Top picks 2012: Virginia Mines

With substantial gold and zinc resources, numerous joint ventures and future royalty streams, this stock looks like a bargain.

By TheStockAdvisors Jan 13, 2012 2:42PM
Image: Gold Bars (© Stockbyte/SuperStock)This post is one in a series in which more than 50 newsletter advisers share their Top Picks for 2012.

By Adrian Day, The Global Analyst

Virginia Mines (VGMNF) is arguably one of the most undervalued companies in the gold sector, with low risk but also significant upside. 

The company's roots are as a prospect generator, finding properties and entering into joint ventures to fund exploration. All its activities are focused on Quebec, one of the most mining-friendly jurisdictions in the world. This model enabled the company to grow rapidly, leveraging other people's money, while building its own balance sheet with minimal dilution. 

Virginia now has numerous properties in joint ventures with others, who have bought interests and are in many cases paying it to run the exploration programs. Its portfolio includes a significant zinc project and global gold resource of over 500,000 ounces.

More significant is a royalty that Virginia owns on a property it discovered and subsequently sold to Goldcorp. The Eleonore property is Goldcorp's next major mine, with construction well underway for a 2014 start up. After its first full year, the mine is scheduled to produce about 650,000 ounces for the next 17 years.  

What's this to Virginia? Well, when it sold the mine, it kept a royalty on future production.  The net smelter royalty has two variables: the gold price and the mine's aggregate production. Suffice it to say, with gold anywhere above $1,200 an ounce, the royalty will soon be paying Virginia 3.5% off the top, or over $36 million a year.

The net present value of the royalty, based on future cash flow at today's gold price (around $1,640), exceeds the total market cap of the company (currently $265 million).  Net out Virginia's cash of $45 million, and the stock becomes a bargain based on this one asset.

All the rest of the company comes free: the gold resources, the zinc deposit, the multiple joint ventures, and the company's own exploration projects around its Eleonore discovery. 

Why so cheap? Well, the market -- and especially the gold market -- likes instant gratification, and Eleonore doesn't start production until late 2014. But as we approach production, we can expect the stock to move up to a more realistic valuation. Virginia also trades on the Toronto Stock Exchange under the symbol VGQ.TO.

We note that the long-term fundamentals for gold remain bullish. All the reasons why people have been buying gold over the past couple of years remain firmly intact. Monetary policy in the U.S. and Europe remains easy. Emerging market inflation continues to pick up, particularly in China and India, the two largest gold markets.

Central banks continue to buy after the third quarter, which saw net purchases double from the previous quarter. Emerging countries, with the highest reserves but the lowest percentage of gold holdings, want to diversify out of the dollar.

See all 50+ picks in our Top Picks Report 2012.

Steven Halpern's​​​ offers a free daily review of the favorite stock ideas of the nation's top financial newsletter advisors.

Tags: goldVGMNF


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