Value investing

What the Lassonde Curve Says About Golden Arrow

Pierre Lassonde is a Canadian mining legend that turned a $2 million investment into a multi-billion dollar mining giant. By purchasing mining royalties, the company grew at a 36% compound rate for nearly 20 consecutive years. Lassonde’s success is due to his deep understanding of the mining industry, which helped him make opportune investments that ended up paying big dividends over time.

In this article, we will look at the so-called Lassonde Curve and what it says about Golden Arrow Resources Ltd. (TSXV: GRG).

What is the Lassonde Curve?

Lassonde’s Curve defines a mining company’s lifecycle in four stages: Exploration, feasibility, construction, and production. A junior mining company’s valuation climbs throughout the exploration cycle, peaks with a pre-feasibility study, troughs during the construction cycle, and then rebounds to a fair valuation during the production cycle. While these cycles may not be entirely clear-cut in practice, mining companies tend to follow the rough outline.

Investors in the mining space can time their investments by identifying these cycles. For example, investing early-on during the exploration phase and buying low during the feasibility and construction phases can yield significant gains when production begins. The added benefit of investing after a pre-feasibility study is that the fundamental premise for the trade is de-risked, while investors also have a much better idea about what to expect.

It’s important to remember that these cycles aren’t always clear-cut in the wild. Often times, macroeconomic cycles will drive junior miners higher or lower despite any company-specific news. For example, a dramatic fall in gold prices could adversely affect all gold miners - even if one of them had just secured a favorable NI 43-101 report. The reward for these investors is the long-term trend and the ability to average into mining companies at favorable prices.

Golden Arrow’s Stage

Golden Arrow Resources Corp. (TSXV: GRG) recently announced a joint venture with Silver Standard Resources Inc. (NASDAQ: SSRI) to commercialize its Chinchillas property and gain exposure to the major’s Pirquitas operation. Under the terms of the deal, the new joint venture will be 75% owned by Silver Standard and 25% owned by Golden Arrow. The companies expect the new mine to generate roughly $140 million per year in revenue at $17 per ounce.

Despite the positive news, Golden Arrow’s stock is trading about 17% lower so far this year. The Lassonde Curve suggests that this decline is due to early investors locking in profits following the partnership deal since the commercialization phase will take several more years. The upshot is that new investors may want to consider purchasing a stake at these depressed levels to take advantage of the potential rise as it moves into production.

The company’s investor presentation estimates that net revenue could reach over $1 billion with post-tax cash flow of $267 million, a 29.1% internal rate of return, and a 3.5 year payback period. These are compelling economics for a company that’s valued at less than C$60 million. Moreover, that valuation doesn’t assign any value to the company’s Antofalla project that could have equally-promising results and long-term potential.

Looking Ahead

Golden Arrow Resources Corp. (TSXV: GRG) represents a compelling opportunity in the junior mining space following its pre-feasibility study. With its recent joint venture, investors may begin to enter the stock in anticipation of the commercialization phase. The company could also reignite speculative interest through the ongoing exploration of its Antofalla Project, which management believes has potential that’s similar to Chinchillas.

For more information, visit the company’s website at www.goldenarrowresources.com.