Disclaimer – I’m stupid long FSM, and have been for about 10 months now. I’ve been smashed tremendously in miners and continue to HODL what I feel is the most under-valued mid-tier miner out there. My trust in the company has grown exponentially, and I await how this all unfolds. Because I am stupid long, you have to weigh what I’m saying carefully and not jump into the pool of razorblades with me.

We now return to the piece…

While I’m not an accountant, my MBA taught me enough about looking at some of the financial statements to be dangerous. That is, you accountants out there could easily scoff at me. And it is a VERY fair assessment to make. But I am doing some 101 stuff here today, which allows me to talk about pizza. Pie, that is. We will talk about miners here in the sense that a labrador, or a 5 year old could understand it.

In case you missed the above reference, it’s from one of my favorite financial movies – Margin Call

With this analogy, I’m going to talk to you here about pizza.

While I HATE mushroooms on my pizza, you get the idea of the visual. If this was a company, and you owned 1/8th the company, you can see how you own your slice of the pie. There are 8 slices, and your 1 slice gives you access to 12.5% of the pie. And 12.5% of the profits.

In this case, imagine our profit for the year was $80. You would have realized $10 profit, or $10 per share, as you own 1 share.

With company dilution, the company then creates more shares to sell.

Pepperoni is more my style!!

Now, in this scenario, the company sold 8 slices they created out of thin air. There are now 16 slices. You still own 1 slice. Assuming the earnings for next year have $80 profit, your profit is now $5 per share. In all reality, the VALUE of your stock has decreased by 50%. Meaning, if you hear that a company is about to dilute, you then have people selling their shares at $10 of value, because soon they will be worth $5. If that’s the case, why would anyone buy those shares at $9. Or $8?

In Fortuna’s case, FSM bought Roxgold last year in an all-share deal worth $884 million.

Further down in the story, you see….

“Investors reacted negatively to the news, with Fortuna’s shares falling as much as 16%”

Roxgold investors made out with a 42.1% premium (more on this below with premiums).

If you look at Fortuna’s balance sheet, you can see that during 2021, they created 107,333 shares. If only 184,196 existed before this, it means they diluted by about 42%. If they diluted by 50%, you’d see shares about 370,000 after. This is where the pizza analogy comes up. In the pizza analogy above, the dilution was 50%.

But why would people then buy shares at these prices as others are falling?

Revenues and earnings. The pizza analogy above is good to show you a percent ownership, but not great to show revenues and earnings.

Simple math here. You own 10% of a company and earnings are $100. Your share of those earnings are $10.

You are diluted by half. You now own 5% of the company – but earnings are $300. Your share of those earnings are $15. So the company was diluted by 50%, but your earnings went up 50%. How does this happen?

Finding the right deals

In this case, Fortuna saw an opportunity with Roxgold. And they hit the nail on the head. In that deal, they were looking to become a 450,000 oz gold equivalent producer. By next summer, they should be in that ballpark. At the same time, Fortuna shifted more towards gold and away from silver. I remember when I first looked at mining stocks in December 2019 or so, I BELIEVE Fortuna was somewhere like 60% silver and 40% gold. A lot of the “primary” silver producers have been making moves to get out of the silver primary business. Most have succeeded. At issue mostly is the paper price of silver has been relentlessly sold down – which has created a situation where the only way to mine silver and be profitable is to have it as a byproduct of other metals being mined. Many are now 60% or more gold miners. First majestic is now closer to 50/50. I believe Endeavor may still be 60/40 gold to silver, but even Hecla is now having silver as a secondary metal. You can go up and down the charts of miners and there may actually only be a handful of legit silver primary miners left on the planet.

So FSM found this deal to get them more gold, and it was in West Africa. Not the best jurisdictions, for sure, but FSM operates already in some troubled jurisdictions. When you really think about it, what happened to them at the end of 2021 with San Jose also has now made Mexico a very troublesome mining district – and this will also be covered by First Majestic below.

When you make this deal and dilute shares by 50% or more, it means you need to ensure you have more than double the revenues/profits. If you have the right synergy and cut the right costs and use your technical and business knowledge to apply to the new company’s resources – perhaps you can make revenues much more than double. This is why you might do an acquisition with shares.

