American Pacific Mining Corp. (USOTC: USGDF, CSE: USGD)

The stock is a good candidate for new buying near the bottom of its trading range (US$0.12-US$0.13), because the Madison project has the potential to become valuable in the future and at the aforementioned price the market would be assigning almost no value to this project. Also, the company has about C$10M in the bank, so it is well financed to explore the Madison project.

However, we are going to set a time limit on this stock and now view it as a trading position with a holding period of up to 12 months, as opposed to a long-term position. Consequently, it has been moved from Section 3 to Section 4 of the TSI List. Vizsla Copper (VCU.V), the new owner of the Palmer copper-zinc project, will move in the opposite direction — from Section 4 to Section 3.

This financing combined with a sector-wide correction could lead to yet another opportunity to buy USGDF near the bottom of its trading range (US$0.12-$.13/share).

When we added the stock we mentioned a valuation-based intermediate-term target of C$3.20. This target remains valid and suggests plenty of remaining upside potential, particularly given that in bull markets our upside targets tend to be exceeded by wide margins. However, we generally would not chase a stock after it had broken out to the upside. Instead, we would wait for the pullback to ‘test’ the breakout that more often than not occurs during the weeks following the breakout. In this case, C$1.60 is the breakout level, so a pullback to around C$1.60 could be viewed as another buying opportunity.

Also worth mentioning is that American Pacific Mining (USGDF) owns about 16% of VCU.V and therefore provides indirect exposure to VCU.V. As illustrated below, USGDF has just started to rebound from the bottom of its trading range.

The reason we haven’t highlighted USGDF as a good candidate for new buying in the recent past is that the company probably will have to do an equity financing soon to top up its treasury.

It is a candidate for a tax-loss trade because a) its assets are potentially worth a lot more than its current market cap, and b) its stock price has dropped back to the bottom of its trading range, partly, no doubt, due to tax-related selling.

This deal is positive, but at this point not materially so.

For an exploration-stage mining company with no current revenue, the balance sheet is by far the most important aspect of the financial reports. USGDF’s balance sheet shows that the company had only C$0.7M of working capital at 30th September. This implies that it will have to do an equity financing soon.

If not for its need to raise money soon, we would be highlighting USGDF as a buy near its current price of US$0.14. Also, note that Vizsla Copper (VCU.V), the company in which USGDF has a stake, could be of interest after it completes its current large equity financing (it is in the process of raising C$42M).

VCU currently is focussed on the Poplar early-exploration-stage porphyry-style copper project in BC, Canada. Following the deal with USGDF it will continue to drill the Thira discovery at Poplar, but the bulk of the money raised in the above-mentioned financing will be directed towards drilling, assays, and geophysics at the Palmer project. The Palmer project is small (the current Indicated resource comprises 178M pounds of copper and 543M pounds of zinc), but the grade is good (3.5% copper equivalent).

We consider this deal to be neutral for USGDF. It reduces the company’s leverage to base metal prices, but at the same time it reduces risk and gives the company exposure to VCU’s Thira discovery.

Whether this news is positive, negative or neutral will depend on the deal that eventually is done. That a deal is being sought is not a big surprise, because USGDF is a project generator/explorer, not a mine builder.

Based on comments by Michael Gentile in a recent 4-minute interview with Peter Grandich, we may have understated the significance of these drilling results. According to Gentile, the results suggest the possibility that a large porphyry-style deposit lies beneath the high-grade intercepts that have been reported to date.

Michael Gentile owns 14% of USGDF, so he is biased. However, he would not have bought 14% of the company if he didn’t believe that there was huge upside potential.

Madison provides USGDF with ‘blue sky’ potential, because an economic gold discovery at this project is a realistic possibility and would add a huge amount to the company’s market value. However, the main reason for our interest in the stock is the more advanced Palmer project, which has an outdated PEA and a recent mineral resource estimate.

For an exploration-stage mining company with no current revenue, the balance sheet is by far the most important aspect of the financial reports. USGDF’s balance sheet shows that the company had C$6.8M of working capital at 31st of March. This should be enough to fund the company’s business, including its drilling programs, until the end of this year, but an equity financing to top-up the treasury probably will be done during the final few months of the year.

We think that this stock has intermediate-term upside potential of around 200%, while the risk is that it will be ‘dead money’ and simply chop around in the US$0.12-$0.20 range for a long time to come.

With at least US$10M in the bank, the company is well financed to progress both projects over the coming 12 months. Furthermore, the senior management of this company has demonstrated an ability to do astute deals.

We recently changed this stock from a trading position to a long-term position. For speculators prepared to hold for at least 12 months, it is a good candidate for new buying near its current price in anticipation of an eventual rise in the stock price to at least US$0.50.

According to the new resource estimate, Palmer contains 178M pounds of copper (up 16% from the previous estimate) and 543M pounds of zinc at a copper-equivalent grade of 3.5% in the Indicated category, plus 152M pounds of copper (up 22% from the previous estimate) and 1,036M pounds of zinc at a copper-equivalent grade of 3.1% in the Inferred category.

Based on a PEA completed way back in 2019 using a copper price of US$2.82/pound, Palmer could be developed into a mine with a post-tax NPV(7%) of US$266M and an IRR of 21%. Capital and operating costs have increased substantially since then, but so have metal prices.

Although the economics of Palmer almost certainly would be attractive at today’s costs and metal prices, the project will have to be grown via additional exploration to be of interest to a large or mid-tier miner. USGDF is not a mine builder/operator, so we assume that the company’s goal is to grow the project to the point where it can be sold at a substantial profit.