Ignore Gold Explorers, Focus On These Miners Instead - Analyst
(Kitco News) - While explorers in the mining sector have received the most attention from investors in the last two years, one analyst said that mid-tier gold producers have the most potential right now.
Speaking at Xplore 2017, the QuĂ©bec Mining Exploration Association’s annual conference, Shane Nagle, director of market analysis for metals and mining at National Bank, said mid-tier gold companies will be most active in the gold space as they acquire profitable projects to increase production pipelines.
The growing problem within the gold sector is the issue of “peak” gold, and Nagle noted that there is a growing dearth of major greenfield discoveries, with very few projects in recent years showing resources of more than 5 million ounces.
Nagle added that between 1990 and 2015, mining companies spent a total of $54 billion on discovery exploration but during that time, the number of major discoveries has consistently dropped.
Nagle said that most major gold producers are looking to develop deposits with at least 275,000 ounces, adding that anything less would make the project economically unviable. According to National Bank’s research looking at 930 assets, 88% of deposits are less than the minimum threshold.
In this environment, Nagle said that mid-tier companies have a little bit more flexibility to develop some of their smaller resources.
“Senior producers spend their existence operating in the tail of the distribution curve, while intermediate and junior producers benefit from broader availability of mines or projects of a size that can make a difference,” Nagle said in his presentation.
While some analysts see gold explorers having the most potential in the marketplace, Nagle noted that this segment of the sector has already seen a significant rally in the last two years, rising 263%.
During the same time period, gold prices were up 11%, while mid-tier producers are up 94% and senior producers up 60%. Junior gold producers have seen the least investor interest within the sector, rising 25% in the last two years.
However, Nagel pointed out that senior gold producers have the highest premium with the segment trading with a 1.25 multiplier against their net asset value.
Intermediate companies are trading at a 1.03 multiplier, which Nagle said means there is more value for investors as these companies look to add deposit to their production portfolios.
The one risk that is still an unknown for mining companies is whether or not gold producers have learned their lessons from the previous bull market. In 2011 as prices rose, companies took on more and more debt and over-paid for assets, which led to a five-year bear market as gold prices from their highs.
“Companies are saying the right things now but who knows what will happen when more money becomes available,” he said.