California Gold Mining Inc.; back to the business of gold exploration & development

** All $ figures are CAD$, unless stated otherwise. **

It’s been a long time since I’ve written about California Gold Mining Inc. {“CGM”} (CSE: CGM) / (OTCQX: CFGMF). Readers may recall that the Company put their two gold projects on hold and branched out into the industrial hemp business. 

There have been a number of twists & turns along the way, but at a time when dozens of hemp companies have gone out of business, or suffered staggering share price declines, CGM is alive & well.

California Gold Mining Inc., as price soars, gold is front & center again!

Looking back 18 months, gold was about US$1,300/oz. Like most juniors, CGM was having difficulty raising capital. Management, led by CEO Vishal Gupta, turned to another sector to generate near-term cash flow — industrial hemp.

Importantly, CGM was different from most companies that moved into new sectors (cannabis / hemp, crypto, etc.) in the bearish years before the current BULL MARKET in precious metals. Mr. Gupta and his board always intended to come back to gold exploration / development, because they have valuable properties.

Fast forward to September 2020, gold is up +US$668/oz.! to US$1,968/oz.!! Suddenly, CGM’s gold assets look interesting again. Readers might be wondering why I’m talking about two projects…. Few may realize that the Company has a legacy gold project in Ontario that’s now being reviewed by prospective acquirers.

Before I dive into CGM’s gold assets, let me update readers on the hemp business. In August CGM generated its maiden CBD revenue; +$328k from the sale of 71 kg of CBD isolate. This month, hundreds of thousands more in revenue is expected.

Management noted in a press release that it has > 1,250 kg of isolate available to sell under the same terms, US$3,500/kg, which would generate ~$6M in revenue. Importantly, much of that revenue would fall to the bottom line as a considerable portion of the associated costs have already been incurred.

The hemp business has become much more competitive & logistically complex. Management is redoubling its efforts in gold and will only operate the hemp business as long as it remains comfortably profitable and is not overly distracting.

Sale of non-core Dingman gold property could net ~$12.8M

CGM’s legacy gold asset is the Dingman project in eastern Ontario, Canada. It has a NI 43-101 compliant resource (from 2011) of 401k ounces of gold. Importantly, 90% (361k of those ounces) are in the Indicated category.

Multiple parties are looking to acquire or option the Dingman project. With gold at US$1,968/oz. this project has real tangible value.

In looking at peers, troy ounces in the ground for early-stage projects are valued at $25 to $105/oz. Of course, a lot depends on jurisdiction, depth of deposit, grade, resource category, resource upside potential, mgmt. skill + experience, geology, permitting, property ownership status & regional infrastructure.

Since Dingman is a fairly small resource (<500k ounces), it’s probably worth on the lower end of the range. Still, in this robust precious metals bull market, 401,000 ounces has an in-situ value of ~$1 billion.

Assuming $32/oz., (half the peer average of $64/oz.) Dingman could be worth ~$12.8M. $12.8M is quite meaningful compared to CGM’s market cap of ~$13.6M = US$10.3M, (market cap includes a potential 15M share private placement to help fund drilling, and be able to start drilling sooner.)

Cash received from the sale of Dingman would be used to pay down debt & continue drilling CGM’s 100%-owned Fremont gold project in California. However, meaningful cash from the disposition of Dingman might not be available at closing. Management could elect to receive a combination of cash & shares in the acquiring company.

The 3,351-acre Fremont project, on private land, 150 miles east of San Francisco, is in the southernmost portion of California’s Mother Lode gold belt, once one of the most prolific in the world.

This belt is an alignment of hard-rock gold deposits stretching 120 miles northwest to southeast in the foothills of the Sierra Nevada mountains of California. It extends from El Dorado County in the north to Mariposa County in the South (the Fremont project is in Mariposa County).

The Mother Lode contains hundreds of past producing mines, including some of the best-known of the 1840’s-1860s California gold-rush era. CGM’s Fremont property contains the Pine-Tree Josephine (“PTJ“) zone, which is open along strike and at depth. There are three other mineralized zones and possibly more to be found.

Most of the intermittent underground mining on the Fremont property took place between 1860 & 1944. During those years, the PTJ mine reportedly produced 126,223 ounces at an average grade of 0.234 oz./short ton (6.6 grams/metric tonne). At the current gold price, that equates to ~$606/tonne of ore.

The PTJ zone has a NI 43-101 compliant [Indicated + Inferred] resource of 879,000 ounces gold (515,000 in the Indicated category + 364,000 Inferred) at ~1.6 g/t. This resource is the result of drilling about a quarter of the known 4,000m strike length, and it captures ~250m of vertical extent.

Management believes the 879,000 ounce resource can reasonably be expanded to 1.2-1.4M ounces of gold with a moderate amount of step-out drilling. Management plans to restart a 10,000-meter program that began in 2017, but was paused in 2018 due to market conditions.

