The Play of The Year Is Having The Sale of The Year

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This week I’m watching Fosterville South (FSX-TSXv) as the best chance I’ll have all year to buy stock.  On September 14, 13.6 million shares with a $1.10 cost base AND half warrants with a strike price of $2/share will come free trading.  The stock is now trading at $3.

That will for sure put some pressure on what has been The Biggest Winner of the Year for me and Investing Whisperer subscribers, running from 40 cents to $5+ in six months.

In one sense I would argue it’s The Play of the Year, because it made Australia super-sexy again for junior gold deals; all of a sudden there are several new Aussie gold deals popping up.  FSX started a new area play.

This week should be The Sale of the Year—as there is an unusually positive incentive for shareholders to exercise their warrants—and I expect some of them to get sold along with the underlying stock.  Let me back up and explain:

Fosterville South is an odd story in a way, because while initial drill results have been excellent,  the management team have actually added the most value through M&A deals, not via the drill bit—so far.

They went public on the sex appeal of the property package connecting with Kirkland Lake’s (KL-NYSE/TSX) Fosterville Mine tenements, some 250 km north/northwest of Melbourne—where they found the Swan Zone, some 2 million ounces at nearly 1 oz per ton.  It became the lowest cost producing mine in the world for a time.

Almost all the initial assets had high grade historical production on them.  In particular, Fosterville South’s Lauriston project, just south of the actual mine, looks like it has great potential—the location and geology—to host another Swan-style deposit.

The stock skyrocketed out of the IPO on the back of those initial tenements (the Aussie word for claims or properties).

But the team wasn’t done.  I’ve known Chairman James Hutton for years, and he is always thinking. Days after listing, they bought two other tenements near the Fosterville Mine called Avoca and Timor for $500,000 up front and potentially another $2 million if the assets produce over 1 million ounces.

Now they are spinning these assets out into a new public company (pubco) called Leviathan. For every share of Fosterville South you own on October 22 you will receive a share of Leviathan.

EVERYBODY wants a piece of this dividend company.  This is now one of the strongest capital markets team in junior mining, and will for sure have a lot of institutional support and retail excitement.  Even Eric Sprott (former Chairman of Kirkland Lake itself) is a large shareholder of Fostervile South. Everybody loves a winner. 

In addition to the 1:1 share for FSX shareholders, Leviathan will raise $5 million out of the gate and I would expect the new pubco to follow the same pattern as Fosterville South—the stock will do very well and management raises another $10 million give or take at 2-3x the IPO price as quick as possible.

Normally investors would hold their warrants until close to the expiry date to gain maximum exposure to a Big Win (which takes time).  But now, those warrant holders will get a FREE share of Leviathan if they exercise before October 20.

Now, I am guessing that a lot of the institutional shareholders who bought that financing may just write a cheque and keep their stock and their warrants.  But a lot of retail investors will likely sell enough stock to cover their warrant position.

Example: if you have 200,000 shares of the financing, you have 100,000 warrants at $2.  That will cost you $200,000 (which the FSX treasury gets) to exercise.  If the stock is trading at $3, you have to sell 66,667 shares to cover your warrant exercise, and that leaves you with 33,333 free shares—and now you will also get a free share of Leviathan.

So there is HUGE incentive for retail warrant holders to exercise now, but this provides a massive opportunity for smart institutional money to be buyers of size this week.

I’ve also known CEO Bryan Slusarchuk since before he became a stockbroker, which was before his success as a co-founder and former President of K92 Mining.  I fully expect him to have a string of drilling results from Golden Mountain and possibly even news on the crown jewel—Lauriston—before October 22.

And of course, IF future drill results are the same as the historical high grade production reported, Fosterville South is well on its way to new highs and the stock price this week will go down in history as one of the best buys of the year. 

But as good as these assets look, nobody knows.  There is still risk here.  And nobody knows what the price of gold will be in late October either. 

Conclusion–I think the 2-for-1 play will be too enticing for shareholders to resist, and the stock will see a lot of pressure this week.  I’ve already taken some profits on this stock, and I’ll be using this week to replace some of my position.

PS—the other big M&A play that Chairman James Hutton and Chief Operating Officer Rex Hutton did earlier this year was stake the entire Walhalla gold belt some 200 km EAST of Melbourne. It doesn’t intuitively fit into the Fosterville South strategy—it’s too far away, and it’s a big enough land position to be a stand alone play.  Makes me wonder if the second spin off from Fosterville South is already in the cards.  That would make these warrants a 3-for-1.