Fiat 'Losing Credibility' Means GOLD Can Only Scream Higher

Key Concepts

• Gold as a Stable Asset: Gold's historical role as a store of value and its increasing appeal in a world of fiat currency devaluation and increasing debt.
• De-dollarization: The global trend of reducing reliance on the US dollar for international trade and reserves, with gold emerging as an alternative.
• Mining Sector Valuation: The current undervaluation of gold mining companies, particularly developers and juniors, despite rising gold prices and strong fundamentals.
• N2 Gold Project: Formation Metals' flagship asset in Quebec, characterized by a large, open, disseminated gold system with significant growth potential.
• "Boring Sexy" Mining: The strategy of focusing on large, consistent gold deposits rather than high-grade, narrow veins, which is deemed more conducive to building a mine.
• Capital Structure and Management: The importance of a strong balance sheet, experienced management, and aligned insider ownership for the success of junior mining companies.

Gold Market Catalysts and Global Economic Indicators

The conversation begins by examining the strong performance of gold in the current year, reaching all-time highs and currently trading around $4,100 per ounce. Deepac Varsn, CEO of Formation Metals, identifies several key catalysts driving this trend:

• US Dollar Weakness: The election of President Trump and his focus on a weaker US dollar is seen as a significant positive for gold.
• Increasing Global Debt and Fiat Currency Devaluation: The perception that governments can "print money at will" leads to increasing debt levels and a loss of credibility in fiat currencies. This prompts investors to seek refuge in gold, a historically stable asset. The Canadian federal budget is cited as an example of this trend.
• Leadership Changes at the US Federal Reserve: The potential for President Trump to appoint individuals who support his agenda at the Federal Reserve is viewed as beneficial for gold.

Varsn argues that the rise of gold reflects a potential paradigm shift, where gold is re-establishing its role as money in a world where fiat currency creates an "illusion of wealth." He notes that inflation makes individuals feel poorer year after year, reinforcing the need for tangible assets.

De-dollarization and Gold's Role in International Trade

The discussion delves into the concept of de-dollarization, highlighting the BRICS countries' increasing gold purchases as a strategy to move away from the US dollar. The sanctions imposed on Russia and the freezing of their US dollar assets are presented as a critical factor driving this trend, necessitating alternative mechanisms for international transactions outside the US financial system.

• Poland's significant gold purchases are mentioned as a notable example.
• Varsn emphasizes that while currencies like the ruble or yuan are subject to manipulation by their respective governments, gold is an actual asset that cannot be manipulated. This makes it a safer option for countries seeking to conduct trade and settle transactions outside the US dollar framework.

The Potential of Gold Re-entering the Monetary System

Speculation surrounding gold's re-entry into the monetary system is explored, including ideas like auditing Fort Knox and gold revaluation on central bank balance sheets. However, Varsn expresses skepticism about these scenarios:

• Fort Knox Audit: He questions whether the gold is actually present, referencing historical audits and the potential for discrepancies.
• Gold Revaluation: While acknowledging the theoretical benefit of marking gold reserves to market to erase debt, he reiterates the fundamental question of gold availability.
• Gold Standard: Varsn believes a return to a strict gold standard would be unworkable given the current levels of deficit spending and currency printing by governments worldwide. He argues that countries would be unable to print money freely if they were bound by gold reserves.

Despite these reservations, he reiterates gold's crucial role in facilitating trade outside the US dollar due to its inherent stability and lack of manipulability.

The Gold Mining Sector: Undervalued Opportunities

The conversation shifts to the gold mining sector, which has also seen significant outperformance. Varsn, a geologist by training, expresses his long-held belief in the sector's potential.

• Underappreciation of Producers and Developers: He notes that despite the substantial rise in gold prices, the share prices of gold producers, developers, and juniors have not appreciated commensurately.
• Record Profit Margins: Companies are producing gold at their highest-ever margins, even with increased costs of production (ASIC).
• Undervalued Companies: Varsn asserts that many larger gold companies are undervalued, with developers and juniors being even further down this scale. He advocates for investing in undervalued assets with the expectation of future appreciation.
• "Buying for Tomorrow": The investment philosophy is to buy assets not for their current worth but for their future potential.

Formation Metals and the N2 Gold Project

Deepac Varsn provides an overview of Formation Metals, positioning the company as an advanced explorer on the verge of becoming a developer.

