By Kishori Krishnan Exclusive To Gold Investing News
What gives with junior gold miners? Many say we haven’t seen anything yet, and that some juniors are set to outpace the pack. But how could that be true?
The fact of the matter is that global gold output has been dwindling by nearly 5 per cent per annum since it peaked in 2001. For the past one decade, there has been hardly any new big gold discoveries. And, the new ones detected in this decade have not been that easy to dig out.
The reasons are clear: all the easy mines have already been explored and the world is clearly heading for a shortage of the yellow metal. Incidentally, the scarcity of world-class gold discoveries is already taking a toll on the mining industry’s bottom line.
In North America, output has dropped over the last decade from 17.06 million ounces in 1998 to 10.59 million ounces in 2008. Historically gold-rich territories like eastern Canada’s Abitibi Greenstone Belt and Nevada’s fabled Carlin Trend have failed to yield any monster gold finds in recent years.
Even geologists are running out of virgin geological terrain that is prospective for the discovery of giant outcropping ore bodies.
So, how can these juniors show off their mettle?
Under the spotlight
What exactly do they have going for them? An attractive price to EBTDA (and price to operating income) ratio like Alamos Gold (AGI), Minefinders (MFL), Oceana Gold Corporation (OGC.TO), and New Gold (NGD) have set for them?
Or does one stick to those with superior ore grades, which should result in a very-low cash-cost? Like what Gold Resource Corp (GORO.OTC), Troy Resources (TRY.ASX), or Dynasty Metals And Mining (DMM.TSE) have going for them?
What about the risky ones, which have a political risk associated with their exploration properties? Like CGA Mining (CGA.TSE), Rusoro Mining (CVE:RML), Capital Gold Corporation (CGLD.OTC), and Castle Gold (CSGLF.PINK), all of which are trading at less than a $1 each.
Why are some junior stocks the fancy of investors? And what do they have to account for their bull run? After all, it should be a matter of concern that some juniors have started outperforming gold, trading at multiples of 100 per cent to 500 per cent of levels seen last year.
Some analysts maintain that Canada’s mid-tier gold producers offer investors an attractive alternative to the senior gold producers.
That despite lacking the liquidity and scale of the seniors, the emerging mid-tiers have the ability to offer more attractive growth profiles as well as the potential valuation rerating as they move up the production chain.
San Gold Corp (CVE:SGR) has been rated `Outperform’, with a $3.60 target price.
Aurizon Mines Ltd (ARZ) has been rated `Market Perform’ with a $6 target price.
Gammon Gold Inc (GRS) has been rated `Market Perform’ with a $10.30 target price.
The fact of the matter is that people are starting to see beyond the credit crisis. And for those juniors that have good assets and have cash, there appears to be a growing audience.
Why, then, are their stock prices going down?
Gold prices have shot through record highs two weeks ago and have since stayed in a lofty range of $1,050-$1,060 an ounce, due largely to a plunging US dollar.
Two years ago, similar circumstances would have sparked predictions of an mergers and acquisition (M&A) feeding frenzy, but acquisition-minded miners are now exercising caution in valuing targets.
Why is that? Aren’t the record gold prices an ideal bait?
Fears of gold price retreating could have kept M&A’s at bay and investors should realize that some juniors could well go belly-up.
After all, no investor wants to end up acting like a newbie at a horse race - placing bets based on the name of the horse or the flash of the jockey’s colors.
So, one should train one’s sights on finding deals that could add value to the portfolio. Though funds are putting cash back into the junior gold sector, they are also being selective about where it goes. Details like resource potential and political risk actually matter again, which was not always the case in the heady days of 2004 to early 2008.
Moreover, there are frankly very few quality stories that have the potential to be mines. For, there has been a Darwinian culling of companies.
So, how does one separate the wheat from the chaff?