IKN

Thy sin’s not accidental

Regarding Starcore International (SAM.to)

Let us be clear as a church steeple bell ringing out over a village green on a crisp winter’s morning about this disclosure: I’m long Starcore Intl (SAM.to), I went long after reco’ing the stock on January 10th 2015, then added some more a couple of weeks later. I’m long SAM.to because it was my idea of a good value high-risk-high-reward tinycap play, one that would do very well if gold decides to move modestly higher (it doesn’t need the stupidhigh targets, $1.3k would do nicely to begin with), though I’m 100% clear about the risks in buying tinyprice juniors and you should be too. I was long before it bought the Creston assets in the disposal sale. My cost average is 12c so I sit today on the right side of the trade, I’m a happy holder and would like the stock to go higher. End of disclosure.
What with some guy called Eric Sprott buying nearly 15% of shares in a block trade last week (the news out yesterday on that) it’s suddenly caught a few people’s attention. Last Sunday in IKN302 we reviewed the SAM.to 2q15 production results just published and noodled on what they might mean, as well as considering the impact of the Creston purchase. We did the pretty coloured charts, chewed over this’n’that and came to a conclusion. Just before the conclusion came this, a list of positives and negatives as I see them around SAM.to today:
The negatives
  • The
    quarter just gone wasn’t great. It wasn’t bad, but production was on the
    light side and they’re not going to wow the market when the financials get
    printed on this one.
  • Financially
    speaking, at current gold prices it’s basically a breakeven company. One
    quarter might be a small net loss, another a small net profit, but without
    a significant rise in the gold price it’s going to tread water.
  • It’s
    small and ignored by the world.
  • If
    gold drops substantially, it will start returning net losses that can eat
    into its cash position and threaten corporate stability.
The positives

  • It’s
    cheap. At around $20m market cap you get a small producing gold miner that
    runs its operations with positive free cash flow.
  • Its
    balance sheet position is strong and there’s no liquidity problems as long
    as the gold price doesn’t fall to bits on us.
  • The
    recent purchase of the Creston Moly assets could become a latent winner.
    Come the time of a sector revival, assets such as these get revalued and
    SAM.to’s bargain basement purchase would look very smart indeed
  • The
    fact that it can tread water at current gold prices means that it’s one
    you can bide your time with. The risk is gold going lower, but if gold
    moves higher (and hey, I say it will) it will move SAM.to into significant
    profits, no matter if a quarter comes in light. For example, $1,300/oz
    gold adds at least $0.5m to revenues.
  • With
    this type of small producer, it only takes one quarter when mined
    mineralization grades go higher in a certain spot for a big production
    difference to happen. When that shows up so do profits and SAM.to has
    already shown it’s willing to share in net profits.
  • Last
    year’s dividend payment could be repeated, for example at July 2015
    year-end. SAM.to popped higher on the news in 2014 (from ~15.5c to ~22c, a
    42% upmove). With just over 151m shares out, a 1c dividend would take a
    managable $1.5m from treasury and in the event of better gold prices, a 2c
    dividend would cost $3m.

The only one of those that I might change is the “small and ignored” now that Sprott has shone his media-attention-making light on the company. But only maybe, because that effect isn’t going to last for so very long. 
Bottom line: I’ve been dubious about Sprott’s investment theories many times, particularly his bad reading of silver and what it is (and isn’t) over the years. But he’s got this one right and has zeroed in on a small producing gold miner that’s run well, financially solid and capable of good gains. 

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