Investing in Undervalued Stocks

San Gold Corporation - Online Stock Investment Analysis - Summary Report

San Gold Corporation - Online Stock Investment Analysis - Summary Report

Author: Jeroen Snoeks   Date  Share price
Initial publication  July 12, 2014  0.15 
Latest update  July 12, 2014  0.15 

In this summary report, you will find most of my commentary and conclusions regarding my due diligence about San Gold Corporation. To inform yourself about all the details of a specific topic of this stock investment analysis report, I created the Table of Contents page, which you can use as a convenient index page. You can also click on each topic link in this summary report, to inform yourself directly about the details of that specific part of my due diligence.

When I started this investment analysis about San Gold Corporation in late February, I still owned the company's stock. However, after reading the company's press releases of March 10, 2014 and March 18, 2014, I seriously began to doubt whether or not the company still deserved to be part of my stock portfolio.

As San Gold Corporation is the first stock I analysed according to my due diligence guidelines, I decided to finish all the investment research I described in the How to Invest in Shares chapter. After I finished this part of my due diligence and concluded that the company didn't deserve to be a part of my stock portfolio anymore, I also choose not to elaborate my stock investment research described in the Mining Companies Analysis chapter.

On the evening I finished my due diligence, the company issued the press release of May 12, 2014 which I read in conjunction with the company's latest investor presentation. As it became clear to me that it still will take a long time before the company's operations will become profitable, I decided to sell the company's stock entirely. On May 13, 2014 I sold my complete position in the company for 0.15, which resulted in a loss of 0.015 per share. I immediately reinvested the proceeds of the sale of my SGR shares into another stock of my stock portfolio. In my opinion, this stock is the most interesting exploration company listed on the Canadian exchanges!

As I do believe the Rice Lake Gold Belt offers great potential, I included San Gold Corporation to my stock watchlist for future reference. However, as management decided not to respond to my email in which I announced this stock investment analysis report, I will not invest in SGR as long as the current management team is in place - or until current management convinces me that their interests are aligned with those of the common shareholders and their attitude towards them has positively changed.

Tomorrow, I will start my next investment analysis about the Canadian listed exploration company from my stock portfolio. If you want to be informed when I have finished this investment analysis report, you can leave your details in the name grab form on the Support page.

General Stock Information

Company Profile

San Gold Corporation (TSE: SGR; OTCMKTS: SGRCF) is a junior gold producer in the Rice Lake Greenstone Belt, in Manitoba, Canada - producing between 75.000 and 85.000 ounces of gold in the past three years. Its current resource base consits of 555,600 measured and indicated ounces of gold (of which 405,400 oz Au are in the proven and probable category) and an additional inferred resource of 2.4 million ounces of gold. In addition, the company has control over a 400 square kilometers land package in this prospective gold belt, which offers a lot of brownfield exploration potential for expanding the current resource base.

My Preconditions for Selecting Undervalued Stocks

Fundamental Stock Analysis


Description  Minimum Value  Calculation (in millions)  Outcome 


# Current Assets / Current Liabilities  1.5  34.5 / 10.2 =  3.4  Passed 
# Tangible Book Value / Total Tangible Assets  0.4  (133.1 - 0 - 0) / (210 - 0 - 0) =  0.6  Passed 
# Tangible Book Value / Market Capitalization  2.0  (133.1 - 0 - 0) / (373.4 * 0.12) =  3.0  Passed 

As the outcome of these 3 ratio's is higher than the preset minimum values, the company complies with my first precondition, i.e. the company is determined - at first glance - as fundamentally undervalued.

Insider Ownership Assessment

Insider Ownership  Shares Held  Total Shares Outstanding5  Insider Ownership % 
Total Shares Held by Key Management  1,478,864    0.4% 
Total Shares Held by Other Directors  329,000  0.1% 
Total Shares Held by Corporate Insiders  1,807,864  373,390,981  0.5% 

The most striking data regards to the ownership of the company's CEO, Mr. Greg Gibson, who doesn't own any shares in the company, although he does own $140,000 worth of "convertible debentures 2013". Mr. Gibson has been a director since September 3, 2013. Before he started as a director he must have done his own due diligence about the company in order to determine whether or not San Gold's future seemed bright enough to accept this job. Perhaps he concluded that the company's future was interesting enough for him to increase his fixed income by accepting a nice salary, but until now he doesn't seem to believe that it is interesting enough to invest his own money in the company's common shares.

I also find it shocking to see that the company's financial experts (Mr. Gestur Kristjansson and Mr. Mandeep Rai: the company's former and current CFO) own so little shares in the company. They have been involved in the company for a long time now and during this time the company has been trading at an enormous discount to it's tangible book value. However, these financial experts still haven't decided to invest more of their own money to acquire the company's common shares. Don't they believe in the company's future prospects?

