Sunday, November 28, 2010

Why I bought Victoria Gold (VITFF) after the Drop - Newmont(NEM) and Kinross (KGC)

Why I bought Victoria Gold (VITFF) after the Drop - Newmont(NEM) and Kinross (KGC)
November 28, 2010
By: Marco G.

I was browsing the internet and I found a reason that explains why I intuitively bought Victoria Gold after they declared an error on November 23rd, 2010 in their April, 2010 43-101 assessment of their Cove gold project in Nevada. Adam Hamilton of Zeal, was writing zealously about the market's typical over reaction to bad news. See the chart following depicting the sudden drop in VITFF's share price after the news of the error: (Click to enlarge)

That is reason number one, the market typically over reacts, and the price should stabilize and regain some of the loss. I intuitively, knew, that something was wrong in such a large drop, and thanks to Hamilton, he provided an article that details the market psychology that typically over reacts to the down side on any bad news.

Reason number two, is that I had been researching recently, about Reserve Recognition Accounting (RRA) and the rationale of reasonable certainty, that is expressed in the security regulations about the reserves and resources of oil and gas development firms. This is very similar to the reserves and resources definitions used by the Canadian NI-43.101 standards, used by most mining companies. So that morning, Victoria Gold had declared an error, that may invalidate the Upper Zone of their mineral resources in their Cove project as given in their March 5, 2010 NI 43-101 technical report.

Upon reading further in the release, the error was to do with four historical drill holes done by their predecessor explorer Echo Bay Mines. The impact was that the calculations for the inferred resources would have to be re-done, and possibly the resources would not meet the guidelines for inclusion as a resource. Oh horrors, the inferred resources, which in itself is the most uncertain of the resource categories, may be invalidated and may not meet the guidelines for inclusion. As to this layman's interpretation of the importance of this revelation, I believe, it matters not one iota. The mineral resources did not disappear off the face of this planet. They may merely not meet the NI-43.101 guidelines for inclusion in the stated resources, which to me, is no big deal, since it was an uncertain category to start with. Victoria gold only needs to just poke further drill holes in there for more certainty, and they will come back into the definitions.This estimation error in the NI-43.101 technical report for Victoria's Cove project in Nevada does not merit slashing 20% off the market valuation of Victoria Gold, and so I bought some shares after the decline.

Reason number three was that I knew Kinross Gold Corp (KGC) holds 20% interest in Victoria Gold. In fact Kinross was so diligent, that they actively participated in the August 24, 2010 private placement, maintaining their 20% share of Victoria. Also, I knew that Newmont Mining (NEM) holds rights of backing into this Cove project should Victoria meet some progress criteria.Victoria having two large gold miners invested in and interested in their projects does provide a measure of support for my own evaluation of value in this company. The kicker came when I listened to Victoria Gold's hastily convened conference call that morning. They disclosed that the error was discovered by a third party performing due diligence upon their reserve and resources information for another party that is in the mining business. Well, did I just hear the "ka-ching" of the gains coming, in the buy-out offer to come?

Disclosure: The author is long Victoria Gold (VITFF, TSX:VIT).

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  1. Hi Marco,
    Are you still holding as now Victoria is at 0.87$?

  2. Yes, I am holding a core of Victoria bought at around $1.04 and now I am underwater.

    Marco G.