And, it looked to be the correct move. Gold prices have obviously been hammered since July 2020, with a respite coming during the Ukraine invasion, but companies that can produce gold with profit are doing well – despite shares getting hammered everywhere. But if you look at 2021 numbers, everything is pretty much double.

Just about everything above is double – with total revenue almost triple. In blue, you see the expenses went up a ton, which all miners have been seeing as a result of inflation – however, net income at more than double out-paced the 42% share dilution.

If you have listened to Jorge Ganoza making some rounds on Arcadia, you can tell that their new mine is on pace to open next summer. With inflation hopefully cresting, and a bottom perhaps in with metals, we can expect to see a lot of good things next summer with earnings and company valuation.

I can’t predict what the share price will be, nor can I correctly value the company – but the shares were crushed based on two events last year – the Peru elections and the San Jose mine. If you look closely, the San Jose mine situation was resolved favorably, but the share price never recovered to before this event. Therefore, there is a massive discount this stock is trading at.

I have written several times dating back 7 months that I believe Fortuna is now misnamed. They are “Fortuna Silver Mines”. I believe it would make sense for the branding of the company to be listed as “Fortuna Gold and Silver Mines”? This is also why it is trading at a discount. More recently, it has become a 27% silver producer, and next year I had read it will drop to 19%. Serious silver bugs like myself know I will get great torque to the price of silver with Endeavor, First Majestic, Hecla, and some others. I would not use FSM as a silver proxy. Likewise, due to the name, some goldbugs may not be aware of the FSM story moving from a silver primary producer to a gold mid-tier producer. By now, most institutional firms understand what is going on, but the retail buzz is not there from the goldbug mining buyers.

I have been a subscriber to Dave Kranzler’s Mining Stock Journal for perhaps 2 years now, and he was covering FSM from the start. It is by FAR the best value out there for those who love newsletters. I had about 230 or so newsletters written myself – for FREE – but I had to suspend several months ago as life just got too hectic to do that anymore. Someday I would love to get into this professionally – and perhaps be a Dave Kranzler or Don Durrette. It’s just really fascinating stuff.

Anyway, Dave mentioned at the beginning of the Roxgold deal how investors were not properly valuing the company with this Roxgold acquisition. I have NOT been an investor in African mining – just because of the craziness in jurisdictions. But I have to get better at understanding African jurisdictions, as it is the same as lumping California and Wyoming into the same basket here. While I’m not a fan of Burkina Faso as a jurisdiction, many of the best mines in the world are in places that I would not visit, for good reason. No one wants this shit in their back yard. So we have to be a student of the nuances of jurisdiction. Unlike Rick Rule, I don’t have the slide rule to properly discount jurisdictions. What I TRY to do is have miners in many different jurisdictions, so if one has a coup d’etat, I can not lose my shirt. I feel terrible for a good amount of countries in Africa that suffer under instability, and perhaps as more regions become more stable, Western money would flow much more freely into them.

To conclude the FSM portion here, Dave has been pounding the table for about 10 months now how much of a steal this is, and he has also talked about the brilliance of the move of the Roxgold acquisition is. I have studied everything I can on this, and I have to full back Dave’s assessment on this. While the dilution of 42% happened, there is very, very strong evidence that by the end of 2023 this would have been one of the most astute acquisitions in recent years. As I’ve written before, “In Jorge I trust”. My only issue now is that I want to see Fortuna grow and reward me for my efforts. At $2500 gold, I have said this could be a $20 stock. This would perhaps also assume a $50 silver price and them being a 27% silver producer. It is not out of the realm of possibility if we see an 18 month tear on gold and silver, that we could see this at a $25-$30 stock. This means, essentially, that you have an under the radar gold mid-tier who can be a 10x from here. You get the rewards of a junior penny stock with the risk of a Barrick.

That risk-reward is unheard of for a company this size. My one problem is I am worried about them being taken out…for a 42% premium. Think about how Roxgold was taken out. I’m down 40% on my FSM stock. Most are. You think they want a measly 42% premium? No, we are looking for a 5 to 10 bagger with this. I’m whale hunting, son.

Another item I wanted to look at here, which I did for FM below was to consider the stock price relative to the “book value” but I also wanted to look at the purchasing power of that stock, at that time, relative to book value.

