Gerardo Del Real is teasing a gold stock, as gold touches all-time highs, and talking up the potential for a 12,500% gain… that sounds quite lovely no? Maybe even the kind of thing that makes you want to pony up $199 for a subscription to a newsletter?

It never makes sense to count on riches by “buying a secret,” so we’ll step in here, check out the clues he drops, and get you some answers. Maybe it’s a great idea, maybe not, but we’ll get you started on thinking it over for yourself, without the FOMO urgency of a newsletter subscription that you might not otherwise want — then you can make your own call. Sign up for Del Real’s Junior Resource Monthly or don’t, that’s your call, but don’t sign up to find out the name of a secret stock — we can do that part for you (and normally I’d urge you to check out our Reviews page to see if other readers like the newsletter, but we don’t have many ratings on that one… the little we have heard from other readers is here, and the ratings for Del Real’s previous newsletter are here).

So let’s dig in… what’s the crux of the story here? Mostly it’s about John Paulson making another “greatest trade ever,” this time in the gold market…

“Legend Who Made $4 Billion Shorting the Housing Market in 2008 Now Making…

“The Greatest Gold Trade Ever

“And he’s positioned to make even more money as his favorite $4 gold stock is set to soar 12,500% or higher… on an imminent Q3 2024 announcement”

OK, there’s only about three weeks left in Q3, so that tingles the antennae… and 12,500% is, of course, a ludicrous gain to imagine.

The reason people pay attention to Paulson is that he was one of the huge winners of the great financial crisis, with maybe the biggest single bet on the popping of the subprime mortgage market back in 2007, a trade that did get memorialized as “The Greatest Trade Ever.”

So yes, Del Real sees him making another similar gain soon, in an entirely different market…

“Now, the renegade billionaire is preparing to do it again… only this time it has nothing to do with housing.

“Instead, he’s quietly piling $110 million into a tiny gold stock that almost NOBODY knows about…

“And I not only know why, but how you can position yourself in what I believe will go down as the Greatest Gold Trade Ever.

“A trade that could make Paulson billions more than he made in 2008.”

The ad takes credit for Del Real picking winning mining stocks like Nevada Sunrise, Magna Gold and K2 Gold in 2019 and 2020, for 500-1,400% gains, so we’ll just take him at his word with those, but I will note that although he claims a 1,450% gain from buying Nevada Sunrise (NEV.V, NVSGF) near the COVID lows in 2020 and selling near the peak, in September of that year, he also teased that stock a few years earlier, in October of 2017 — the stock did climb like crazy from March to September of 2020, but the results if you had bought earlier on and held were a lot less dramatic:

I mention that one just because I don’t think he has publicly teased recommendations for those other stocks… and as a reminder that smaller mining companies are extremely volatile, and tend to be trading vehicles, not “buy and hold for massive wealth” investments (Nevada Sunrise is partially a gold/copper prospect generator, but is primarily an early stage lithium play, just FYI, so the wild swings in the lithium market explain some of the volatility).

People overreact dramatically to both good and bad news with junior miners, which means the trading returns are often very impressive in retrospect… but really hard to earn in real time, since you usually have to be very contrarian and very nimble. These companies tend to look like junk you’d never consider at the bottom, and like great companies with fantastic prospects at the top, so it’s very easy to lose money with the all-too-typical, “sell low and buy high” trade. As Seth Klarman would say, these are trading sardines, not eating sardines.

And Del Real goes on…

“This gold mine I’m going to share with you today is poised to eclipse every single one of these big home runs…

“And beat them by a landslide.

“You see, I’ve been at the center of this story as it unfolded over the last eight years.

“I’ve visited this mine twice…

“I’ve interviewed the execs and everyone involved…

“My colleague, Nick Hodge, even chopped it up with Mr. Paulson at an investing conference in Puerto Rico.

“Because of all of this groundwork, I know:

“Why the billionaire keeps adding millions upon millions to his position…

“Why he now owns 40% of the company’s shares…

“And why he’s betting more than he did on the collapse of subprime mortgages.”

Ah. So that probably puts this firmly in the “repeat” category, we have followed Del Real and his colleague Nick Hodge as they’ve pitched this same mine, off and on, since at least 2018… but lets get a couple other clues from the pitch, just to make sure…

The ad says Paulson is betting big on gold because of his conviction that we’re on the cusp of a crisis far bigger than 2008, something more like the 1970s decline of the United States as an “empire” and a corresponding decline in the US Dollar, creating a 1970s-like “perfect storm” for a “gold panic”.

