What's in the Name: More Than Meets the Eye at DNA Precious Metals
Much like precious metals, companies dealing in them were also at the receiving end in the stock market last year. The situation is no better for gold and although an uptick in late June offered a breather, gold is still heavily discounted from its highest levels seen in the second-half of 2011. As is the case with stock markets, they tend to overreact and discount the positives when the chips are down. As such, it is not imprudent on part of average investors to think modestly of precious metals or remain ignorant of the ongoing revolution in the realm of digital currencies. However, there are companies like DNA Precious Metals Inc (NASDAQOTH: DNAP) which are practically going for a song in current market conditions. This Canadian exploration stage company may come across as just another junior miner but there is more to it.
DNA Precious Metals is largely focused on near term production at its Montauban mine in Quebec, Canada. Montauban region is a historically rich mining area with proven past exploration. According to an NI 43-101 report issued in January 2011, the company's Anacon tailings have resources of 428,000 tons with a grading of 0.31 gram of gold and 32 grams of silver per ton. All of this effectively translates into 4,200 ounces of Gold and 440,000 ounces of Silver. The NI 43-101 standard is a Canadian mineral resource classification that acts as a minimum ceiling and eliminates advertent or inadvertent inflation of mineral resource estimates. By no means, it is the final word on the actual amount of minerals that can be mined. As such, there is great potential in DNA Precious Metals' additional, but NI 43-101 non-compliant, tailings. If previous independent reports are any indicators, these resources hold potential to mine 20,328 ounces of gold, 1.29 million ounces of silver, and 42,800 tonnes of Mica. The company's Montauban Near Surface Ore Resource is another asset that has tremendous potential although it is not necessarily in compliance with the NI 43-101 standard.
And the company has been making fresh additions in its resources. Towards the end of June 2014, the company acquired 57 contiguous mining claims of Tectonic Resources in Montauban mine property. The latest mining claims cover an approximate surface area of 2,560 hectares.
Exploration stage but near term opportunity
Production at the Anacon resource is expected to start as soon as the last quarter in 2014 as the company has most of the permitting and infrastructure in place. This includes a serviced road access as well as municipal water supply to the Anacon mine. With these positives, the company has a big near term opportunity that could potentially translate to $5.8 million of operating revenue in 2015, growing to $10.8 million in the subsequent year. Not to mention that the company has a first-mover advantage over other firms in the region that has just recently been reopened to mining exploration.
Since it is an exploration stage company, DNA Precious Metals has no revenues and thus, incurs losses. However, profitability is not an effective yardstick for valuing companies in industries that have seen extreme volatility. Even well-established players like Newmont Mining Corp (NYSE: NEM), Hecla Mining Company (NYSE: HL) and Coeur Mining Inc (NYSE: CDE) witnessed significant dents in their financial performance last year. Newmont, one of the largest gold producers, even posted loss on annual basis and had to cut workforce in an effort to streamline operations. On the other hand, Hecla Mining undertook a massive ramp up in silver and gold production last year but still reported a loss of $25.7 million for 2013 as prices remained depressed for most of the period.
Being a new player, with little overhead costs, is actually good for DNA Precious Metals. Another factor expected to help the company is the gradual recovery in gold prices this year. With a particularly bad year in 2013, it is time for a rebound and the steady demand from China and India, after lifting of import taxes curbs, will help the matters. Being a new entrant in the market, it would have been particularly difficult for DNA Precious Metals to weather the depressed market but a better pricing scenario for the rest of the year bodes well for the company.
Bitcoin mining complements physical mining operations
Apart from the physical mining operations, DNA Precious Metals has added a new ace up its sleeves in a business that is rapidly emerging in a parallel industry of sorts. In early June, DNA Precious Metals formed a wholly owned subsidiary named DNA Crypto Corporation with a long term goal of identifying crypto currency mining opportunities in the US and Canada. Initially, the Nevada based subsidiary is focusing on mining bitcoins.
Bitcoin – a polarizing digital currency – has its proponents as well as adversaries in droves. Particular among the hit points is the anonymous nature of the currency which initially made it greatly difficult for Bitcoin to be considered a currency of legal tender. However, there is growing evidence of the currency gaining traction as more and more merchants have started accepting the digital currency. Although the US Internal Revenue Service (IRS) continues to treat bitcoin and other virtual currencies as property and not currencies, merchants are wholeheartedly adopting bitcoin for its transactional capabilities. The benefits for merchants are fairly obvious as adoption of the cost efficient currency means merchants can sell goods and services without paying large cuts of 2-4 percent in processing fees. While there are several mainstream online merchants now accepting virtual currencies including satellite operator Dish and online travel agency Expedia, perhaps the most recognized name of all is Apple which has now said that its app store will allow apps that accept virtual currencies provided they are in compliance with all state and federal laws. Apple has not explicitly mentioned which currencies it will allow but it is a big vote of confidence from a company which has been aggressive in removing apps which enabled bitcoin payments in the past.