• Flagship Asset: N2 Gold Project (Quebec): This project, discovered in the 1980s and 1990s by companies like Agnico Eagle, is described as a significant asset acquired at a time when gold prices were much lower.
• Historical Resource: The project has a historical resource of nearly one million ounces of gold at a grade of 1.5 grams per tonne, located at surface.
• Growth Potential: Varsn believes the project has the potential to grow to 3 to 5 million ounces.
• "Boring Sexy" Approach: The N2 project exemplifies this strategy, featuring a large, open, disseminated gold system with significant strike length and width (up to 1,200 meters at its peak). The majority of the gold is found within the first 200 meters vertically.
• Historical Drilling: Over 55,000 meters of drilling have been conducted by reputable companies, indicating a robust understanding of the deposit.
• "Stranded Assets" vs. Mineable Deposits: The N2 project is contrasted with "stranded assets" that are difficult to develop. The project's location in Quebec, within the Abitibi Greenstone Belt (a prolific gold-producing region), and its proximity to infrastructure and the town of Malartic are highlighted as significant advantages.
• Past Producing Mine Proximity: The project is adjacent to a past-producing mine that was a victim of lower gold prices, underscoring the viability of mining in the area.
• First Nation Support and Infrastructure: The presence of a past operating mine suggests potential for First Nation support and existing infrastructure.

Formation Metals' Strategy and Team

Varsn outlines the company's strategic approach and the expertise of its team:

• "Business Geologist": Varsn, a geologist with a background in entrepreneurship and capital markets, leads the company. His family has a history of success in Vancouver's capital markets.
• Capital Raising Success: Formation Metals has raised nearly $17 million, with a recent financing of almost $10 million. This success is attributed to the compelling story and the asset's potential.
• Strong Cap Table: The company has built its strategy around several anchor investors, with insiders, management, and strategic shareholders owning approximately 70% of the company. The Varsity family office is a significant shareholder.
• Long-Term Investors: The focus is on attracting investors committed to the long term, rather than short-term traders.
• Technical Team: The technical team is associated with Abatubi Metals, a company that has achieved significant milestones, including a recent deal. This provides synergies due to the proximity of their projects.

N2 Gold Project: Progress and Future Plans

Detailed plans for the N2 Gold Project are presented:

• Reclassification of Zones: The six main zones are expected to be reclassified into three, with the A Zone being continuous over 8 kilometers of strike.
• Drilling Program: The company has fully funded 30,000 meters of drilling, eliminating the need for further fundraising until 2027. This provides a significant position of strength.
• Focus on A Zone: The primary focus of the drilling will be on the A Zone, with continued exploration of the RJ East and Central zones.
• "Boring Sexy" Drilling Strategy: The goal is to consistently drill 20-30-40 meter intervals of minable gold (1.5-2 grams per tonne), rather than chasing high-grade, narrow veins. This approach is seen as more effective for building a mine.
• Maiden Resource Estimate: The company anticipates releasing its maiden resource estimate in Q2 of next year, with a target of over one million ounces. This is seen as a significant step towards the 3-5 million ounce goal.
• Financial Strength: Formation Metals boasts nearly $14 million in working capital, positioning it favorably in the current market.

Insider Ownership and Valuation

The high insider ownership (67%) is a key talking point, demonstrating strong conviction in the company's prospects.

• Undervalued Stock: Varsn argues that the company is undervalued, with a market capitalization of around $30 million and a significant cash balance. He estimates the enterprise value for the historical resource to be around $10-$11 per ounce, which he considers exceptionally cheap compared to recent M&A deals valued at $42-$50 per ounce.
• Peer Comparison: Companies like Sitka Gold, with double the resource, are trading at significantly higher valuations, further highlighting Formation Metals' undervaluation.
• Motivation for Buying: Varsn openly states his motivation is to make money, and he believes the stock will appreciate as value is created through results and development.

Key Takeaways for Potential Shareholders

Varsn emphasizes three critical factors for investors to consider when evaluating a company like Formation Metals:

1. Cash Balance: A strong cash position is paramount for executing work programs and generating returns. He highlights that many projects are "stranded" due to companies' inability to raise capital.
2. Enterprise Value (EV): Formation Metals has an incredibly small EV relative to its asset potential. The N2 project is seen as worth multiples of its current trading value.
3. Management: Consistent insider buying, significant shareholdings, and successful capital raises (like the recent $8.66 million financing) serve as validation of the company's strategy and the project's potential. He notes that even after a recent dip in the share price, investors are adding to their positions, viewing it as an opportunity.

Varsn encourages potential investors to research the project, understand the financials, and reach out to him directly for further discussion. He expresses confidence that the N2 project will become one of the next mines in Quebec.