On Tuesday we released a blog post about San Lorenzo Gold Corp. (SLG.V) when it was trading at $0.18. It closed at $0.30 on Friday, up 67%. So it can already be added to our winner's pile. But we think this explorer has a unique set of circumstances that still make it a strong speculative buy even after it has quintupled in price over the last several days. We are up to 1,033 followers on our ValueTrades blog despite not giving out a lot of alerts, a fact that we think is indicative of a successful, diligent and prudent stock picking history. If you like our picks you can also follow this blog by clicking the follow button on the top of the left hand panel. We have 122 followers so far on here. You can also follow us on X @StockTradePicks which has over 5,000 followers.
SLG skyrocketed last week upon the announcement of significant gold mineralization on the first drill hole of two separate targets on its 88 km sq Salvadora property in Chile.
The two targets were Cerro Blanco and Arco de Oro, which are located on completely opposite ends of the property and are separate discoveries. The copper results are still pending on Arco de Oro. Either one of these discoveries would have merited a significant valuation bump as the first of three drill holes on each program. SLG investors get a 2-for-1. This significantly reduces the usual amount of risk associated with buying during a drill program. Investors aren't putting their eggs in one basket, they are putting them into two. All for a company that will have about a $24 million market cap and about $1.5 million in cash after warrant expiry.
The unique timing of this news release is what led to this buying opportunity post-news in the first place. There are 8.3 million warrants set to expire at the end of this week at $0.18. SLG initially spiked to $0.30 on the news, but faced steep selling down to $0.18 as warrant holders who likely wrote off those warrants long ago got a surprise Christmas gift in March. We don't think the timing of the news release was accidental. SLG management wanted to ensure this news came out before expiry and therefore released these partial results on the first drill holes instead of waiting for the larger batch. That tells us that management does right by shareholders. Rather than looking to raise cash in another financing, management made sure SLG got the cash through warrant exercises and that legacy private placement investors were able to exercise the warrants profitably. This doesn't mean SLG won't try to raise more cash, but this warrant expiry gives it the flexibility to wait for a higher price or weigh its options by securing a strategic partner instead. Salvadora is 100% owned by SLG with no NSR so the company is in a position to negotiate a good deal for shareholders if it goes that route.
With the price being at $0.30, we have no doubts that essentially all warrants will be exercised. The share overhang from these exercises has likely been mostly absorbed, but we can't rule out that more remains. The stock has had some resistance at $0.35 and sold off to $0.30 by day's end on Friday. We predict that the stock price will be around the $0.50 range early next week. Why? Two reasons. First, we expect a bump in price from the expiry date of the warrants. We saw a similar event occur on one of our past picks, Sintana Energy Inc. (SEI.V) (SEUSF) once its warrants expired. I think most readers can understand why this is a bullish event, as any kind of selling pressure related to warrant exercise would officially be in the rear view mirror. The second catalyst would be that by next week, further assay results would be days away. There would be buying from increased speculation.
We think that $0.50 at least brings SLG to a fair valuation. That would be a $40 million market cap, in line with another one of our successful past picks, Awalé Resources Limited (ARIC.V). From there, it would be up to investors to hold on speculation of further good results. If the second and third holes in both targets confirmed similar robust results as the first holes, we expect the company's valuation to increase to the $100 million market cap range, at least on initial hype. If one target achieves robust results while the other is poor or mediocre, SLG likely is still a material win even for $0.50 buyers. Only if all remaining drill hole results on both targets disappoint relative to the first results does the stock price drop, and we think even in this instance there would be plenty of time for $0.30 buyers to exit at a profit. In our opinion, $0.30 is a no-brainer buy zone with the hold/sell decision not becoming a thinker until at least the $0.50 level.
Disclosure: We are long SLG.V
