With renewed strength in gold and reading a few articles/tweets from good analysts that expect gold to be ending the year not far from its all time highs, I thought it would be timely to just do a quick post about what my focus is at the moment in terms of miners.
Scenario: Let’s assume that gold is in a real bull market and that the metal will be close to $1,800 year end
In this scenario, I would lean towards buying PROVEN plays with bankable gold. It would also probably be an OK time to pick up some optionality/leveraged plays.
This would not be the time to bet on high margin companies that are trading at a premium in terms of P/Ounces and/or P/Production etc. These companies will benefit the least from a rising gold price and on top of that, they are probably already relatively expensive since the market often assigns a premium for down side protection (high margins).
This would also not be the time to pick up companies that does not own assets with a long life or little to no growth in sight (especially if they have a high EV/ounces number). This is because a rising tide lifts all boats, which means that any company with low internal growth potential will have to buy assets to remain exciting and you don’t want to own companies that will be forced to pay X times the price it would cost to buy the same asset just a couple of months earlier. A developer/exploration company might do fine if it has a large project/projects with a lot of blue sky potential left, but that is still unproven, and you will miss out on the bankable revaluation from bankable ounces if the exploration efforts fail.
Worst case scenario would for example be owing sub par exploration stocks in a $1,800 gold environment with no gold in the ground to get beta returns from. There is no bankable value appreciation opportunity for a pure green field gold exploration company that hasn’t found anything if gold goes to $10,000 tomorrow. On the other hand, even a junior with a small proven resource would see their in-situ gold value shoot up enormously in that case. One must not forget how much money, time and attempts a typical explorer must go through in order to even find and drill up a 1.0Moz deposit and there are companies out there that have successfully done all that and are still trading not that far off from some of the grass root exploration companies. The only exploration companies that I am interested in currently are the ones that have a chance to find something huge. Otherwise I don’t think the Risk/Reward is favorable compared to simply buying banked success.
Also, I would not prefer to buy the bear market champions, namely the streamers and the prospect generators who inked their deals during the bear market. First of all the streamers will benefit least of all from a gold bull, and many of the although efficient prospect generators might not have a lot of beta exposure if they do not find something big and economic.
With that said, there is merit to keep holding the best of the best even in these latter categories. Kirkland Lake (High margin producer with tier 1 assets) and the well run streaming company Sandstorm are good examples. One should also not forget that the volatility (beta) will often be higher for companies with banked resources and/or producing companies simply because the company has something real that is directly affected by the price of gold.
Remember, this is a very risky asset class to begin with, so betting on a gold bull through higher beta companies is not for the feint of heart or risk averse.
Disclaimer: This should not be viewed as investment advice. I am only airing what I am currently focusing on with my own money.
The Hedgeless Horseman
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