Why I have been buying this gold penny stock

Via Penny Mining Stocks, I have been buying Midway Gold (MDW.T)

*This is not investment advice. This article is my own thoughts and I could easily be wrong. Please do your own due diligence and talk with a licensed financial advisor before making any investment decision. The author of this article owns Midway stock purchased in March in the open market and is therefore biased. All facts are to be verified by the reader.

I have bought Midway Gold stock twice in the last 10 trading days at CA $0.45 and  CA $0.$415. Midway stock has had a tremendous sell off in the last  couple months and is currently trading at a 52 week low of $0.375 (Friday March 28th close).  The stock was as high as 93 cents on March 3rd. I believe the stock offers a terrific risk/reward scenario at these levels. Midway will be Nevada’s next gold producer (any day now). The stock does have some issues but I will explain those as well.

 Here is why:

1. Low volume – The sell off has been on extremely low volume with only 2.98 million shares traded since March 3rd.  31% of that volume was done on Friday with 989,000 shares trading hands. Midway stock has high institutional ownership with 13 funds holding ~44% of the stock. One or more of these funds could possibly be unloading shares for a variety of reasons that could include MDW stock does not meet their minimum criteria (mandate) any more (share price to low or market cap below certain levels). The end of the first quarter is Tuesday so funds could also be rebalancing (moving positions) around before quarter end.

    2.Production (days away) – Midway announced on Friday testing of the refinery and a gold pour of 100 ounces ($120,000 at $1200 gold). I am expecting an announcement early this week as the company has announced that the first commercial scale production is expected for Monday, March 30th. History shows according to US Global research shows that when a company begins production (cashflow) the share price responds positively. See below chart.

3. Additional Projects – Midway has a plan to use future cash flow from Pan to bring a pipeline of projects in to production including Gold Rock and Spring Valley (JV with Barrick Gold). These are excellent projects in their own right and investors can read more at theMidway Gold website.

Issues

 A couple problems that may be causing of some of the sell off in the stock. 

1. Midway due to delays in reaching production has experienced an estimated US $5 million dollar shortfall. I believe although this is an issue to be concerned about it will work itself out soon. The lender would be crazy at this point and so close to production not to extend more money. Lenders tend to be sharks though and hopefully production can start pouring some gold and Midway can meet covenants. 

• Midway has drawn $47.5-million (U.S.) of the $53-million (U.S.) project finance facility held with Commonwealth Bank of Australia (CBA). The company is required to satisfy certain covenants, tests and obligations related to the facility, including schedule and other contingencies, in order to continue to draw amounts available under the facility and to remain in compliance with its terms. Based on current projections, a two-week delay from an internal targeted mid-March pour will likely now result in a working capital shortfall of about $5-million (U.S.). In addition, Midway is working through the terms of a credit amendment with the lender. As a contingency, these terms may require the company to finance project working capital for a scenario under which first production is assumed to be May 1, 2015, and potentially defer project distributions that could increase corporate working capital needs from prior estimates. The company’s performance in the coming weeks will affect the amount of these contingencies, and Midway is evaluating alternatives to finance working capital needs.

Note: Midway Gold’s new CEO is William (Bill) Zisch who recently was VP one of the largest gold streaming companies in the world (Royal Gold). As VP of operations for Royal Gold Mr. Zisch will have plenty of experience and contacts with financing and funding deals so I expect this to be very beneficial with the current situation Midway is in.

 2)  Ore grades –  This is also a worry for investors. It is too early to say whether or not this will be an ongoing issue and Midway has been very quiet on details. 

• Early sampling of ore grades have generally been below modelled grades, with tonnage variances being both positive and negative. As is appropriate during the start-up of a mine when observing initial variances averaging below expectations, the company has engaged an independent engineering firm to review modelling, sampling and assaying practices to gain an informed understanding of tonnage and grade variances to date. Sustained gold production from the heap will provide an additional data point from which to complete an assessment of initial model performance, and will provide the first estimate of actual gold recoveries.

 Initially this was a big concern of mine until I did some more research on the project economics. 

These economics are some of the best of any current development project and gives Midway a little breathing room if grades are lower than expected. The following chart provided by Midas Gold shows the Pan project as a low cost producer.

Obviously if the grade is lower this will have a big effect on the cash cost but at this point we do not have enough info from Midway to make an educated guess on how much. I did pull the following sensitivity analysis chart from the 2011 Feasibility Study to have a look at though.

At these prices I believe the opportunity is there for investors to buy Midway stock. I have purchased shares and am therefore I am biased. I easily could be wrong but I have a hard time seeing Midway at these levels 6 months from now unless something crazy happens. That being said quite often something crazy does happen with mining stocks but I am comfortable taking that risk in this situation.