As most here know, SFMI leases their claims from the "parent" company, Goldcorp Holdings, GHDC. Once SFMI starts producing revenue, GHDC gets $1m/yr, plus some other smaller "fees", plus 15% off the top of any revenues. GHDC will have minimal expenses, since SFMI will be doing all the work. I'd like to see a discussion of how the two companies should be valued relative to each other. I've recently built a position in GHDC thinking that it is at least as undervalued as SFMI. I'll start off the discussion:

Both companies have about the same number of shares outstanding, so the share prices can be compared directly.

For simplicity's sake, I think the $1m/yr can be ignored if the revenues for SFMI are anywhere near expected, especially once SFMI starts mining the high grade stuff. I'll also ignore debt repayment by SFMI, since it's pretty minimal. So it's a matter of comparing net revenue for the two companies (assuming share price is the same multiple of net revenue for both).

GHDC will get 15% of revenue. That's pretty simple. How much of net revenue will SFMI get? Let's ignore silver, and concentrate on gold. Assume $1000/oz (it makes calculations simpler). Initially, during the processing of the "tailings", SFMI should have expenses of maybe $150/ton, since it's just a matter of hauling and milling the tailings with no mining required. If the tailings are 6g/ton, that's $750/oz costs. GHDC gets $150, leaving $100 for SFMI. So at lower grades, GHDC should be valued at least as much as SFMI, maybe much more. At grades of 1oz/ton, though, at costs of $150/t, that's $150/oz costs, $150/oz for GHDC, and $700/oz for SFMI. So at higher grades, SFMI is worth maybe 5x GHDC. It can be shown (I won't do it here), that as grades go higher, the price of gold (and silver) goes higher, the amounts processed go higher, and costs become a smaller percentage of revenue, then the ratio of net revenue approaches 85:15, with SFMI worth 5.7x GHDC. 5.7 is the maximum multiple, which derives from the fact that GHDC gets at least 15% of revenues with essentially no expenses. So if SFMI is priced at more than 5.7 times GHDC, then GHDC is the better value. Right now the prices are .14 and .022, a multiple of 6.4, which is not far off the calculated number, with GHDC a slightly better value.

This is all oversimplified, of course. GHDC will always be worth more than calculated here (the multiple can approach 5.7, but never exceed it), simply because it has no real expenses. I've also ignored the $1m GHDC gets every year (which will be more important during early stages before revenue ramps up). And if you're thinking really long term, at the end of the 15 year lease, GHDC will still own the mines.

As I said, I've built a position in both. If I buy any more right now (I'm already overloaded in both), I think I would buy more GHDC.

Any comments from the peanut gallery would be appreciated!