Narrow your focus when picking junior gold companies
Kitco Commentaries | Opinions, Ideas and Markets Talk
Featuring views and opinions written by market professionals, not staff journalists.
Gold rallied after becoming very oversold and hitting important support at $1675-$1690, but it could retest that low or make a lower low before a sustained rebound begins.
Regardless of the short-term movements, with Gold having corrected 20% and GDX and GDXJ correcting over 30%, there are some great opportunities to buy quality and there is much better value than eight months ago.
There are hundreds of juniors to choose from, so knowing which to rule out can point your research in the right direction and narrow a crowded field of candidates. In other words, by the process of elimination, you can save time and increase your chances of finding a big winner.
Here are some potential flaws that a junior company could have and possible reasons why their stock isn't performing.
The first is size. The market and mining industry wants at least 3M oz Au deposits and can produce 100K oz Au per year or more.
If the deposit is less than 3M oz Au, it better be able to produce 100K oz Au per year and have strong margins.
The second is the grade is too low. This is a very common flaw. Unless the deposit can be a heap leach project, a grade of around 1 gram/ton or lower relegates it to the optionality category.
Third, is the CAPEX is too high for a junior company to raise on its own. If a good project requires a significant amount of capital to build, the junior may need to bring on a partner. In a way, these can become optionality plays because the ability to finance the project is leveraged to the Gold price.
Fourth is permitting. If permitting a project is difficult or will require more than a few years, then the market will assign low odds to that project becoming a mine. This is not that common of a flaw, but it does exist.
I would also include jurisdictional risk here. Avoid areas and regions in which major companies don't have a presence or operate.
Last but not least is a lack of upside potential in a deposit or the company. The market always wants growth potential, whether it be in an undeveloped deposit or a mine.
It’s also important to factor in the potential cost (in capital and dilution) against achieving the value proposition. Avoid companies where the potential upside is not materially higher than the cost to achieve it.
This list is not the be-all-end-all. It is possible a future big winner could have a flaw or two. Moreover, I'm not against investing in something with a flaw or two if the price and value are right.
However, given where the market is, we can buy high quality at a steep discount. I'm looking for and investing in companies with a defined value, fundamental quality, and the potential to be 5, 7, and 10 baggers when the real bull market begins.
We could be coming to an end-of-quarter liquidation in precious metals. The bad news is prices are going lower. The good news is this should lead to a significant low and sustainable rebound.
In our premium service, we continue to identify and accumulate those quality juniors with considerable upside potential over the next 24 months. To learn the stocks we own and intend to buy that have at least 3x to 5x potential and more, consider learning more about our premium service.