Novo: Question From a Reader #2

Question:

“I get what your saying above and it makes sense. Where I’m having a hard time is when I think about what NOVO could be worth when it begins producing gold in 12 months and the market revalues it much higher and so the equity that Q is trading for these other companies seems to be not such a great trade. If Q were buying these stakes in other companies that he likes but using free cash flow from opperations I would love it, I’m just not happy about the equity trade.

Again as an anlogy Warren could trade 1M shares of Brk for 10M shares of Tesla which he thinks has revolutionary potential is it a good trade? Brk is a granteeed great buisness and Tesla could go either way so trading equity is a great move for the risker company not such a great move for a great company.

Thanks for your reply by the way.”

My Thoughts:

“I hear you and I somewhat feel the same. What I think is going on is that even though I think shares of Novo are undervalued and I would like there to be as little dilution as possible, it might also be that especially KZR and GBM are even more undervalued, at least in the short to medium term, while having an easier time to potentially revalue quickly. I also don’t know how many eyes might be watching the Bendigo/Fosterville area and what will happen once the tenements released by the state of Victoria find new owners. If not us, then some other entity would probably finance any of these juniors.

Thus I think it was deemed worth it simply due to timing. I think that KZR has one of the best prospective brown field exploration potential that I know of (hence why I also own KZR directly on top of indirectly through Novo). Novo will take time to really flourish and I expect it to get exponentially better in bankable value as exploration, delineation, permitting and processing gets increasingly figured out.

NFG, KZR and/or GBM might have a Fosterville type deposit at the end of the day and it will be known long before Novo turns into a Major gold company. In other words: Especially KZR and GBM could outrun Novo and then be monetized (if appropriate) and then be re-invested into Novo for example.

Lets say KZR/GBM hit something really good within 12 months that will get better and better in a hurry. By this time, Fosterville will be another year closer to becoming a “regular” mine again, all else equal. Thus, Kirkland Lake’s willingness to pay up for a tier 1 asset near their flagship asset will just be going up, all else equal. If KZR/GBM would become lets say a ten bagger before Novo, and it gets sold, then those proceeds could theoretically be used to buyback stock in Novo in a manner that would have benefited shareholders, assuming the share price of Novo doesn’t outrun these companies.

What makes this scenario more likely is the fact that the market is very much unwilling to take anything for granted with Novo, unlike easily understandable and conventional high grade lode gold plays.

Take De Grey for example. If Novo would have owned a stake in DEG before they started hitting their best holes yet, then such an investment would have already revalued many 100%. Thus, theoretically, Novo could have sold shares of DEG with a big and quick profit and bought back stock.

To sum up: Any dilutive investment(s) will have been net positive as long as the investment(s) outrun our own stock on average. DEG has for example recently shown how fast a conventional junior can run after announcing above average intercepts with the drill bit. The earlier Novo invests, the quicker and more violent the revaluation, assuming we have success with the drill bit.”

Best regards,

The Hedgeless Horseman

Note: This is not investment advice. I own shares of Novo Resources and Kalamazoo Resources which makes me biased. Novo Resources is also a banner sponsor on my site.