On the day of the announcement, FSM’s stock price was $7.96. We’ll get back to that in a minute.

Accounting 101 has…

Assets = liabilities + equity.

For argument’s sake here, assume your house is worth $500,000 as appraised by a realtor. Assume you have $300,000 in a mortgage. Your home equity is then $200,000. You and your wife are perhaps equal shareholders and if the sale of the house were to occur in a divorce, the equity would be divided by the two of you so that each of you have a $100,000 ownership of equity in the house.

Companies can get far more complex, but that is the big picture idea.

If you look at the “book value” and divide by shares, you get:

2020: $3.94 – stock price at end of 2020 was $8.25

2021: $4.72 – stock price at end of 2020 was $3.89

Above, you can see that if you took the stock price and divided by the book value of the shares, you see 2.09x for 2020, and 0.82x for 2021. If I can translate for you, it means essentially that the company is work about 20% more if they just sold it for spare parts. Translating again, the market doesn’t understand the profit potential with FSM and possibly sees lots of losses ahead.

If you travel to end of Q2, you see some other fun numbers.

The share price at Jun 30 2022 was $2.83. Book value was $4.79. Meaning, the stock is trading at 0.59x book value, with a new gold mining coming online next summer which is 75% done and on time and budget.

I want you to understand the silliness of the numbers above. Today, I just saw they hit $2.13. Meaning, it’s trading a .44x book value. Laughable.

To put this into perspective, let’s look at Apple.

When you look at the BOOK value and divide by the shares issued, you get $3.84 per share. If you look at what they are trading at right now, you see $150. So Apple is trading at roughly 39x book value. To me, this then tells you that they are making ridiculous cash flows and profits RELATIVE to the assets/equity they have in the assets.

But gold miners are at half of their book value, today? Something is broken – but this also tells me that in a fear play, Apple has a long way to go, and sector rotation will find deep value in these gold miners.

First Majestic

I love to own First Majestic, at times, to trade. My main issues with First Majestic were dilution as well as the Mexican tax issues. But I also think the Keith Neumeyer premium here is worth it. A CEO is supposed to be out and selling their company and their product. Keith is an ambassador to the entire INDUSTRY.

When you go to their company website and look at the investor materials, they have slides that could be used by any silver miner in the industry…

While I was a silver whack job before Keith Neumeyer, he is the one that got me to go all in on miners. Have I got the shit stomped out of me? Yes – but I also made a killing too. I was all in at the March 2020 lows and made a small fortune before selling half my shit in July 2020. This was ACCIDENTAL. I was not a fortune teller. You know the shit storm hitting us now? That’s what I saw coming July/August 2020, but they did QE to infinity and that hit the snooze button. Since they took the punch bowl away, my forecasts of doom for the stock market are now in play.

I digress – KN is the MAN. And with this, pretty much ANY common silver investor knows about KN and First Majestic. And if and when silver is expected to move up, this is one of the first stocks they pile into. I got a FIVE X on some of my AG options in Jan 2021. For MOST of them I got a 3x. That was what sold me on call options. And then I got smoked on GDX and others a few times. So while I looked like Gordon Gecko for a month with making like $26k in a month of banked gains, I gave all of that back over the rest of 2021 with false breakouts – buying call options on the breakout, only to see the breakout get destroyed.

With this, I have also had many battles with Taylor Dart at Seeking Alpha. November of 2020, I was going to battle with him over AG. Pretty much every other piece he writes is about how over valued AG is. He talks a lot of the dilution. But he also doesn’t really factor in the KN impact to share price, like I did. He wants to look at discount to this, stock flow that – but he failed to see the forest for the trees. At the 50,000 ft view, AG was highly shorted – perhaps rightly so – but he didn’t grasp the DEMAND for the shares as silver price rises. With this, I have to say his metrics and dissection of pieces of mining companies is absolutely brilliant work. I can disagree with someone and still recognize their intelligence – but also disagree in direction.

With AG, he was also very right about dilution. KN does dilute the shit out of AG. But we also have to look at revenues, earnings, etc. Many times you do see some shitty earnings with AG. But a lot of this is taking cash and putting it into the ground or into high tech shit. Amazon lost money for what, a decade? Then it went parabolic. I see AG as having a setup like this, to an extent.