In total, the corporate insiders hold only 1,807,864 shares of the company, which equals to 0.5% of the company's total shares outstanding. As the company has a market cap < 100 million, I would have like to see an insider ownership percentage of at least 5.0%. Therefore I must conclude that the company failed to comply with my second precondition. I would consider it a very bullish signal if management buys additional shares in the company around the current share price, to increase their ownership to at least 5.0% of the company's total shares outstanding.

Country Risk Analysis

Country Risk Resources  Ranking  Weighing 
The Coface Group  A1 
A.M. Best  CRT-1 
The Fraser Institute's  21 
Weighted Average  (5 + 5 + 4) / 3 =  4.67 
UndervaluedEquity.com's Country Risk Ranking System  CRRS-1 

The weighted average of UndervaluedEquity.com's CRRS code equals to 4.67, categorizing Canada into the highest Country Risk Ranking possible, i.e. CRRS-1. Thus, based on this country risk assessment, the company passed my third precondition and operates in a relatively safe jurisdiction.

Detailed Stock Investment Analysis

Company Announcements Evaluation

Based upon the information provided in the company's investor presentation and press releases, management has not convinced me to buy the company's stock at current prices. I conclude that I have too many questions left unanswered. I will ask management to respond to my commentary by email, especially regarding Mr. Ian Berzins sudden replacement.

Key Management Evaluation

I especially like the involvement of Mr. Dale Ginn. Next to having extensive experience at the larger gold producers as Goldcorp and Harmony Gold, he is also a co-founder of the company, which I believe is a very positive trait.

I am a bit sceptical about the recent appointment of Mr. Gibson as CEO as he has multiple directorships: President and CEO of Kerr Mines, Chairman of Temex Resources Corp., director of Mag Copper Ltd. and a director of SGX Resources. As of the date of this evaluation, he has control over the following amount of common shares - directly or indirectly registered to his name, according to the information found on SEDI.ca:

Company Name  Shares Held  Share Price  Ownership Value  Total Shares Outstanding2
(in millions) 
Ownership % 
Kerr Mines  800,000  0.03  $24,000  1,323.58 million  0.0% 
Temex Resources  630,500  0.08  $50,440  185.74 million  0.0% 
Mag Copper  2,369,500  0.015  $35,542.50  78.27 million  3.0% 
SGX Resources  0.025  134.09 million  0.0% 

The data in the table above has not convinced me that Mr. Gibsons interest are aligned with those of the common shareholders. Perhaps Mr. Gibson is willing to explain why he holds several directorships without investing more serious amounts of his own money in these companies.

Based on the biography's of the company's key management, I believe key management consists of a team which complements each other's quality's, which I consider a positive sign.

Ultimately, the company must become a profitable gold producer and I am not sure the current management team will be able to manage the company through this transition.

Management Discussion and Analysis Evaluation

In the MD&A of September 30, 2013 the company revised its full year operating cash cost guidance to between $900 and $950 per ounce of gold sold (instead of $800 to $900 which was communicated in the MD&A of June 30, 2013. I consider this increase in cash costs as a negative sign.

Referring to the MD&A of December 31, 2011 the Company sees good potential to increase production from 2011 levels and at the same time to lower the costs. However, until today management didn't succeed in achieving these preset goals, which I consider as a negative sign too. Therefore, the questions to management are:

  • When does management expects to increase production and further lower the cash cost to the levels which were suggested in the MD&A of December 31, 2011?
  • What amount of capital is necessary to execute these plans?
  • Are there any further restrictions, except the amount of capital needed, before management can execute these plans?

Management Compensation Comparison

Based on the outcome of this management compensation comparison, I must conclude that San Gold Corporation has a "Reasonable" compensation policy.

However, the company's latest proxy circular refers to the compensation paid in 2012. Perhaps management is willing to disclose what the current compensation of key management is, so that I can estimate if this conclusion is still accurate.

Management Compensation Evaluation

The total compensation paid declined by $2,407,184 or 40.6% from 2011 to 2012. Normally, I consider a decline in management compensation as a bullish signal as the company can now instead invest this money in upgrading the value of its assets. However, when management has done an outstanding job - supported by an increase in its share price - I believe they have to be rewarded for such an achievement accordingly.

As you can see in the table above - which includes the historical quotes from Yahoo Finance - the long term shareholders in San Gold Corporation had a horrible year in 2012, losing as much as 58.2% of the value invested. However, as management's compensation decreased while the company's share price decreased as well, I rate management's compensation as 'Reasonable' for 2012.