Things are wildly different now than they were in the 1970s, of course, particularly on the gold front — that’s because of Nixon’s decision to blow up the Bretton Woods agreement and stop backing the dollar with gold in the early 1970s, which meant that the “official” gold spot price of $35/ounce, which had effectively been set in stone since the end of World War II, soared to over $800/oz by 1980. After which it spent 20 years mostly going down, once the US had tamed the extreme inflation that persisted into the early 1980s.

But there are also parallels, of course — inflation in recent years has started to remind people of the late 1970s, the enduring feeling of unease from endless wars and proxy wars and the simmering Cold War seems awfully familiar, and the cultural and political divides in the country might seem similar, in some ways, to what previous generations went through in the 1960s and 1970s.

And we’ve mostly, with the exception of a decade or so of budget discipline that ended before the 9/11 attacks, spent the past 45 years pretending that the US living way beyond its means, with deficits and debt at ever-rising extremes, is just what Americans deserve, a perpetual gift from a thankful world, in exchange for the US acting as the lord protector of everything… and that’s a belief that might have an expiration date, even if politicians on both sides continue, with the tacit approval of all voters who would like to hear only happy stories of tax cuts and federal largesse, to ignore debt and deficits. If inflation doesn’t stay down, and if interest rates don’t decline, then we’ll pretty quickly be in a position where we can’t ignore that any more — if only because the interest payments on the debt now suck up 14% of government spending, a number that is higher than the Defense budget for the first time (the only bigger spending category now is Social Security, at 22% — which makes changes difficult for any politicians to contemplate how to get to a sustainable budget, since retired people are among the most consistent voters… any category of federal spending outside of health, Medicare/Medicaid and Social Security is essentially a rounding error — even the popular infrastructure stimulus spending approved a couple years ago, which isn’t even really hitting the budget yet).

So sure, I agree that the argument for gold looks pretty compelling now. Though clearly some other folks do, too, since gold has climbed 50% since the 2022 lows, and has been tickling new highs for most of the year. Does that mean we’ll see a gold “supercycle” like in the 1970s? Maybe. The missing piece is really individual and institutional investors, who have not been buying gold — or at least, who seem to not be buying gold, because there has been net selling of all of the major physical gold ETFs over the past year (they might be buying gold in other ways, but usually when investors are excited about gold they pour money into those ETFs, like GLD and IAU — they did that in 2020, and again during the early part of the market’s drop in 2022, but they’re not doing so now). You can see this in the AUM of the big gold ETFs versus the gold price — the assets under management should climb exactly as much as the gold price (and the ETF’s share price) if investors are just holding on to the ETF, but AUM will grow faster than the gold price if investors are adding to their gold bets on a net basis (more folks buying the ETF shares than selling), and will grow slower than the gold price if investors are net sellers of gold exposure. You can see the net bet on gold in early 2022, when the market started to fall, but since then, the net interest in gold has been shrinking, reinforcing that the major driver of gold prices over the past few years has been politically-driven central bank buyers in China, Russia and elsewhere, not “regular” investors…

You can look at that as bullish for gold, because the gold price has been climbing even though individual and institutional investors aren’t really interested just yet… but it could just be that they won’t get interested, even with gold at new highs. Usually you can count on new all-time highs bringing in new speculators, whether that’s in a hot stock like NVIDIA or a commodity like gold, but not always… and we have, at least, seen the “convert your IRA to gold coins” folks out advertising heavily again, so maybe that’s a sign of rising interest. But we’ll have to wait and see.

But back to our “greatest gold trade ever” … what else does Del Real say about this mining stock?

He says it’s much larger than anyone knows…

“Officially the company reports it has six million ounces of gold in the ground.

“And that alone makes it a massive gold mine.

“But I have every reason to believe that they are dramatically understating their actual reserves.

“Why?

“It’s simple.

“Mines with 5 or 6 million ounces of gold are much easier to get approved.

“Fewer ‘official’ reserves means fewer loopholes, less waiting time, and less regulatory hassle….

“Based on my own observations and some informal resource estimates…

“I believe there are actually 20 MILLION ounces of gold in total…

“Which would make it a world-class find worth $40 billion.

“And one of the biggest – if not THE biggest – gold mine in America.”

It also contains a lot of a strategic metal, antimony, that the Pentagon needs…

“Why would the military care about a gold mine?

