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With gold futures turning back up, junior gold miners should sparkle
Topics: Uncategorized
Readers of this blog know that I have been bullish on gold for some time. Even in recent weeks, with central banks dumping bullion and most commentators calling for a broad retreat in commodity prices, what has surprised me most is how little gold prices have actually dropped. The weekly chart shows that the yellow dog has put in a series of higher lows since late 2006. Like Bill Cara and James Sinclair, I believe that gold is headed for a retest of 2006 highs. If so, junior mining shares should profit handsomely. Like natural gas five years ago, the precious metal majors can replace and grow reserves more cheaply by acquiring junior mining companies than by virgin exploration. That doesn’t mean that I expect all of my gold holdings to be acquired. Rather, the prospect that they might be acquired should provide a higher upside as bullion prices increase relative to the majors. Mid-tier mining companies also are likely acquisition targets. Since I don’t know which junior mining company will become Wall Street’s next darling, I spread my gold positions across several junior and mid
-tier companies. I like each for different reasons, but the list is by no means intended to be comprehensive. There are plenty of good mining companies out there. Juniors I currently own:
- U.S. Gold (UXG): former Goldcorp CEO Rob McEwen seems to be lining up another world-class claim in Nevada. Its risky, but McEwen has a huge amount of his own capital in the venture. I want to bet alongside him.
- Tanzanian Royalty Exploration (TRE): royalty structure founded and run by James Sinclair, who continues to increase his ownership stake.
- Crystallex International (KRY): Sure, there is a chance that Hugo Chavez will rescind the mining contract for the Las Cristinas mine, or that the needed environmental permit will never come through. But if Crystallex gets the permit, a double or more should be easy. By all accounts, Las Cristinas is a phenomenal property, and its in Venezuela’s interest to get it mined. Bill Cara has called this the Stock of the Year for 2007. Cramer says avoid. I say avoid Cramer and stick with Bill.
- Goldenstar Resources (GSS): I just bought Goldenstar last week. Technicals are great–a breakout from prolonged consolidation, followed by a retrace to the point of breakout. Fundamental performance leaves a bit to be desired, but I’m willing to give GSS a little leeway.
- Western Goldfields (WGDF.OB): My most recent purchase, last Friday at $1.98. Shares look like they are breaking upward out of consolidation. Cara says "This one is a winner on all counts. I don’t think WGI.TO will be trading at a low price for long." I think his analysis is spot on.
I also own shares in the following larger companies: Goldcorp. (GG), Agnico-Eagle (AEM), Gold Fields (GFI), and Meridian Gold (MDG). As always, I will scale out portions of these positions into rallies. On a serious pullback, I’ll reconsider the entire position. DISCLOSURE: I am long UXG, TRE, KRY, GSS, WGDF.OB, GG, AEM, GFI, MDG. I presently have no position in gold futures. Not a recommendation to buy or sell any security. For informational and educational purposes only.
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Hi MS,
I have been following an exciting story for a few months now and wanted to share it with some of your readers to get additional feedback. A few months ago, I sent a similar e-mail to the CEO of Nautilus Minerals (NUS.v or NUSMF in the states) a small company ($600m+/- MCap) wondering if he might be able to provide some perspective for me on the scale of their truly unique seafloor mining opportunity. It seems to me the relative richness or cheapness of NUS’s shares depend upon the tonnage of extinct smoker sulphide deposits that exist.
One way to value the venture would be to back into the valuation. (numbers based on prices at the time I wrote this to Mr. Heydon) At between US$3.75 and US$4 per share, NUS has a fully diluted MarketCap of approximately US$600 million. Looking at mining comps I note that companies with market caps about 8 times that or US$4B – $5B have annual revenues of between $350M (Minas BV SA), $510M (Agnico-Eagle) and $700M (Kinross).
So in essence, new investors would be paying fair market value if NUS were finding 1/8th the revenues as the above (assuming a similar cost of extraction): $40M to $80M worth of gold, silver, copper etc. Some quick math using current spot prices would indicate that you need to be able to find about 85,000 tons of material with mineral levels equivalent to (these are lower numbers than the NUS website touts from a previous find):
8 g/t gold
220 g/t silver
8% copper
3% zinc
So how many tons of cold smokers do you estimate are available? In the world? Just in your 15,000 mile PNG concession? There are thousands of miles of fissures throughout the Ocean bottoms, some are not readily reachable due to prohibitive depth. But this might be a problem that future technological advancements can sovle while the low hanging fruit is plucked closer to shore. I am long a starter position in the name (few 1000 shares) but would consider loading up if more certainty could be established.
Their story gets me going everytime I hear/tell it. Any thoughts?
CP
Thanks for your comment. I have not had time to take a close look at Nautilus, but I’d be very careful about extrapolating ratios from operating companies onto an unproven junior miner, especially one that plans to mine underseas.
Do they generate any revenues currently? If so what are their lifting costs and total costs per ounce?
Also keep in mind the cost of carry and dilution when valuing reserves.
What do you think are the best sources for information on Nautilus besides the company’s website? As a pink sheets co. it doesn’t file periodic reports with the SEC. Not sure about SEDAR.
what are your stops for UXG ?
Amit,
I’m more than happy to discuss ideas and even entry points, but I don’t share specific stops.
I don’t do it for two reasons. First, it would allow readers to shoot against me. Second, stops are only a part of my money management scheme, which also involves position sizing and systematic scaling out. I’ll talk more about the scheme over the course of the summer.
[...] producing mine and to establish a platform for the growth of Western Goldfields.” With the stock up over 30% since my purchase two months ago, I don’t mind [...]