Insider Trading Analysis

In the following table, I have summarized the insider transactions from the period January 1, 2013 until July 12, 2014 and included the cumulative ownership data from the article: San Gold Corporation - Insider Ownership Assessment.

Name Insider  Total Shares Acquired or Disposed  Total Shares Held  % Ownership Change 
Anderson, Michael  +31,000  35,000  +775.0% 
Brennan, Robert Brian  +50,000  50,000  +100.0% 
Friesen, Tim  NA  NA  NA 
Gibson, Gregory  NA 
Ginn, Dale  +20,000  1,356,140  +1.5% 
Harapiak, Stephen William  +100,000  100,000  +100% 
Kristjansson, Gestur  +20,000  71,724  +38.7% 
Michaud, Michael Julien  +75,000  75,000  +100% 
Power, Michael  +100,000  119,000  +526.3% 
Rai, Mandeep  1,000  NA 
Total  +396,000  1,807,864  +28.0% 

As all the insiders who have traded in the Company's shares only bought shares recently, I consider this a bullish signal, as insiders only buy shares if they think the price will rise. Overall, the insiders increased their ownership in the company by 28.0%.

Institutional Ownership Analysis

Unfortunately, the available data on MSN, NASDAQ and Reuters is in conflict which each other. I was only able to confirm the position mentioned on NASDAQ, as I have reverse engineered the institutional stock ownership through the website of the SEC. As the data found is only relevant when I have been able to confirm it myself, I have excluded the data which I was unable to confirm and summarized my findings in the table below:

Shareholders  Shares Held
(Previous Reporting Period) 
Shares Held
(Latest Reporting Period) 
% Change  My Rating 
Total Shares Held by Institutions  35,000  40,000  +14.29%  Positive 
Total Shares Held by Mutual Funds  NA  NA  NA  NA 

Thus, based on my findings in the table above, I have rated the instituational ownership as positive, as I found that the total institutional ownership has increased compared to their ownership in the previous period. However, you should always interpret the change in institutional ownership in conjunction with their total ownership in a stock. Therefore I have created the following table too:

Shareholders  Shares Held
(Latest Reporting Period) 
Shares Outstanding1  % Ownership 
Total Shares Held by Institutions  40,000    0.0% 
Total Shares Held by Mutual Funds  NA  NA 
Total Shares Held by 5% Insiders  NA  NA 
Total On-The-Radar Ownership  40,000  373,390,981  0.0% 

Thus, based on my findings in the table above there is no substantial company ownership by on-the-radar investors according to the latest reporting period. In general, it seems that most on-the-radar investors recently closed their positions in the Company, based on the information found on MSN, Nasdaq and Reuters. Compared to the previous period, most institutional shareholders and mutual funds seem to have closed their complete positions in the company entirely. Therefore, I conclude my institutional ownership analysis with a negative rating, as the ownership change is greater than minus 5%.

The most striking data regards to Sprott Asset Management, who apparently initiated a new position in the second half of 2013 by acquiring almost 45 million shares until October 10, 2013. Then, they sold the entire position before December 31, 2013. They do still own 16,000,000 warrants with an exercise price of 0.18 per share, but if Sprott was really confident about the company's future prospects, they probably would not have sold this position, especially when you consider that they have acquired the majority of their position for just 0.125 per share. For more information about Sprott's investment in the company, you can read the company's press release of September 12, 2013.

Stock Options and Warrants Analysis

In the following table you see the effect on the total amount of shares outstanding and the insider ownership percentage, when all the relevant employee stock options and stock warrants are converted into common shares:

  Total Shares Outstanding  Shares Held by Corporate Insiders  Insider Ownership %  Dilutive Proceeds 
Situation before Conversion of Options and Warrants2  373,390,981  1,807,864  0.5%  NA 
Situation after Conversion of Options and Warrants  397,160,981  8,807,864  2.2%  4,424,000 

Thus, based on the stock options and warrants analysis, the company does not comply with my minimum share ownership percentage by corporate insiders - even if all the relevant in-the-money and near-the-money stocks options and warrants are converted into common shares. I consider this as a negative sign.

Short Stock Positions Analysis

Overall, I do not believe it's likely that a short squeeze will happen anytime soon, as the outcome of all three indicators for measuring the level of short interest in the company are below the average short interest range.


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About Jeroen Snoeks

Jeroen Snoeks - UndervaluedEquity.com

Jeroen Snoeks is the founder of UndervaluedEquity.com, a website for investors passionate about investing in undervalued stocks. Through UndervaluedEquity.com, he shares his experience and knowledge and will soon reveal his personal stock portfolio.

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