“Because the site is home to not only gold but a mineral that defense brass calls ‘a critical strategic metal’…

“And ‘essential to national defense as a key component of munitions.’

“This is why the site was first mined 100 years ago — to produce the mineral for the military to help win WWII.”

And could have a use as an electrode material in new batteries, too…

“… antimony’s applications don’t end with the military…

“It’s at the center of the next big battery breakthrough…

“One backed with a $144 million investment from Bill Gates and John Paulson himself….

“They’ve pledged enough antimony to power 13GW of battery storage.

“That’s 8x more than all of America’s energy storage in the year 2020…

“So the government has every reason to kickstart this mine.

“Its clean energy agenda, military needs, independence from China…

“This mine meets all of these needs.

“Which is why approval is practically in the bag.”

And Del Real also says this new mine is an environmental plus…

“EPA & US Wildlife Service Applaud Company’s Work…

“It’s near a pivotal stream for salmon, bull trout, and other fish populations in Idaho.

“In the past, a hydro dam in the area collapsed, allowing sediment seep into the river, which blocked the migration of salmon.

“So far the EPA has already spent $4 million on cleaning the site up… but with little to show for it.

“Now, it’s preparing for a major turnaround… and this miner is leading the way.

“They plan to:

“Restore the old salmon stream…

“Repair sediment deposits on the stream…

“And they’re spending millions to clean up metal leaching from the prior operators.

“These efforts will improve the water quality and temperature all around.”

OK, so that’s also all familiar ground — these are the same arguments Del Real and Nick Hodge have been making for this stock for many years. What’s new this time?

Well, apparently the permit is about to be approved…

“Upcoming Announcement Can Spark 1,000% Short-Term Windfall By September 30, 2024, the US Forest Service will vote to permit the project…

“It’s the last hurdle to clear before this site becomes a fully permitted mine to operate…

“And, as I’ve just shown you, they’ve already tipped their hand.

“The US Forest Service recently highlighted the project’s benefits…

“Such as the improvements of the water quality and river habitat.

“They even called the company’s plan a ‘preferred alternative’ to leaving the area as is….

“Early investors who act before then could reap windfalls as this stock launches from $4 to $20… to $40 and beyond.”

And Del Real argues that this company could climb much more than that, here’s his logic:

“They will also run one of the lowest-cost operating gold mines in America…

“With each ounce costing only $438 to mine.

“At today’s gold price, that makes each ounce worth around $1,500 in profit on paper.

“That means we can value the 20 million ounces I think the company has at $30 billion.

“Given this company’s market cap of a mere $230 million…

“We’re talking about just over 12,500% upside.”

That’s probably extremely optimistic, and not just because those 20 million ounces remain somewhat hypothetical — mining companies are NEVER valued at anywhere near the net value of all the gold they are expected to produce. There’s too much uncertainty about the cost of production, the future commodity price, the cost of borrowing, etc. And it’s not close, if we go by the valuations implied by acquisitions of gold companies over the past decade, then the price paid per ounce of reserves in the ground varied but has generally been in the range of 5-25% of the then-current gold price. On average, for mining deals from 2012 to 2021, S&P Global says that acquiring companies paid $187 per ounce of reserves (or $76/oz if you count resources as well as reserves). That number has generally risen with the gold price, partly because there were a few big deals in 2019 and 2021, but over time it’s been pretty unusual to see public companies valued at more than ten cents on the dollar by that measure.

So what’s the stock, for those who we’ve left sitting on the edge of their seat? This is still good ol’ Perpetual Resources (PPTA), formerly known as Midas Gold… just as it was when Del Real and Nick Hodge have hyped it in the past, as America’s Biggest Gold Discovery back in 2018, as Paulson’s “big long” gold stock in 2020, and, for most of 2022 and 2023, the “Biggest Gold Mine in the US… and Nobody Knows it.”

And actually, Perpetua’s potential Stibnite Mine has already moved a little closer to getting its final permit — they got the ;Final Environmental Impact Statement and the draft “Record of Decision” to authorize the project from the U.S. Forest Service last week, on September 5 — so the latest pitch from Del Real focused on September 30 was probably mostly just based on the promise from Perpetua that they expected this response “by the third quarter,” which ends on September 30 (earlier this year, the expectation was “second quarter”, but, well what’s a few months after many years of delays?)