What does AG have going on which causes some dilution?

  1. Drilling to extend the life of mines as well as fund new resources to backfill silver taken out of the ground. Ideally, you want to pay for this with earnings, not dilution.
  2. HIG mills. The dude really went high tech to improve silver recoveries. Again, you want to do this with earnings, not dilution.
  3. Acquisition of Jerrit Canyon. I noted above how dilution worked to buy Roxgold. Could JC have also created that type of situation?
  4. Getting an influx of cash from an investor like Eric Sprott to keep things liquid.

Remember how I said silver primary miners were dying? If you look at AG earnings over a long period of time, it’s not a great story. You see share dilution along with earnings that are dying. This is indicative of a long term suppressed silver price, which has driven silver primary miners out of the game. They HAVE to mine gold, or lead/zinc, or die. All of you that love Pan american Silver? 26% silver producer. So AG has been fighting the good fight, and investors have been more than patient waiting for those $30, $40, ad $50 per oz silver days for AG.

They have not come.

So let’s take a look at dilution and earnings going back a few years.

If you go from 2018 until the end of 2021, you are only seeing roughly a 30% dilution in stock. Fortuna above when 42% in one fell swoop! So let’s then take a look at revenues, earnings, all of that jazz.

You can see that revenues are sharply up! But you can also see expenses sharply up.

On the balance sheet, a stock holder would have been diluted by 30% the last few years, but the “tangible book value” is 2.5x.

If you look above and see the book value and divide by the shares, you get in 2018 $2.98 and today you would have $5.42. So assume the company were to be liquidated tomorrow, the VALUE of the stock APPEARS to be about 82% higher.

Now that doesn’t mean that is the share price. When you buy stock in a company, you aren’t necessarily buying the “book value”, but you are potentially banking on stupid high profits to come.

The share price at the end of 2018 (Dec 31) was $6.38. If you divide this by $2.98 you get 2.14.

The share price at the end of 2021 (Dec 27) $11.04. If you divide this by $5.42 you get 2.03.

The share price at the end of Q2 was $7.54 (June 30). There were 262,680,950 shares and equity of $1,364,266 which gives us $5.19 per share. This then gives us a ratio of 1.45.

What this is telling me is that investors were selling the stock due to reduced expectations on future cash flows. I get it. Silver price $19. Cost to mine the shit is up. But we have that Jerrit Canyon acquisition.

What’s interesting though is that it didn’t seem the mine acquisition caused further dilution of much. Stock was $17.32 on March 15th, 2021 when this was announced. That’s about 27m shares. If you see the share count at end of 2020 to end of 2021, you see about 37m shares added. There’s also 5m warrants – and I don’t understand much about warrants – so this roughly accounts for it.

Meaning, if you are KN, when that ratio stretches high – at a $17.32 share price for $5 book value, you are roughly at a 3.25 multiple of the book value. This is a GREAT TIME to buy an asset with shares, as shares are at an inflated price. Shareholders then were diluted roughly 20% with the JC acquisition by share count.

At a 1.45 share price to book value, this seems like a good time for a company to do share buy backs. Let’s take a look at cash…

Ummmm..I might not want to buy back here. This looks like they burned through $120m of cash in 6 months. If they have a cash burn rate now of $20m a month, that leaves them 6 months of cash left, going into a severe recession.

Now, my life has been crazy the last 6 months and probably AG fans would be quick to point out this cash went to fix things at JC to reduce their cost to mine. So maybe there was a one-time cost of $83m to build something. So the numbers are able to provide questions to then ask yourself and this is when I’d take a deep dive on AG announcements over the last 6 months to see where cash went.

Overall, Dave Kranzler had made mention that the roaster that came with JC itself could be worth a billion. I am not the expert on this by any means, but he mentioned what the type of gold is in NV, and how it is extracted, a roaster is needed. He mentioned there are only 3 of these in NV, and due to permitting and environment conditions, it is unlikely that any others will ever be built.

I want you to consider the last sentence I wrote there. I mean really understand it.

First Majestic’s acquisition of JC has had some hiccups. The AISC have been high.

