I’m writing this because there is a crime currently in progress. The market has seen FSM get their mining permit reinstated and a BIG 17% move up yesterday. But the crime in progress is that it is currently STILL significantly undervalued. STILL.
Yesterday was the third best trading day of my life, but I have a lot left in the tank yet with my FSM holdings. Below, I make the case that FSM is STILL supremely undervalued.
First, I want to give you a forensic accounting of the value of FSM prior to the mining permitting issues.
On November, 11th, the news came out about FSM’s 3rd Qtr results. Here is the hourly chart of FSM to show how the morning went – and the price peak.
It is FAIR to say that during the morning hours some news started to come out about FSM losing its mining permit for San Jose. You can see at 1030 the selling starts…these seemed to be those early in the know.
At 12:16PM on 11/11, Reuters announced the issue…
Through the end of the day and Friday, the sell off occurred. I only heard about it around 3PM Friday 11/12. When I heard about it, I scrambled and found in my inbox that Arcadia (Chris Marcus) was reporting on it with Dave Kranzler. I hadn’t reviewed Dave’s Mining Stock Journal yet, and I was interested to maybe buy this at a discount.
My initial buy was because the stock tanked like 32% and San Jose only made up 26% by EBITDA. MEANING – the markets MAY have overly punished FSM. There was a potential credit risk down the road, but all parties seemed confident that this would be resolved. Most of the downside had been already realized!!
I jumped in. And bigly. On Friday afternoon, I pulled my car over at 3:45ish and bought everything I could. Monday, I liquidated a ton and did some pre-emptive tax loss selling to raise cash. I detail my current position here, but suffice it to say I’m still in it for a massive part of my portfolio.
FSM Move – $1.80 on closure of San Jose.
AT the same time in November, silver began the monthly beat downs for the COMEX monthly options expiration, starting the Monday after the mine permit rejection. This now hit FSM for the SILVER/GOLD part of their pricing.
This led to a take down of $3.87 from peak to trough on Dec 15th.
You can see this silver price move then corresponds with a 27% take down of the price to as low as $2.91.
During the course of this, there was news the president would intervene, which is where the price went from $3.12 to $3.60, but that faded away as silver kept getting bombarded. So what we can potentially look at here is how much damage the silver price take down did to the share – and we can perhaps go back to see when silver was $22 before, where was FSM? What about at $25.30? Let’s bring up the FSM chart and try and find the spots when silver was $22ish (red) and $25ish (green). This should give you an idea of where the FMV should be, removing the San Jose mine from the noise. For this, we have to go back prior to 11/11.
Here, to be fair – we have two sets of data. The “before the Peru issue” and “after the Peru issue”. More on that in a bit.
Let’s go back in time and see when silver was around $25 and when it was around $22.50 to find where FSM trades at those prices – over the last 2 years.
We now look at those dates on an FSM chart.
I wrote on here the “Peru problem” which was essentially that around their elections, they put in an anti-mining president. Anything that had Peru got killed, but since, the stance has softened and companies like PAAS and Bear Creek had recovered somewhat. DURING this, silver got hammered for 4 months as well and before the “mending” of the Peru issue.
So before the “Peru Problem”….
$25ish – you have $6.68 to $7.23 as FMV.
$22.50ish – you have $5.70-$6.39 as FMV. We are at…$3.80!!!!!
Now AFTER the Peru problem, which SHOULD be on the mend…
$25ish – $4.38-$5.08
$22.50ish – one occurrence at about $4.00. That would have us perhaps $.20 below FMV. But, that was also at the bottom of a 4 month down trend in silver.
What I’m playing for is that there was NO REAL RECOVERY in December for gold and silver – this to me, showed a bottoming pattern. I see gold and silver recovering AT LEAST to $25 by end of January. Meaning – this has me potentially seeing $5.00-$5.50ish FSM.
What I believe we saw with the $5.52 was the beginning of the Peru recovery, if you will, eventually heading back up to prices in the $7 range for $25 silver. More on that below.
Right now, it is “fair” to see $4 as a very conservative, low end FMV for those with some trepidation yet.
Now, I paint you a picture for the next 30-90 days…
- Those who sold in tax loss selling are waiting to come back in with a vengeance. Many of them folded the towel at the capitulation December 15th lows.
- IF there are any shorts, many started to cover, and anyone NOT covering will need to or get run the hell over. Quickly. Could see more short covering yet.
- Silver has double bottomed at $21.44 and I made an attempt to call the (double) bottom there, which is dangerous – but I see a glide path to $25 very easily.
