Private Briefing subscriber Warren B. wrote to me last week and posed this question about Paramount Gold & Silver Corp. (NYSE: PZG), a junior miner that Real Asset Returns Editor Peter Krauth recommended back on Feb. 1, 2012.
"Bill, I own a lot of PZG. All I hear from analysts is that it's a "Strong Buy." But the undeniable fact is that it just keeps declining in value. What are your current thoughts on this company?" – Warren B.
Nice question, Warren.
Wanting to get you the most complete answer possible, I telephoned Peter, our in-house mining and natural-resources expert, and asked him for his latest thoughts on the Winnemucca, Nevada-based venture.
As usual, Peter went above and beyond … and he even confided that he expects to have a sit-down with the CEO in the very near future. If that happens, I'll make sure he passes at least some of what he learns to Private Briefing subscribers.
"Bill, the biggest news – at least right now – involving Paramount is that the company just released its Preliminary Economic Assessment (PEA) results on the San Miguel gold project it has in Mexico," he told me. "And the numbers look great."
As Peter walked me through the numbers, I could see how right he was.
The initial capital requirements are a reasonable $232 million. The mine would produce 57,300 gold ounces plus about 3.1 million silver ounces annually. If you convert the silver to equivalent gold ounces, that's a total of over 115,000 gold-equivalent ounces produced annually.
If you use a 5% discount rate, the project has a "net present value" (NPV) of $707 million and the internal rate of return (IRR) is a healthy 32%.
"Here's where it starts to get interesting," Peter continued. "The $707 million NPV on San Miguel alone is more than double the current market cap of $296 million. If you base your calculations on this PZG project alone, you'll see that the company's stock should be trading at more than $4.50 a share."
And San Miguel isn't Paramount's only project.
There's also the "Sleeper Project" in Nevada – which we told you about last Aug. 20.
"On that crucial project, start-up capital costs are $346 million, and sustaining capital is an extra $278 million over the mine life of 17 years," Peter said. "Sleeper would produce 172,000 gold ounces and 263,000 silver ounces annually, with average operating costs at $767 per ounce of equivalent gold recovered."
On the Sleeper project, the internal rate of return is an attractive 26.8% at $1,348 gold. However, with gold at $1,618 an ounce (roughly the current price), Sleeper's IRR zooms to 40%.
Essentially, the PEA determined that – with gold at $1,384 and silver at $26.33 (both reasonable in Peter's opinion) – the project has a whopping net present value of $695 million at a 5% discount rate.
"So now we have two solid projects, both advanced to the PEA stage, both in great jurisdictions with good infrastructure, both worth $700 million," Peter said. "That's a total $1.4 billion of value, yet the stock price values the company at just under $300 million. With this in mind, PZG shares should instead be trading north of $9 per share."
Think of it: That's 4.5 times higher than Paramount's current price of around $2.
"The implied value in this stock is tremendous, yet it's trading at a ridiculous discount," Peter said. "If even a tiny part of you is in any way contrarian, you need to own this stock. Sentiment will change, and Paramount will shoot higher. It's totally realistic to expect that it could at least double or better within the next 12 months."
Peter's final message: If you don't already own Paramount, it's definitely a "Buy" now.
Peter is planning to host a conference call with Paramount CEO Chris Crupi on Thursday for his Real Asset Returns subscribers. To find out more about Peter, check this out.
Delcath Update: A liver-cancer-treatment developer, Delcath Systems Inc. (Nasdaq: DCTH) is scheduled to report its fourth-quarter results after the market closes tomorrow (Wednesday). Analysts are expecting revenue of $6.6 million and cut its per-share losses by about half. The company will host a conference call at 4:30 p.m. The stock was up more than 8% in late-day trading yesterday and has zoomed nearly 26% since Sept. 13 – our most recent recommendation. We updated its progress with its Food and Drug Administration (FDA) approval efforts on Feb. 28.
Book Drawing: We received some great comments from you folks in conjunction with your book-drawing entries last week. I'll notify the winners this week and will post some of the comments in a subsequent Private Briefing. Thanks to all who entered.
[Editor's Notes: Unless otherwise specified, we recommend investors employ a 25% "trailing stop on all holdings. Peter recommends a 30% "trailing stop" on Paramount.]