You can see though that there’s about 440,000 oz of gold proven and probable – which isn’t terribly, big – but then take a look at the money going into the ground.

So First Majestic did FOUR KEY items with buying Jerritt Canyon:

  1. Got another resource outside of Mexico. With the tax dispute going on there, it threatened their operations and became more hostile.
  2. Got another resource outside of silver. With buying a gold mine and potentially moving to a mostly gold producer, AG is now positioning itself to be a silver BYPRODUCT producer. They have been 60/40 silver to gold for some time, but are now 50/50. With silver prices continued to be smashed by paper sellers, this now can perhaps help generate strong earnings moving forward.
  3. They improved jurisdiction. With getting a NV established gold mine with upside potential, they are now in a more friendly jurisdiction.
  4. They bought one of 3 roasters in NV, and potentially this entire deal is worth it just for the roaster.

Consider if FM wanted to continue to buy/build gold and silver mines in NV. If you own the roaster, you can then direct who uses it. I have been a fan of Blackrock silver, formerly Blackrock gold. Perhaps they are on the list of acquisitions? What if projects that are in development need to use a roaster, but they have no access to one? Would it not make sense that only the companies that own the roasters would allow their own resources to use these roasters? This potentially means that a company like Blackrock would be an extremely attractive target for FM, and the gold that comes out of there could use the JC roaster. At the very least, FM could become a very key shareholder in the company, if not already.

This also means that potentially ANY gold or silver miner in NV is now an acquisition target for FM, and the key to any acquisition in NV would be controlling the roaster. Without that access, probably any property is dead in the water, depending on how they extract the gold – and if it needs a roaster.

With the JC acquisition, you have seen some share dilution. However, you have also seen significant revenue growth – but expenses are crushing them like any other miner on the planet. The ratio of share price to book value is lower, but that is on the heels of expected lower earnings due to depressed metals prices – along with the high AISC of JC. The goods news though is it looks like with a lot of the personnel changes, investments, and drill targets, JC is a turnaround story that should have a significantly reduced AISC for 2023.

But the strategy here cannot be understated. Diversifying out of Mexico AND silver was a strong, strong move. Additionally, the acquisition of a gold mine with depleting reserves and rising costs with distressed operations presented an opportunity to get a working gold mine with a roaster probably as a SEVERE discount to book ratio – and it was at a time when AG’s share price was 3.25x book value, giving them significantly high purchasing power against a company selling at discount to NAV.



Both of these acquisitions were bought for stock, and both had dilution. Dilution scares many, including myself – but it’s a bit different if there’s deep value created WITH dilution. How many of you have invested in the junior miners only to see nothing but raises for more money? They don’t produce revenues or cash flows, so with this, you want to find value in the dilution which could lead to greater EQUITY.

Consider the drill bit that eventually leads to a resource. As the resource grows, so does the book value of the company in equity. So dilution of companies that have no revenue can hurt – but if it is increasing the VALUE of the EQUITY, then it is worth it.

In both of these cases, we can see how acquisitions with shares alone can produce STRONG results on the backend. If you are a CEO, you might also look to see when your share price is stretched high relative to your book value as a GREAT time to buy – and targeting distressed resources that have runaway costs and may be viewed at discount to NAV may be great targets. Add bonus points to both companies for diversifying out of silver, and bonus points to both for going into different jurisdictions. Add one more level up to KN for the roaster acquisition which may position him to acquire more resources in NV.

Overall, you can see that gold miners, relative to the FAANG-type stocks trade at ridiculously low multiples to book value as opposed to some of these tech companies. I believe in my thesis that as the recession goes deeper, a fear trade begins to occur. With this, I believe there will be sector rotation out of companies that are stretched with price to book value and money will rotate into companies that trade a much, much lower price to book value. Add points to those companies like gold miners who pay dividends.

Pain is temporary. Understanding the value plays here help me sleep soundly at night despite the margin calls trying to break my will. To them, I say – “I was early, I was not wrong”. It may take time, but I know I’m on the winning team, and that’s why I stopped giving a shit about daily metals prices many months ago. I more or less stopped with the charting mostly because it seemed almost pointless. No algos can really be programmed to do what is being done now, this is a man-made push down. And I’ll wait for whatever forces pushing this down for the millions that run for the door.