Oh mining stock investor, tell me your tale of woe. We all have plenty to tell these days.
As we survey the mining stock landscape, our precious-metal shares have been trampled like the African savanna after an elephant stampede.
As a sector, the average gold stock — I’m using Market Vectors Gold Miners ETF (NYSEArca: GDX) as my proxy — is down nearly 25% for the year. Juniors did a little better — down about 18%.
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But not every gold stock was underwater this year. A handful of mining companies actually saw their share values rise in 2015. The big question is why did these particular miners (I counted six on my screen) buck the bear-market trend?
One factor shared by every company in the group of winners is that they all control large, high-quality undeveloped reserves, and they’re ready (or nearly so) to go into production.
Green Light for Digging
Seabridge Gold (NYSE: SA) is a good example. It gained a little over 9% in 2015. The company has long referred to itself as a “gold in the ground ETF,” after having acquired a portfolio of raw properties in Canada back in the early 2000s when the gold bull market was just getting underway, and prices were still cheap.
The company’s main focus has been on its “KSM” property purchased during that time. And what a property it is! KSM ranked a few years back by Natural Resource Holdings as one of the top 10 undeveloped gold deposits in the world.
But it’s taken all this time, with extensive test drilling, environmental approvals and the like, just to get to the point where the property can go into production. When that happens depends on the price of gold, and likely a bigger partner. But the point is that the property is ready to go.
Agnico-Eagle Mines (NYSE: AEM) is another of the companies on the list of “gold gainers” for the year, up about 10%. Likewise, it controls the Meliadine gold project in Canada’s Nunavut province, which is also highly ranked in the top 50 of the world’s identified-yet-undeveloped gold mines. More recently, the miner has been getting good indications for “Amaruq” — yet another of its Canadian exploration areas.
The rest of the companies fall more or less into the junior mining category, with most up by just a percent or two for the year. Still, considering the average junior gold miner — I’m using the Market Vectors Junior Gold Miners (NYSEArca: GDXJ) exchange-traded fund as my proxy — is down more than 17% for 2015, that’s saying something.
Again, the key factor appears to be proven fresh reserves, ready to go into production. For instance, Richmont Mines (NYSEMKT: RIC) has been pulling company-record amounts of the yellow metal from its Island Gold Mine this year and last. The company put out a press release just last week, noting more positive test-drilling results as it explores the potential of the property. Likewise, another junior gold miner on the list, Asanko Gold (NYSEMKT: AKG) — notably the only one in my group with its main project outside of Canada — said it too is nearing the start of its production phase (slated for the first quarter of the coming year).
Gold “Banking” on the Cheap
The oft-used analogy of an in-the-ground gold “bank” isn’t that far off the mark with any of these companies. The share prices of these companies are up for the year — but down (along with the rest of the sector) over the last five years, reflecting the out-of-favor status of gold among investors in general. Companies are being valued as if gold prices will always be at such low levels.
We know, of course, that they won’t. Clearly, the smart money is now migrating to fresh, high-quality projects that are heavily discounted at current prices. But they will be worth much, much more — and ready to go into production — when gold prices start ticking higher again.
Editorial Director, The Sovereign Society
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