That Record of Decision won’t be final for a few months, given the mechanics of these decisions (there’s a 90-day period for objections and any potential resolution), but this particular federal permit seems likely to be finalized around the end of the year. There are other permitting decisions needed, apparently, including the Army Corp of Engineers permit and some Endangered Species Act “consultation” work, but from my limited understanding of this project, nobody seems to think that those signify red flags now that the major USFS decision has been made (all but one of the “letters” on the USFS website since the draft decision was announced last week are against to the project, but from what I can tell they don’t bring up any new reasons to reject the mine, so I have no idea how those kinds of objections are handled). This graphic is from their new Investor presentation this week…

Optimism has been gradually rising for Perpetua for a while now, so the share price has been well above $4 since March… but the many years of delays in getting permitting, and the occasional need for more exploration funding at times when the gold price wasn’t so high, have meant that long-term speculators haven’t really made money just yet. Partly because past “this time we really have the permit” moments have exploded in their face as more reasons for delay have emerged. Here’s what the longer-term chart looks like if we go all the way back to the first time we covered one of these Hodge/Del Real teases for Perpetua (then Midas Gold), back in mid-January of 2018 (that’s PPTA in purple, the average big gold miner in green (the GDX ETF), the actual gold price in blue, and the S&P 500 in orange):

The biggest positive news, helping to spur the shares higher back in the Spring, was probably the initial announcement that the Export-Import Bank of the United States (EXIM) has provided a “letter of interest” in offering a $1.8 billion financing deal for building the Stibnite Project into a mine, coming just after they hired a new CEO who is described as a “mining veteran,” which folks seem to believe means “construction time is coming.”

So now, if we assume no further logjams in the permitting process, what’s next? They have to borrow the money, perhaps from EXIM and maybe others, build an access road and put in power lines, start to order equipment, and get the real mine design and engineering work underway.

All of the economic assessments are still based on the 2020 feasibility study, so I imagine things would look different today, with higher gold prices and higher construction and operating costs, but as of the latest Investor Presentation this week, the company still believes it is valued at less than 20% of “net present value” today, assuming a gold price of $2,350 or higher.

The current timeline, assuming the Record of Decision comes through as expected at the end of the year, is that they expect to get the rest of their permits and the financing in place in “early 2025”, make the formal construction decision later in the year, and officially begin construction soon after, which they think would lead to commercial operations beginning in 2028. Which is roughly two years later than they were projecting back in 2020, when they first released their feasibility study.

And they expect the valuation to re-rate once they complete permitting, which they think, measuring by near-peers, could mean trading up to an enterprise value of $200-$500 per ounce of reserves (they’re at $118/oz as of the last measurement)… and if there’s an additional formal study done, the reserves number could climb, since they haven’t updated that in many years. There is certainly the possibility that millions more ounces of gold will be found, as Del Real believes… but there may also be a possibility that the permits won’t allow them to expand the mine in a meaningful way, or will force them to do their clean-up and restoration after 15 years, even if there’s more gold available to be produced. It’s tough to guess at what the future holds.

The 2020 feasibility study estimated an initial capital commitment of $1.3 billion, so even with presumably a lot of inflation in those costs, that $1.8 billion EXIM loan potential might be all that they need. The expectation was that they would have after-tax free cash flow of $584 million/year over the first four years of production, at $1,850 gold, so if those assumptions are still relevant it’s an easy investment — the construction loan could theoretically be repaid within the first few years of production, so even though the plan is for production to drop dramatically after those first four years, the economics make sense. Theoretically, if we look back 20 years from now, the mine will have produced more than $3.5 billion of free cash flow, as long as gold stays about $1,600. It’s hard to trust mining companies, because they tend to blow that cash flow on buying other attractive projects just when commodity prices peak… but just going by their estimated financials, it certainly makes sense.

What would such a company be worth in the eyes of the market in, say, six years or so, when they should be in commercial production? Tough to say. SSR Mining was producing a little less than that in free cash flow back in 2022, thanks to a variety of pretty low-cost mines, but they also had future projects in the hopper, and they were valued at about 10X free cash flow, right around $4 billion. Of course, that’s not a great example because that stock collapsed, losing 75% of its value, when its mine in Turkiye had an accident, a tailings dam collapse that killed nine employees. But for a single-mine operator with a lot of reserves left, 10X cash flow seems like at least a rational starting point, assuming that commodity prices are relatively stable. If all goes well with construction and permitting, and they get the EXIM loan without having to sell more equity, and gold is at $2,500 an ounce in 2030, then that feasibility study indicates they might have free cash flow as high as ~$700 million a year for the first four years, or an average of $400 million for 15 years. Even at that lower average, maybe we’ll be able to justify a $4 billion valuation for Perpetua Resources.

