Emerging Gold Stocks: ‘Show
Me the Money!’
www.Top40GoldStocks.com and www.BNWnews.ca
In a jittery stock market, the
only gold stocks that investors should own are for companies that really do have
the goods. This is the consensus view among various gold investment industry
commentators and analysts.
In particular, ‘advanced stage’
gold development stocks offer the best bets for speculative investors, argues Al
Korelin. He is the publisher of the Korelin Economics Report, a longstanding
radio show that covers politics and business news, with a particular focus on
the mining investment sector. By definition, advanced stage gold companies have
sufficiently defined deposits to clearly demonstrate the size and potential
viability of their deposits.
“Just like gold producer stocks,
development stocks are also a pretty safe bet in this market,” Korelin says.
“Right now I’m most comfortable with companies that are exploring to enlarge an
existing asset, as opposed to the ones that are exploring to find an asset.”
Better still are companies that
have sizeable enough gold assets to be takeover targets for mid to large sized
gold producers, he adds. Especially as the world’s biggest, deep-pocketed gold
miners are scrambling to replenish dwindling inventories. And the easiest way to
do that is to gobble up much smaller would-be producers that own sizeable gold
“A particularly good example
that’s a pretty safe bet is be a company that has a significant discovery like
Exeter Resource” Korelin says.
Exeter Resource Corp. (TSX.V:
XRC) (NYSE-A: XRA) is advancing the Caspiche gold-copper discovery in northern
Chile’s prolific Maricunga gold belt (where over 100 million gold ounces are
defined). This veritable monster, which is still growing in size through new
drilling, already weighs-in at 24.3 million ounces gold, making it the second
largest of its kind in Latin America.
Only the nearby Cerro Casale
gold mine in-the-making edges Caspiche in size. Jointly owned by global gold
mining powerhouses, Barrick Gold (TSX: ABX) (NYSE: ABX) and Kinross Gold Corp. (TSX:
K) (NYSE: KGC), it hosts 26.4 million ounces of gold.
‘The bigger the better’ is a
sentiment that is also echoed by Marshall Berol and Malcolm Gissen, who manage
the San Francisco-based Encompass Fund. This small mutual fund, which has a
heavy weighting in mining equities, was ranked as the top performer in 2009
among 722 global equity funds that are tracked by Morningstar, a financial
sector ratings agency.
“Every year, just to stay even
from a revenue and cash flow standpoint, major mining companies need to acquire
large undeveloped gold deposits with a lot of ounces in the ground to replace
their mined-out reserves” Berol says. “And it’s increasingly difficult to find
large gold discoveries. There really aren’t that many left anywhere in the
“So the few junior mining
companies that have made those larger discoveries are the ones that are going to
be extremely attractive takeover targets for the large miners,” he adds. “One of
those companies for example is Exeter Resource.”
“The company’s Caspiche project
is an exceptional resource that sits right between one currently producing gold
mine and another deposit that’s moving towards production, both of which are
owned by major gold companies,” Berol adds. “So it seems to us that a logical
progression is that some major gold producer is going to buy out either Exeter
or the project.”
Other gold juniors that are
developing huge world-class gold deposits include Novagold Resources Inc.
(NYSE-AMEX: NG, TSX: NG), which has two company-maker deposits in Alaska with
combined resources of over 31 million ounces, and Ivanhoe Mines Ltd. (NYSE: IVN)
(TSX: IVN), which is the majority owner of a sprawling 45-million-ounce deposit
However, quality can be just as
important as quantity when it comes to assessing the merits of a gold deposit,
according to David West, a mining analyst for the Vancouver-based investment
bank, Salman Partners.
He says that with less prolific
gold discoveries, investors can often benefit from a very favourable risk/reward
trade-off by betting on higher-grade deposits in mining-friendly jurisdictions.
Especially since the higher the gold grades, the more insulated the project is
likely to be to any volatility in the gold price.
“High-grade deposits can lend
themselves to solid economics, even if the price of gold drops somewhat,” West
says. He cites Extorre Gold Mines (TSX: XG) as an example of an aspiring gold
miner that looks like a winner with the emergence of its modestly-sized, but
richly-mineralized gold/silver Cerro Morro deposit in pro-mining Santa Cruz
Province in southern Argentina.
“What sets Extorre apart from
similar companies is that the Cerro Morro deposit has exceptional gold grades,
which takes a lot of potential mine development risk out of the equation. Its
high-grade and exploration upside makes Cerro Moro one of the better projects.”
Additionally, holding gold
juniors that have solid fundamentals should provide investors with considerable
gains over and above holding just bullion itself, West adds.
“There’s much greater potential
upside for the share prices of these stocks, compared with the potential upside
of owning physical gold. Investors who take further risks by holding equities
require risk premiums, and should receive them over time.”
Another key advantage is that an
asset-rich junior gold stock’s upside does not necessarily have a strong
correlation to bullion prices, he says. If a company develops a rich enough
deposit to warrant a mine, its share price should likely enjoy re-rating once
the mine is developed, regardless of the prevailing trend in gold prices.
Meanwhile, gold’s current trend
is an investor’s best friend, according to Lawrence Roulston. Lawrence is a
certified geologist and an independent mining analyst who publishes the Resource
Opportunities mining investment newsletter.
He says anxious investors in
gold development stocks have little to fear. They should take comfort in the
fact that these equities are underpinned by underlying gold assets, which are
becoming increasingly valuable in a rising tide market for bullion prices.
Not only do gold development
stocks offer considerable leverage to the price of bullion, but many are likely
to seriously outperform the broad markets over time, Roulston adds.
“There are incredible
opportunities at this time for investors who look at a specific resource company
investment, rather than looking for moves in markets. The upside potential for a
successful junior gold stock is measured in a several fold return or better,
whereas the volatility in the market can be measured in percents, or at worst in
tens of per cent.”
The principals of
and its sister publication
www.BNWnews.ca do not directly or indirectly own shares in any of the
companies mentioned in this article.