Underground workings extend to ~1,500 ft. (~457m) depth. Production records & drilling info, combined with other historical data, maps & reports make this a robust brownfields project.

An historical, non-NI 43-101 compliant, Feasibility Study (“FS”) was completed in 1986. Based on a gold price of US$425/oz., the project appeared viable. However, from a high of US$503/oz. in 1987, gold fell (five years in a row), to US$333/oz. in 1992, causing the project to be shelved.

Adjusting the late 1980’s gold price from the historical FS to 2020 implies a price of ~US$960/oz., less than half the current price! While a 30+ year-old FS is not easily converted into a current report, it contains valuable info.

For example, the Fremont project was presumably well on its way to being permitted, had decent metallurgy, access to water, a tailings management / mine reclamation plan, etc. These factors will facilitate the due diligence efforts of equity / debt investors moving forward.

CGM has 65.1M shares outstanding, $4.1M in debt (May 31st) & $2.8M of net working capital. Management’s goal is to pay down most or all of that debt (due July, 2021) & fund drilling with cash flow from its hemp business, plus cash proceeds (if any) received from the sale of Dingman, plus cash from new equity issuance — (if/when needed).

Armed with a potential 1.3M ounce resource, ~60% expected to be in the Indicated category, and possible delivery of a PEA next year, Fremont should attract a lot of attention. Readers are reminded that the vast majority of gold dominant properties held by juniors around the world have no NI 43-101, SEC or JORC-compliant resource estimate.

Given that under a quarter of Fremont’s strike length has been meaningfully explored, and that the deposit is open at depth and along strike, there’s the potential (subject to more drilling) for a resource of perhaps 2 or 3 million ounces, which would be of keen interest to dozens & dozens of larger companies.

Based on the peers in the chart, a prospective 1.3M ounce Indicated & Inferred project in the U.S. could be worth $64/oz., or $83.2M. Combined, Fremont & Dingman could be worth roughly ($83.2M + $12.8M = $96.0M). That equates to $1.20/shr. (based on 80.1M pro forma shares after the possible issuance of 15M new shares).

Peers trading at an EV/oz. ratio of $64/oz. vs. $10/oz. for California Gold

The eight comparable early-stage gold-dominant juniors listed above trade at an average EV/oz. valuation of $64/oz. By contrast CGM is trading at just $10/oz. That very low relative valuation assumes management finishes the already planned and partially executed drill program later this year — potentially increasing the resource to 1.3M ounces.

As CGM re-establishes its gold focus and investors recognize that the Company’s value could be up to $96M, today’s market cap of just ~$13.6M / US$10.3M could become a distant memory. There’s tremendous upside potential if management executes & communicates its successes to the market.

It’s hard to overestimate the value a 1M+ Indicated / Inferred resource might have in the next few years. Perhaps worth $64/oz. now, but potentially much more than that to a well-financed player — especially if the number of ounces can grow above 2M.

Over 1M Indicated + Inferred ounces at the Fremont project alone would make California Gold Mining Inc. (CSE: CGM) / (OTCQX: CFGMF) a serious player in the U.S. At 2M or 3M ounces (subject to more drilling) CGM would host a top-quartile gold resource among N. American juniors.

If management executes well and can fund drilling without too much equity dilution, this is a stock that has lots of room to run.

Disclosures: The content of this article is for information only. Readers fully understand and agree that nothing contained herein, written by Peter Epstein of Epstein Research [ER], (together, [ER]) about California Gold Mining Inc., including but not limited to, commentary, opinions, views, assumptions, reported facts, calculations, etc. is not to be considered implicit or explicit investment advice. Nothing contained herein is a recommendation or solicitation to buy or sell any security. [ER] is not responsible under any circumstances for investment actions taken by the reader. [ER] has never been, and is not currently, a registered or licensed financial advisor or broker/dealer, investment advisor, stockbroker, trader, money manager, compliance or legal officer, and does not perform market making activities. [ER] is not directly employed by any company, group, organization, party or person. The shares of California Gold Mining Inc. are highly speculative, not suitable for all investors. Readers understand and agree that investments in small cap stocks can result in a 100% loss of invested funds. It is assumed and agreed upon by readers that they will consult with their own licensed or registered financial advisors before making any investment decisions.

At the time this article was posted, California Gold Mining Inc. was an advertiser on [ER] and Peter Epstein owned shares in the Company. 

Readers understand and agree that they must conduct their own due diligence above and beyond reading this article. While the author believes he’s diligent in screening out companies that, for any reasons whatsoever, are unattractive investment opportunities, he cannot guarantee that his efforts will (or have been) successful. [ER] is not responsible for any perceived, or actual, errors including, but not limited to, commentary, opinions, views, assumptions, reported facts & financial calculations, or for the completeness of this article or future content. [ER] is not expected or required to subsequently follow or cover events & news, or write about any particular company or topic. [ER] is not an expert in any company, industry sector or investment topic.