What would that mean, if the stock goes from $550 million to $4 billion by 2030? Assuming no further dilution, it would mean you’d enjoy an average annualized gain of 40%. Mining projects are rarely linear, so maybe it will have a year when it goes up 500%, and a year when it loses 60% along the way, and we do not know, of course, what the terms are of their potential loan, or how the 2020 feasibility study will turn out to need updating, but that’s just one way of thinking about the potential. If it turns out that they get acquired, then probably a reasonable bid would be $400 or so per ounce of reserves. We do sometimes see unreasonably high takeover offers, so one never knows, but that would be about $1.9 billion, so roughly a 300% gain from here if they get bought out by a biggie… but there’s no indication of that being particularly likely at the moment… the one obvious potential strategic acquirer who might have been interested, Barrick Gold, was a major investor in Perpetua Resources for years but sold all their shares in 2022.

The major investors today are primarily financial, there are a few hedge funds holding meaningful stakes, but the cap table is overwhelmingly dominated by John Paulson’s firm, which has been a substantial shareholder since 2016, has poured in substantially more money since, and effectively controls almost half of the shares now (44%, as of the last report I saw).

What happens if gold falls back to $1,500 an ounce, or even further, and interest rates rise, and investors hunker down? It could easily mean that the project gets put on mothballs for a couple years, as has happened in the past, or if it is already built and operating, doesn’t do much more than break even… though if commodity prices fall over the next year or so, their fate probably depends primarily on the availability and terms of that potential $1.8 billion financing deal from EXIM.

So what to do? I like the simplified version of the mining stock life cycle posted by US Global Investors, which reminds us of the general movement of mining stocks through the cycle of prospecting, discovery, exploration and then feasibility studies, financing and construction, and finally production, which can be followed by more reassessment and more discovery of new resources to add to the mine plan (U.S. Global is Frank Holmes’ company, and he’s long been an advocate for gold and gold mining stocks — and, no surprise, he thinks that now is a particularly opportune time to invest). This is what that cycle looks like in the elementary school version (not specifically for Perpetua, to be clear, but for these kinds of “juniors hoping to become producers” companies — from what I can tell, none of the U.S. Global Investors gold mining mutual funds hold PPTA shares):

My guess? I do think gold is likely to rise in value in the future, given the financial risks in the world and the rising mistrust of governments. I also think mining stocks are such terrible businesses, on average, that we should always be cautious about making bets that depend on a mine being built, and being as commercially viable as expected, over the next five years. We might be at a decent spot here, in the year or so before the official production decision and start of mine construction is likely to happen… but even if there are no more meaningful speed bumps in their path, a lot depends on the financing, and on how those capital costs of construction and startup might have changed in the past four years, so it’s certainly quite possible that there will be disappointing moments in the year ahead, too, or that the stock will fall back down during the ~3 year construction period, particularly if gold prices soften at some point and investors tire of the wait.

Curious about that “battery” bit of the story? That’s obviously speculative, since they won’t begin producing antimony until at least 2028 (and with mining companies, there’s usually reason to expect delays), but the partner they’re talking about is Ambri, which has been developing a “liquid metal” battery for years, including partnership with Microsoft. And yes, Bill Gates, John Paulson and others have invested in this company for years… and also lent it money when it was falling into bankruptcy, and bought control of the company out of bankruptcy a couple months ago. Who knows… maybe by the time the Stibnite Mine is operational, Ambri will be ready to buy a bunch of antimony from them — they did sign a supply agreement back in 2021, though it’s a very preliminary agreement and could change dramatically by then.

So… your turn! Will this be the real push for Perpetua, with construction possibly finally beginning in 2025, after so many years of disappointment and delays? Think that makes for a worthy investment, if so? Planning to ride the stock through the cycles to get to their strong free cash flow in five or ten years, or expecting to trade the news in the years before this becomes an operating mine? Those are your choices to make as an investor. For me, I’ll stay away just because I usually stay away from speculating on individual mining projects, but it does seem, at least like the permitting and financing prospects have gotten much more solid this year than they had been over the past decade.

But I’m not really much of a mining investor, I confess, I tend to just stick with the royalty stocks and mostly dig into these mining stories out of curiousity… so after six years of pretty active over-the-top teaser pitches for this stock, from a few different newsletters, I’m kind of sick of looking at this one. Maybe something new next time, guys?