Why Barrick, Silver Wheaton Are Eyeing GLDN As It Soars

Submitted by David Gould through our Trefis contributor tool

As Seeking Alpha’s leading contributor on Basic Materials, I have run into many attractive gold and silver plays. My AuRico Gold (AUQ) pick, for example, is now up 6.3% in just a little over one month since I first presented my bullish thesis. Rising tension between Israel and Iran – to say nothing about the Fed’s announcement of continuing low interest rates at least until 2014 – will further drive secular appreciation in the years ahead. The basic materials sector, in general, provides an attractive hedge against macro volatility and inflation while emerging gold / silver producers, in specific, provide the real sources of upside.

Gold Dynamics is one such emerging gold and silver explorer that has been rightfully soaring in recent days. In the last three days of trading, buy-and-hold investors have more than doubled their money and, fortunately, technical and fundamental indicators are pointing towards a continued bull run.

ATTRACTIVE OWNERSHIP NEAR THE MAJORS

The firm is focusing on developing the Santiago Gold Project, which spans 315.7 hectares around the “Sierra San Francisco” mountain range in Durango, Mexico. This is located near the Promontorio project, which has been one of Mexico’s most lucrative at a historical resource size estimated at 12M oz of gold. Santiago has 5 contiguous mining concessions that have been under-explored despite the potential for ore shoots to yield more than 50 g/t based on sampling. With Silver Wheaton’s (SLW) interest in Promontorio being located just 7km away from Santiago, Gold Dynamics merits a takeover premium on top of the innate value of its inferred resources.

Exploited ore shoots at Bella Vista, one of the mine’s concessions, have yielded between grades between 8 and 35 g/t. Moreover, the site has optimal exploration potential for Au-Ag given its ideal hydrothermal activity and geological structure. Major E-W and WNE-ENE faults intersect with NW-SE trending faults are represented at Santiago, which provides a proper environment for imiting operational costs and allowing for smooth production.

STRONG UPSIDE, LOW DOWNSIDE

The inferred total gold resource of Bella Vista has been estimated at 71,343 oz of gold. A 5% loss of gold from mining production and an 85% recovery factor at today’s price of gold would put the implied value at nearly $100M. Even assuming that the firm only develops 5% of its resource at Bella Vista next year at profit margins of 25% would suggest the stock price quadrupling. Moreover, I find that any attempt to reverse engineer a value below that which is currently assessed by the market would have to be predicated upon absurdly low assumptions off of the inferred resources. Accordingly, as much as Gold Dynamics is a high reward play in the emerging gold space, it is equally -if not more – a safe play.

Fortunately, management is also not resting on their laurels. The company recently agreed to acquire Lake Ste-Anne in Canada, which contains 6 silver and gold plays. This will likely gain the attention of Toronto-based Barrick (ABX), which has been an aggressive takeover suitor over the the last half decade. Investors that get in early before gold production ramps up will particularly benefit from greater informational flow, potential partnerships, and takeover offers.

DISCLOSURE: The distributor of this research report, Gould Partners, is not a licensed investment adviser or broker dealer. Investors are cautioned to perform their own due diligence as information contained within this report has been derived from public sources and cannot be guaranteed by us to be fully accurate. We are a consultant to a third-party EAG, representing Gold Dynamics and have received one thousand dollars for independent research. Always discuss investments with a licensed professional before making any financial decision. Statements made herein are often “forward-looking statements” as stipulated under Section 27A of the Securities Act of 1933, Section 21E of the Securities Act of 1934, and the Private Securities Litigation Reform Act of 1995. Since these statements are uncertain, actual results may be materially different from those expected.