- The “Peru issue” seems to have receded somewhat, and we can perhaps expect $5.50-$7 FSM prices at $25 silver. I point this out on charts below, so my expectation is that the $22.50 silver price is closer to $5.70-$6.40 now. Or you can perhaps split the difference from $4.00 to $6.00 and get a FMV at $5.
- According to Dave Kranzler, FSM has never recognized the Roxgold acquisition in their share price. My guess is this will start showing up, considerably, on the balance sheet – and with this, make FSM extremely attractive. On my analysis with FSM and other silver miners, I noted the extremely low P/E ratio of 12.76. To me, this was being discounted due to jurisdictions and perhaps undervaluing the Roxgold mine.
- They never stopped mining in San Jose, so those revenues do not ding Q4 production
- Acceptance of Roxgold into the share price is inevitable with the gold they mine and the revenues hitting the balance sheet – expectation is that the share price eventually increases perhaps $1+ on this. I haven’t done the hours of looking at the revenues and do the accounting exercises needed, but it’s fair to say this adds some decent value.
- Marin Katusa just put out in his report that January is traditionally the best month for gold and silver.
- Jan 1st – Basel 3 supposedly takes effect and we can see a sharp rise in gold prices.
What we saw yesterday, however, was silver moved mostly sideways and we got a $.58 recovery in the price. If I take that off of the $1.80 drop we saw, I can then potentially suggest we still have $1.22 remaining to recover from this ding. I don’t expect everyone to pile back in tomorrow – but I also see a potential for the below to happen…
Those in the know about what may be going on, and understand how this is still potentially undervalued by $1, could start loading up in call options. I would count myself in that camp if I wasn’t so overstretched with them already. Right now, my current position is to watch this grow over the next month, sell off options, and sell shares into what I think will be a significant price rise.
As all of these call options are bought, this will move the price, as this forces the brokerage to buy the underlying securities. It is very possible large newsletters cover this “meat on the bone” and one day we have another gap up by $.50 as buyers see the value and come marching in.
Suffice it to say, tax loss selling was brutal, and I think there’s a LOT of buyers sitting there waiting for the dust to settle, to buy back in to things they liked and to wait until the final low is in. Personally, I feel from now until the end of the year will have the mining stocks screaming.
If you compare FSM to the price of silver since March 2020, you can see silver went sideways while Fortuna shot up and has flagged. To me, this also shows the mining stocks (and FSM) has catching up to do. FSM is only 27% silver right now by revenue, but my hunch it is still trades like a silver company.
You can see out of the gate from March 2020, FSM launched up – but it is now UNDERPERFORMING SILVER since the bottom. Let that sink in. And – during that time, they got a gold company too. And Lindero started up.
Let’s compare this with First Majestic and PAAS. First Majestic outperformed silver…
PAAS is about even with silver.
Look at that pretty correlation for a 26% silver producer.
One can make the argument that FSM OUTPERFORMED silver, AG, and PAAS up until the “Peru problem”. You can then see that recovery from the Peru problem…..take a close look where it started to SIGNIFICANTLY outperform silver. This was when you saw prices hit $5.52 at $25 silver looking to move up even more.
This period of recovery can ALSO be seen with Bear Creek, but not with PAAS.
Conclusion – I understand $3.80 today. I understand $4 today. But until this whole thing went sideways, you can see clearly that we were healing from the “Peru problem” with a FMV of about $5 at $22.50 silver with potentially “fully healed” back up to $6 at $22.50. Given the fact that today we are at $3.80 is a SCREAMING BUY.
Disclaimer – I’m fully fucking in on them. Mostly, based on the evidence above that is overwhelming. Does that mean we can’t have another jurisdiction headache somewhere else tomorrow? No. But today. Today, my friend, we feast…
Welcome to the party when the light bulb goes off.
P.S. I was sent this write up by Taylor Dart at Seeking Alpha. The date is October 11th, which is in the midst of the “Peru recovery”. If you look above, you can potentially see FSM’s stock price bloated to its peers. That being said, Taylor points out that in October, it was an extremely attractive purchase price. This was obviously before the San Jose issue. However, it’s worth noting about the comments here as part of the FSM story of currently being significantly undervalued.
December 21, 2021 at 10:22 pm
Good writeup on FSM. I was seeing the same thing. I sold everything the day of the earnings release, then I started buying back on on Nov 12. Obviously I was too early, but I just kept buying and buying as it went down. Got my last tranche at $2.94. Now holding 187,000 shares. Should be about $6 stock at $1800 gold, mayb $6.50 at $1900, but if gold plateaus at $1900 then I’m completely wrong about the economy. They sure have been fighting like crazy to keep gold from getting too close to the publicity around the $2000 price.