Almaden Minerals (AAU): Six Reasons Why We Think This Stock Is Fool's Gold

By Sonya Colberg, TheStreetSweeper Senior Editor

Almaden Minerals ( AAU ) stock has shot up following a report on a highly speculative gold mine projected to cost more than $1 billion - nearly a thousand times more than the company's cash reserve.

Pushed by professional promoters, the stock has risen to unsustainable levels even as company losses have rushed on beyond $59 million.

Before any more investors put another penny into this kettle of fool’s gold, we present this executive summary highlighting investors' downside risk:

*The company kitty contains only several million dollars, yet its sole mine prospect, the Ixtaca project, would cost over $1 billion total; $28 million for construction alone.
*Ixtaca’s large pits appear to be economically marginal or unfeasible, suggest notes by authors of a preliminary study.
*The company justified a likely pending stock offering by pitching its $6.5 million option deal to buy a Nome, Alaska mill as a way to reduce Ixtaca expenses.
*Unaware of the likely stock dilution, the market actually pushed up the stock price ... primarily thanks to professional stock promoters.
*Institutional interest is minimal and five of those banks have recently sold out of their Almaden holdings.
*Almaden's largely inferior financial position, low return on equity and other notable weaknesses spurred a recent and rare "Sell" rating.

Investors may find other viewpoints here . Meanwhile, TheStreetSweeper offers the following six reasons that Almaden stock appears poised for decline:

*1. Ixtaca Project: Risky $1 Billion Bet

The stock recently escalated virtually overnight to a 52-week high , following a preliminary study indicating the Ixtaca project in Mexico may hold possible gold and silver reserves.

But the market apparently didn't realize that any future Ixtaca mining would bust the budget.

Construction costs alone, according to the pre-feasibility study, would take $28 million. And total initial costs could reach or exceed a whopping $100.2 million .

Stunningly, construction costs plus sustaining costs associated with the Ixtaca project are expected to exceed $1.1 billion (table 1-5 ).

Yet Almaden's cash is a tiny, tiny sliver of that amount.

(Source: Company SEC filings )

Our estimates are based on cash reserves falling to just $6.2 million on December 31, and a burn rate of about $2.47 million a quarter.

Projecting those assumptions over 1 ½ quarters, cash has now probably dropped to between $2.5 million and $3.7 million …  about 10 percent of construction requirements, about 2 percent of needed initial capital and a fraction of a percent of the sustaining expenses, assuming mining ever takes place.

*2. Non-Cherry Picked Pit: Negative Financial Returns

Ixtaca’s large pits - which were not selected for study - appear to be economically marginal or unfeasible, suggest notes by authors of the preliminary feasibility study.

While the pits that were selected for study may produce minerals worthy of mining and could perhaps pay back in 2.6 years, authors say it’s all very risky …

“The economic results are based on the potentially mineable tonnages in the selected ultimate pit…The reader is further cautioned that the preliminary economic assessment is preliminary in nature, and that there is no certainty that the preliminary economic assessment will be realized.”

Most importantly, authors wrote:

“The selected (undiscounted) ultimate pit limit is chosen where the incrementally larger pits produce marginal or negative economic returns.”

So in a nutshell, authors suggest: the larger mining pits likely will pay off very little or won’t pay off at all.

*3. Previous Action: Dilution Looms

Just last October, Almaden announced what amounts to three years of stock dilution required to buy a mine that was mothballed over seven years ago.

The company pitched a $6.5 million option deal to buy the Nome, Alaska mill, saying the deal could reduce Ixtaca ramp costs by $70 million - an arguably highly inflated guesstimate - to an estimated ramp cost of $174 million.

“The Rock Creek mill only operated for several months before the mining operation was curtailed in 2008 and has been kept in excellent condition during subsequent care and maintenance. ”

The old equipment will be dismantled (Almaden contends in an email to us that the equipment isn't really old - just used six weeks and has been on “care and maintenance” since it was mothballed back in 2008). Then the equipment will be barged 4,300 miles from Alaska to Ixtaca east of Mexico City, Mexico, for possible use at Ixtaca.

Almaden’s corporate development vice president, Donald McDonald, told TheStreetSweeper that the company has depended on stock offerings and joint venture-sales deals to operate for 30 years. And “continued development activity at Ixtaca is subject to our ability to raise capital from equity, debt and/or other traditional sources…”

So the deal would likely dilute shares if Almaden proceeds with the option to buy Rock Creek by 2018.

Yet the market happily bought into the story.

Here’s why …

*4. Hello: Stock Promoter

Almaden’s stock recently went crazy following an e-newsletter campaign launched by professional stock promoter Broad Street Alerts.

On April 7, 2016, a release headlined, “Compelling Gold and Silver Project at Almaden Minerals,” promoted the company report, here . The author was paid up to $250 a shot for redistribution rights and Broad Street cautions:

“Our reports/releases are a commercial advertisement and are for general information purposes ONLY. We are engaged in the business of marketing and advertising companies for monetary compensation.”

TheStreetSweeper asked if Almaden managers were aware of the Broad Street promotion or made any sort of payment to the firm or its associates.

“To my knowledge no-one in this firm has ever met anyone from Broad Street Alerts. We did not pay them or interact in any way in respect of any write up they have done,” Almaden’s Mr. McDonald responded in an email.

He attributed the stock price increase to “a resurgence of interest in the sector.”

We find it amusing that instead of saying, “We like gold and silver, so we recommend buying the gold-silver index,” some kind-hearted promoter pushed a highly speculative mining company with “ no revenue from mining operations,” very little cash, and barely hanging onto its New York Stock Exchange listing.

*5. Institutions to Almaden: Thumbs Down

Almaden has attracted virtually no institutional interest whatsoever. Institutions – most of which are virtually unknown - make up less than 1 percent of all investor holdings.

(Source: Nasdaq )

Just as significantly, only one institution has bought shares recently.

(Source: Nasdaq)

As the charts above show, the stock attracted just that single new buyer … compared with five institutions that recently sold out.

And institutions aren’t the only ones yelling “Sell”….

*6. Analyst Rating: Sell!

Until now, no analysts have bothered to cover the stock. But weak financials have earned Almaden a “Sell” rating from The Street Ratings, as reported in an April 17, 2016 note to investors.

(Source: The Street Rating)

Almaden reports negative earnings of $-0.23, twice as bad as the negative earnings the previous year of $-0.10 per share.

Net operating cash flow plummeted to the negative range of $-1.12 million … a stunning 153 percent drop compared to the same quarter last year.

Almaden has performed as bad – and often - worse than its peers in many metrics.

(Source: The Street Ratings)

*Conclusion:

Almaden has failed to produce sales from mining operations over three decades and continually leans on stock offerings – including 4.5 million shares sold privately for 75 cents each just last November.

Some institutions, analysts and auditors (Deloitte resign ed in January) are telling the company “Bye-bye,” even as the company and promoters push a glittering, arguably unbelievable, story of someday hitting gold.

We believe all that glitters is really just fool’s gold. TheStreetSweeper fully expects shares to soon plunge to a much more reasonable valuation of about 30 cents apiece.

* Important Disclosure: The owners of TheStreetSweeper hold a short position in AAU and stand to profit on any future declines in the stock price.

* Editor's Note: As a matter of policy, TheStreetSweeper prohibits members of its editorial team from taking financial positions in the companies that they cover. To contact Sonya Colberg, the author of this story, please send an email to scolberg@thestreetsweeper.org .