It is not just online merchants but more traditional setups also which are now acknowledging that virtual currencies are here to stay. Latest to join the list is the state of California where Bitcoin has become a legal tender. State governor Jerry Brown signed a bill in late June, effectively conferring legal tender status to bitcoin and other alternate currencies in California. Financial markets are also recognizing the potential in the idea of consumers using the currency as a means of payment – an evolution that has attracted venture funding in many digital currency payment start-ups such as BitPay, Coinbase and SnapCard. SecondMarket – an online marketplace for buying and selling illiquid assets – has recently launched a bitcoin investment platform that allows small investors to participate in the market.
A big factor driving this investor interest is the fact that the number of bitcoins that will be in circulation at any point in time is limited to 21 million. This seeming restriction on the total number of bitcoins is actually the source of strength for the currency as investors know it's far from the case of the government printing more bills. Out of the possible 21 million, less than 13 million are currently in circulation, effectively meaning more than 8 million are yet to be discovered. This discovery of new bitcoins is aptly named "mining" as it requires sophisticated software and hardware to verify several transactions. The difficulty in the task can be assessed by the fact that it takes more than 10 minutes before the collective strength of the super powerful and purpose-designed computers find new bitcoins. The system is designed in a way that it becomes difficult progressively to mine new bitcoins.
Higher bitcoin prices fuel mining rush
Unlike fiat currencies which are vulnerable to government's printing habits, there are going to be only 21 million bitcoins ever in circulation – a realization that is going to drive the currency's valuation even higher as merchant and consumer acceptance increases. It is no wonder that the soaring value of bitcoins makes it a hugely profitable business to mine coins which are currently undiscovered. So much so that bitcoin mining start-ups, some pooling money and system resources to crack it, are attracting funds from venture capital firms. Such recent and relevant examples include BitFury's $20 million funding round as well as Newnote Financial which opened a bitcoin mining centre in February and was recently valued at $11 million.
Within days of setting up the subsidiary, DNA Precious Metals has also received numerous inquiries regarding potential joint ventures and investments. From the initial estimates, the subsidiary will not require big investment and eventually the model can be used to mine other coins like Litecoins. While it remains to be seen how developments unfold further, bitcoin's rise so far in value terms is reassuring. In case of prices rising further, there will be more demand for bitcoin mining. However, the fact that a well-developed ecosystem has developed around bitcoin platform will help mining firms in the event of a price correction as hashing power will become more affordable.
In the current state of affairs, bitcoins reign supreme in the world of digital currencies which explains the mining rush but the same setup can be purposed to mine other crypto currencies which might become popular in their own right. If DNA Crypto Corporation reaches a critical scale, it can expand into Litecoin mining – a move that has the potential of growing revenues exponentially. In a nutshell, opportunities are unlimited for DNA Crypto and if it scales operations rapidly enough, valuations mentioned above wouldn't be beyond its reach. Given the right set of conditions, the subsidiary can be spun off and listed overseas. Such a scenario would be great for DNA Precious Metals which currently has a market capitalization of less than $20 million.
What's in store for DNA Precious Metals?
Several of these outcomes are tentative and remain contingent to scalability of operations but DNA Precious Metals is favorably placed in most scenarios. The company has solid prospects of near term production at the Montauban Mine and the recent expansion in its mining claims has enhanced the investment value besides bolstering DNA Precious Metals' long-term exploration program. If the yellow metal's 10% rally so far this year serves as an indicator, prices will remain higher from previous year's historically low levels. Given that current gold price of $1,300 per ounce is not very high from average production cost of $1,100 per ounce, there is a solid logic behind the thinking that the worst in terms of gold prices is behind us.
While the company has reasonably solid plans; production, subsequent sale and profit generation is known to be a long-drawn process. In contrast, an immediate catalyst for the company is the newly formed subsidiary DNA Crypto Corporation. The fact that the parent company has already received investment and joint venture inquiries speaks volumes about the near-term potential in digital currency mining operations. The parent company has already identified a bitcoin mining investment for DNA Crypto Corporation and it wouldn't be surprising to see the board recommending more specific measures which may as well be acquisition or merger. The parent company's market capitalization of $20 million is simply inadequate when it comes to factoring the potential in digital currency mining. The subsidiary itself could be spun out to unlock value in the longer term. With some pieces of the puzzle already in place, DNA Crypto Corporation, and by extension DNA Precious Metals, is indeed in the right place at the right time.
The following article is from one of our external contributors. It does not represent the opinion of Benzinga and has not been edited.