Hurry, Startling News Gives You a Golden Opportunity
Gary is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
A stock sale announcement sent Primero Mining Corp shares tumbling Wednesday morning. Feel free to become a “gold digger” because this is an excellent opportunity to pick up more shares of this gold mining company at a discount.
Why Did the Announcement Cause a Price Dip?
Shareholder confidence supports market prices. When the corporate insiders start selling, we wonder why.
That is why when Facebook Inc. (NASDAQ: FB) shares sank to a record low on September 4, Facebook founder Mark Zuckerberg announced he would not sell any of his shares in Facebook for at least one year. Shareholder confidence restored, Facebook's market price rebounded the next morning and has continued to climb more than 30% since his announcement.
One of my major holdings is Primero Mining Corp (NYSE: PPP) and I'm happy to report the stock price has more than doubled over the last two months. Then Tuesday afternoon the alarms went off and red flags popped up when PPP's major shareholder sold a huge hunk of Primero Mining stock.
GoldCorp Inc. (NYSE: GG) is the major shareholder of Primero Mining. After the markets closed on Tuesday, September 18, GoldCorp announced a sale offering of 8,422,460 shares – 21% of GoldCorp's share holdings in Primero Mining.
The next day the price of Primero Mining dropped from $5.65 to $5.13/share. I believed this was an overreaction to the news. The following morning the price dropped again, opening at $4.80/share. I began to doubt my confidence in identifying overreactions.
Share offerings make for scary news because they often dilute the value of currently owned shares. The resulting drop in market price is often appropriate. At other times, just a knee-jerk reaction. How can you tell the difference?
Your first move upon reading about a secondary share offering should be to follow the money. Sometimes it's going to a good cause.
For example, I own shares in Box Ships (NYSE: TEU), a 2011 spinoff from Paragon Shipping. Paragon ”sold” its container ships with profitable existing shipping contracts to Box Ships in exchange for stock.
This July Box Ships announced a secondary stock offering. The announcement sent the stock price tumbling from $8 to under $6/share. The stock offering was scary to investors because, in bad times, floundering shipping companies often make dilutive stock offerings to gather enough cash to bail out the balance sheet and stay afloat.
So I followed the money. Turns out that the proceeds of this stock offering went towards the purchase of two more ships, the OOCL Hong Kong and OOCL China. The average earnings/share for Box Ships should increase with these additions to the fleet, supporting the currently amazing 16% dividend yield. What a bargain price that is.
So, where is the money going from this sale of Primero Mining stock? GoldCorp is keeping all the proceeds. Primero doesn't get a cent. That's appropriate because GoldCorp owns the shares.
So what's the relationship here?
Who are the Players?
Understanding the players is important too. For example, Heckmann Corporation (NYSE: NES) supplies waste water treatment to oil and natural gas drillers. My shares in Heckmann have taken a beating this year. Share prices dropped from $7/share to $2.60/share.
Labor day weekend Heckmann announced it would be issuing shares to purchase Power Fuels, another waste treatment company operating in the Bakken Shale basin. The deal offered tremendous synergies for both operations. Heckmann's share price doubled within two weeks.
Gold Price in US Dollars data by YCharts
What is the Relationship Between GoldCorp and Primero Mining?
Primero Mining Corp purchased its major asset, the San Dimas gold-silver mine in Mexico, from GoldCorp in August, 2010. GoldCorp received shares of common stock, a 5-year promissory note and a $60 million convertible note.
The San Dimas gold-silver mine has done well for Primero, spitting out gold and silver ingots at a steadily increasing pace. Last October excess cash was used to pay off half of GoldCorp's convertible note. The remaining half was paid off on August 6 with 8,422,460 shares of common stock at $3.74/share.
If you think that number looks familiar, you're right because it was the resale of those same 8,422,460 shares that was announced Tuesday. With this sale alone at $5.35/share, Goldcorp made a $12.7 million – a 42% profit in just two months. I wish my stock portfolio was doing as well.
Why such a huge profit? Mining company stock prices have been depressed because gold and silver prices have been stagnant. Then investors noticed how undervalued Pimers had become. The price of PPP exploded this summer from under $2.50/share in June to $5.63/share last Tuesday (see the price chart below).
You might be wondering why GoldCorp only sold part of their stake. GoldCorp's remaing shares (payment for selling the mine in 2010) are under lockup for three years and cannot be cashed out until after August 11, 2013.
The sale of the new shares fits with GoldCorp's original strategy for selling the mine. In the original mine sale announcement they wrote “Goldcorp does not have any present intention to acquire ownership of, or control over, additional securities of Primero.”
Play The Price is Right
The question you should ask before placing an order is “Is the price right?” The price of Primero Mining has more than doubled this summer. Is it still bargain priced or time to “take your profits?”
The first thing I check is book value per share. While not a perfectly accurate estimate of a company's fair market value, the book value gives you an idea of the cost of a company's underlying assets. As of June 30, Primero Mining Corp had $538 million in equity or $6.10/share. Of that, $1.46/share was in cash.
Since June, to use an old prospector movie line, “Day found gold in dem dar hills!!”
Primero Mining has completed a more accurate survey of nearby deposits within the mine. On September 4, Primero announced gold reserve estimates were increased by 126,593 ounces and silver reserves were increased by 5,760,000 ounces (http://tinyurl.com/9ms7qbu).
This is about $423 million in found money – over $4/share.
This 100-year-old-plus mine has many decades of untouched ore waiting to be explored. The $2.2 billion in currently measured gold and silver reserves only includes 18 veins within 100 meters of the current mining level -- 18 out of more than 120 known veins on the property. Wth a market cap under $500 million, Primero Mining's assets are significantly undervalued..
While P/E ratios are important, you may not want to rely on price/earnings numbers for new companies that are ramping up production. While the San Dimas mine is old (the first reported mining on the San Dimas deposit is dated 1757), Primero Mining has barely completed two years of production ramp up at the mine.
That said, Primero Mining has a current P/E ratio of 7.9, a fraction of the average 39.6 P/E for metals and mining firms and well below the average P/E of stocks within the Junior Gold Miners ETF (which average a P/E of 14.2).
Grab a Shovel and Start Digging for Gold
Considering the circumstances, Primero Mining's earnings and stock price have plenty of room to grow.
I believe Tuesday's announcement wasn't significant, but did create a brief price pullback, a dip within a long-term upward price increase towards the true value of Primero Mining stock. It's a great time to buy a new position, or add to your current position in Primero.
PhotoPhool has no positions in the stocks mentioned above. The Motley Fool owns shares of Facebook, Heckmann, and Primero Mining and has the following options: long JAN 2014 $20.00 calls on Facebook and long JAN 2014 $4.00 calls on Heckmann. Motley Fool newsletter services recommend Facebook. Try any of our Foolish newsletter services free for 30 days. 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.If you have questions about this post or the Fool’s blog network, click here for information.
