Gold-mining juniors now rule the day. And the secret to their success is discount gold. The real leverage for higher gold prices isn’t hiding in plain sight. It’s hiding in the massive mineral reserves of junior miners. Mentioned in today’s commentary includes: Seabridge (NYSE:SA), B2Gold (NYSE:BTG), First Majestic Silver (NYSE:AG), Great Panther Mining (NYSE:GPM), Teck Resources (NYSE:TECK).
Those miners have recently become the lynch pin for the survival of the entire industry. And there are only three things an investor needs to know in this scenario:
- Discount gold is what you get when you buy shares in a gold company that has proven resources but is significantly undervalued at today’s gold prices.
- Some of these juniors are sitting on gold reserves that could determine whether or not the biggest miners in North America are able to staunch the decline in output.
- Not all juniors are equal.
What’s discount gold today, won’t be discount gold tomorrow.
Take African Gold Group (AGG.V, AGGFF), for instance: It’s sitting on 2.2 million ounces of mineral resources in Mali, and according to a recent report, it has drilled less than 10% of its almost 260 km2 of concessions. The company’s Kobada mine is located right in the middle of one of the hottest mining venues in the world at this moment, and relative to many mines, the company is practically able to scrape the gold from the surface, resulting in comparatively low production costs.
What’s really interesting is that AGG only has a market cap of around $12 million but is sitting on gold reserves worth billions. The thing is, investors aren’t the only ones looking for discount gold: North America’s biggest miners are on the hunt, too.
The Hunt for Discount Gold
Senior minors are running out of gold to mine. Their answer to that is a massive M&A push, so they’re looking for the right juniors to buy out to replenish their reserves. The hunt began in earnest in 2016, when gold output fell for the first time since 2008. Two years later, the trend was set in stone, thanks to ‘peak gold’.
Nothing made the situation clearer than the $18.3-billion mega merger of Barrick Gold and Randgold in 2018, followed by the Newmont Mining’s acquisition of Goldcorp Inc. earlier this year. But now it’s about the juniors.
The cheapest way for big miners to grow is by scooping up juniors who have big reserves, low-cost production and plenty of upside.
In fact, as far back as 2017, big miners were on the hunt for the right juniors. By the first half of 2017, they had invested nearly $300 million in junior exploration companies — the highest level of investment in a decade.
Nearly half of all the equity raised by junior miners on the Canadian TSX exchange came from senior miners in 2017. Now the game seems to have shifted to acquiring junior miners outright, or gradually, through a series of “micro deals”.
All the big miners are doing it. It’s the only way they can reverse the decline. So, who will be the next acquisition target?
Miners Looking To Canada
It’s no secret that Canada is a hotspot for gold miners. The country is rich with resources, and offers a variety of unique plays across its vast terrain. From the major mining giants of the world to junior and medium miners, Canada offers a number of options for a wide range of resource companies.
Seabridge (NYSE:SA), for instance, is an ambitious young company taking the industry by storm. It has a unique strategy of acquiring promising properties while precious metals prices are low, expanding through exploration, and then putting them up for grabs as prices head upward again.
The company owns four core assets in Canada; the KSM project, which is one of the world’s largest underdeveloped projects measured by reserves, Courageous Lake, a historically renowned property, and Iskut, a product of a recent acquisition by Seabridge.
A Global Approach
(NYSE:BTG) is another up-and-comer, except its focus lies on the other side of the world. With acquisitions in Nicaruagua, Namibia, Burkina Faso, Colombia and the Philippines, B2Gold is constantly looking to expand its footprint. And it’s paying off.
In the second quarter of the year, B2Gold posted a record-high production of 246,000 ounces of gold. The company’s production boom is unlikely to slow anytime soon, especially as gold continues to climb. Even if gold does flatline, however, B2Gold is well positioned to weather the market’s wraith, with fully-operational mines and low overhead costs.
Welcome to Mali
Mali is the third-largest producer of gold in all of Africa, and the Birimian Greenstone Belt is the giant sweet spot here. It’s a massive gold belt that spans 350,000 square kilometers, stretching across seven countries.
African Gold Group’s Kobada Project is right in the heart of this.
