BY EDWARD VRANIC
This is my first individual stock-focused write-up for Cap Circle. I am optimistic that this organization will become a marketing leader for North American small caps across a variety of industries. But of course, launching a newco in capital markets is not for the faint of heart – Cap Circle is in the beginning stages of building out its base of satisfied customers, so it must start somewhere and the junior gold market is speculative but heating up!
One such company is Element79 Gold Corp. (ELEM.CN) (ELMGF). I have known this story for a while and was initially attracted to it primarily for two reasons. First, I liked the business model of the Lucero Project in Arequipa, Peru. While ELEM may not have recorded revenue, the project itself is active with artisanals profitably extracting minerals. The company was in the process of working with local officials and community leaders to share in the wealth. It also holds the knowledge of the location of additional veins once the currently tapped ones dry out, acting like a “fail-safe” should relations with the locals deteriorate. Second, I appreciated that now-outgoing CEO James Tworek was a Bay Street financial type who is focused on sector-agnostic projects that have the potential to be immediate cash flow generators, like Lucero. Exploration companies tend to be led by these mavericks who enjoy the chase of finding gold as opposed to trying to run a profitable business or achieving an exit. There is nothing inherently wrong with that, but it’s just not how I prefer to invest. Element79 was different.
I never pulled the trigger on an investment in ELEM. Luckily for me, as it has been nothing short of a disaster for shareholders. The chart has been a ski slope from (split-adjusted) $2.00 back in late 2022 to $0.04 today. A lot of stocks on the TSXV or CSE have tanked mightily since the 2021 COVID hype days, but ELEM’s drop is extreme even within this context. A lack of progress and eventual Force Majeure Event at Lucero to temporarily halt payment obligations by Element has been the prime reason for the tank. The rest has been due to the obscene level of dilution from approximately 10 million shares back in 2023 to 108 million today.
The balance sheet as of May 31, 2025, shows that the company has minimal cash, $1.2 million in a working capital deficit and shareholder’s deficit of $2.6 million. The company’s most liquid asset is its 2.7 million shares of Sun Silver, which at the date of the financials were worth $1.7 million. Sun Silver has increased in price since the end of May, so shareholders have an upward revaluation to look forward to in the next set of financials. However, that won’t be enough to move the needle when it comes to needing an injection of cash. Shareholders and prospective investors need to be aware that on top of the already heavy dilution in the past, they can expect more to come.
Given the history of past dilution, the need for future dilution and an unclear timeline for moving forward with Lucero, I was initially hesitant to bother covering the stock. I made it clear that if I did, I would pull no punches on what I found to be negatives or red flags. It was fellow Cap Circle associate Ryan Yanch who convinced me to give it another look. While most of us are holding a portfolio of small caps that came well off their COVID government money highs, Ryan was pounding the table on Enterprise Group, Inc. (E.TO). That stock has been one of the few Canadian microcaps to be a steady climber since 2021. So I figured he might see something worthwhile and insightful on ELEM too.
As Lucero sits in limbo, dependent on the politics of the region, the company has tried to shift focus to Nevada with its Elephant and Gold Mountain Projects. I would consider both projects to be early-stage gambles. While it’s a valiant attempt to get some nearer-term news flow, I view the shifting focus towards Nevada to be a distraction until the company can make progress at Lucero. There is no shortage of explorers that have plotted land and began drilling in Nevada. Many of those companies have better balance sheets, the cash needed to drill, have more advanced stage projects and more connections and experience in the region than ELEM. If ELEM makes this region its prime focus, it’s going to get lost in the shuffle on Bay Street. In my opinion, the stock will live or die on the progress of its Peruvian asset.
So if I don’t like the threat of dilution and I don’t care for the shifting focus to Nevada, what is the bullish investment thesis here? Most exploration or startup mining companies in ELEM’s position of shareholder destruction are there because they failed. Their drilling results were dust or their mine had cost overruns that destroyed an overleveraged balance sheet. ELEM is unique in that it’s the slow pace of local Peruvian politics that is causing the company grief, not the viability of Lucero itself. With 108 million shares outstanding and at a price of $0.04, ELEM is trading below a $5 million market cap. It’s priced essentially as a call option on the hopes that Lucero one day gets back on track. When there was positive sentiment around this project, the stock was trading around a $20 million market cap. Even if the company was to dilute itself by 50% so that there are 160 million shares outstanding, simply returning to somewhere around the$20 million market cap level would lead to a stock price in the $0.10 to $0.15 range.
There you have it. A whole bunch of paragraphs to explain why ELEM has been a bad stock with a lot of challenges moving forward. One paragraph at the end to explain the bullish investment thesis. But the advantage to that is that thesis is easy to understand. It doesn’t need much more than a paragraph, unless readers want to pretend that I’m an expert on Peruvian sub-national politics who can provide insight as to the timing and likelihood of Lucero getting back on track for ELEM.
The thesis is simple. If Lucero advances, so does the stock. Likely to the point where one has at least a double and maybe up to five times their money relatively quickly after the positive momentum is fully appreciated by the market. If Lucero doesn’t advance, investors likely have another zombie gold stock in their portfolio with a couple of Nevada Hail Marys. Probably a 50% to 75% loser from this already depressed level. The risk-to-reward trade-off is pretty good, even when explaining it in a somewhat cynical way. Just manage the risk accordingly.
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