Evrim Resources Corp. (EVM, To., 0.32) released on December 6 very disappointing results from its eagerly anticipated initial drilling at its Cuale project in Jalisco, Mexico. To call drilling a complete dud might be an exaggeration, but certainly there was nothing that lived up to the expectations engendered by the extraordinary trenching results from the spring. The stock collapsed.
Most recent buying was founded purely on this property and this drilling, so clearly many shareholders simply sold the shares regardless of price. (Pre-open, the stock had over a million shares on the offer at 25.) We think this is a mistake. Indeed, Evrim is good value here, although the near-term stock movement is unknown, as more investors learn of the disappointing drilling results and tax-loss season hits peak selling.
Is it so bad?
Over 1,100 meters of drilling has been completed and assays of four out of five holes received and released. There was some gold (and copper), but nothing comparable with the trench results. A drill has been turning at nearby North Dome target. The company will finish that drilling and release the results, including from holes already completed. But clearly there are now low expectations. The company is re-evaluating its program, and more broadly its approach. It is unlikely to complete the second part of the planned drill program (after current holes) without further pre-drilling work and evaluation. It will also consider its participation. Evrim is a prospect generator, who drilled this project itself because of the potential and because funds could be raised (with Newmont buying 19% of Evrim shares at a premium). That may change.
The market has exaggerated the decline (no doubt because those who purchased recently purely for this project are selling without regard to the price). First, drilling did hit some gold (including, for example, 14 meters of 1.92 grams from the surface), as well as some copper in different holes. This represents a significant hydrothermal system, and clearly the gold in the trenches had to come from somewhere. There are other targets (from geochem and magnetics) on the property. It is possible another company might be interested.
A solid company, with cash, strong team, and multiple projects and partners
Second, without any consideration for Cuale, the current price discounts other assets in the company. The market cap is now C$26 million. Evrim has cash of about C$11 million (my estimate), plus a royalty on Ermitano (which I estimate has a value of up to $30 million). It also has numerous joint ventures and earn-ins, including some with drilling underway (including at the high-grade Cerro Cascaron project in Chihuahua State, which we have discussed before). Partners include Antofagasta, Newmont and Yamana, and include two regional alliances. If Cuale had never entered the picture, we would be buying Evrim at this price.
You might want to pick up more shares at this level, and perhaps trim your holding from any high-cost shares over the next month or two for a tax loss. Evrim is a buy, though not for the same reason we were buying a month ago.
Lastly, we must commend the Evrim team for exemplary disclosure all the way along, including in recent release. The episode is a reminder that, however compelling a target, however proficient and thorough the team, exploration is still a difficult business without guarantees.
Adrian Day, London-born and a graduate of the London School of Economics, heads the money management firm Adrian Day Asset Management, where he manages discretionary accounts in both global and resource areas. Day is also sub-adviser to the EuroPacific Gold Fund (EPGFX). His latest book is "Investing in Resources: How to Profit from the Outsized Potential and Avoid the Risks."
[NLINSERT]Disclosure:
1) Adrian Day: I, or members of my immediate household or family, own shares of the following companies mentioned in this article: Evrim. I personally am, or members of my immediate household or family are, paid by the following companies mentioned in this article: None. My company has a financial relationship with the following companies mentioned in this article: None. Funds controlled by Adrian Day Asset Management hold shares of the following companies mentioned in this article: Evrim. I determined which companies would be included in this article based on my research and understanding of the sector.
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