive the price of gold and/or silver down, and the demand would go down in parallel. The producers would know that there's gold & silver nearby, but they wouldn't have to buy Paramount until they really need to. In the interim, how long could Paramount survive?

    I'm curious about what has happened to companies like Paramount in previous boom / bust cycles?

  • Report this Comment On October 14, 2011, at 2:13 AM, ikkyu2 wrote:

    "Paramount Gold & Silver seeks to occupy the "sweet spot" of shareholder value creation -- which it defines as the stages of development between discovery and production -- by "expanding and upgrading known, large-scale precious metal occurrences in established mining camps, defining their economic potential and then partnering them with nearby producers."

    So they're essentially a PR firm for gold mines. Weird.

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