Some 2.2 million ounces in mineral reserves has already been proved up in a 2016 feasibility study, and as mentioned before, the drilling at Kobada has focused on a tiny fraction of 259km2 of prospective concessions. These 2.2 million ounces, worth some 3.3 billion dollars at today’s gold prices, could be just the tip of the iceberg. Geologists have identified numerous other shear zones through test drilling and regional geology techniques, and African Gold Group (AGG.V, AGGFF) owns all of it.
Another major advantage for African Gold Group is that the gold is very close to surface, and easy to mine. That means it will be low-cost and highly scalable. The deepest hole AGG has had to drill so far has only been 300 meters.
So, what about the discount gold? African Gold Corp estimates all-in LOM sustaining cash operating costs at $788/Oz Au. Right now, gold prices are still soaring, and promising to hit the $1500 mark. With a market cap of only ~$11 million, that is some seriously discounted gold.
It also makes AGG a potential target for the big miners who are hunting for new gold. But this is where the management question comes into play.
The Undisputed King of Discount Gold
Discount depends as much on who’s behind as it does on massive reserves. In June, African Gold Group (AGG.V, AGGFF) reshaped its board of directors and management team, and brought on legendary mining figure and financier, Stan Bharti, of Forbes Manhattan, as Chairman of the Board, President and CEO.
If Bharti is interested, so will be investors. Big miners are likely to have already pricked up their ears. That’s because Bharti knows the value of discount gold more than anyone, and he has even made it work in the middle of a financial crisis. Not only has Bharti been in Mali already for over a decade, but he’s already turned around one company there for 20X profit.
In 2008, Bharti’s Forbes&Manhattan acquired Avion in Mali for $20 million, turned it around and sold it to Endeavour for $500 million in 2012. That Mali mine is Endeavour’s main asset today.
The rest of the new board and senior team is also a discount gold success story that includes the former Canadian foreign minister, the Honorable Peter Pettigrew; Sir Sam Jonah, former Anglo Gold Ashanti CEO; Bruce Humphrey, former Goldcorp COO and Daniel Callow, a Glencore Africa veteran.
Never Better for Discount Gold
Major miners are gunning for junior prospects. The world’s central banks are hoarding gold at a record pace. Talk about the Gold Standard is no longer just fluff. And major world powers are making every effort to disengage from the US dollar.
And gold is about to soar even higher, thanks to new threats coming out of Washington for another round of tariffs on Chinese goods by September. That news has already shot gold up to new six-year highs:
While soaring gold prices might heal the hurt for some of the big miners, they won’t do anything to replenish those dwindling reserves. No matter how much gold is selling for, you still can’t get it out of the ground if you don’t have it.
Opportunities In Diversification
While discount gold is appealing to any investor, there are other opportunities ripe for the picking. Companies that will benefit from the rise of gold, and remain a safe bet if the price of gold were to suddenly backpedal.
Take First Majestic Silver (NYSE:AG) for instance. While it’s primary focus remains on silver mining, it does hold a number of gold assets, as well. Additionally, silver tends to follow gold’s lead when wider markets begin to look shaky. And with analysts sounding the alarms of a global economic slowdown, both metals are likely to regain popularity among investors.
Further boosting its portfolio, the company also entered a share-repurchase program, as it feels that its stock is. at the moment, undervalued, and will benefit all shareholders by increasing the value of the stock.
Great Panther Mining
(NYSE:GPM) is another strong bet with a variety of resources at its fingertips. Based in Vancouver, Great Panther is active in Brazil and Mexico where it explores for silver, gold, lead, and zinc ores. The second half of 2018 has been tough for the midcap miner, but its share price doubled last month, shortly after the acquisition of Beadell resources, which adds another 200,000 gold equivalent ounces to its reserve base.
According to a recent statement in the press, the focus in the near-term will be on the integration of the Brazilian operations, the continued optimization of the Tucano gold mine, and advancing an exploration program to unlock the significant exploration potential of Tucano.”
Now the company has managed to bump production and add to its reserves, the near-term catalyst needs to come from higher gold and silver prices.
Then there’s Teck Resources (NYSE:TECK), one of the best-diversified miners out there, with a broad portfolio of copper, Zinc,energy, gold, silver and molybdenum assets. Its free cash flow and a lower volatility outlook for base metals in combination with a potential trade war breakthrough could send the stock higher in H2 of this year.
Teck Resources recently received a favorable investment rating from Fitch and Moody’s, and will likely benefit from its upgraded score.
By. Joao Piexe
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