The gold price peaked at around $1,735 an ounce on Monday before reversing yet again despite the small pullback in the U.S. Dollar Index. Gold rallied last week starting on Wednesday after traders refused to let it stay below $1,700, but analysts suggest that many investors are staying on the sidelines until the Federal Reserve announces its next policy decision this week.
Gold bulls like Daniel Oliver of Myrmikan Capital are persistent, which could mean that the yellow metal will hold its resistance just below $1,700 an ounce. But what about gold miners, specifically, smaller gold miners? Oliver is bullish on a handful of those names, although others, like Yamana Gold, Kinross Gold, Pan American Silver and Endeavour Mining, might also be worth watching.
Q2 2022 hedge fund letters, conferences and more
Watching The Junior Gold Miners
Both of VanEck's Gold Miners exchange-traded funds are in the red this year. The VanEck Junior Gold Miners ETF (NYSEARCA:GDXJ) is down more than 26% year to date and 14% in the last month. In a recent note, Oliver pointed out that the ETF is now well below where it stood when the pandemic started in March 2020.
However, he added that such "enormous" swings in value do not threaten his investment strategy the same way extreme losses might impact a trading strategy. Oliver explained that recovering from such extreme losses would be "nearly impossible."
Of course, when the market sends gold prices lower, the value of gold mining assets also falls, dragging down the valuations of the companies that own those assets as well. However, Oliver pointed out that the assets themselves are still physically unchanged and generally improve through further development. As a result, when the gold price recovers, the values of those gold mining assets recover as well, pulling the valuations of the companies that own them up as well.
Oliver drew attention to a similar situation in 2015 when mining companies feared that accountants would officially impair the values of the projects on their balance sheets. Of course, the market had already done that in the form of plummeting stock prices.
However, Oliver noted that impairments on gold mining assets differ from a typical impairment that recognizes a permanent loss. Impairments on gold mining assets reverse as soon as the gold price recovers. Oliver also highlighted three of his favorite junior gold miners, although he did not name any of them.
Tietto Minerals
The first is a company that's spending $200 million to establish a gold mine in West Africa. Based on this news report, it sounds like ASX-listed Tietto Minerals Ltd (ASX:TIE) could be the company he was writing about.
He said the unnamed company is expected to produce 260,000 ounces of gold in its first year of operations, which is expected to begin by the end of this year. The company expects an all-in-sustaining cost (ASIC) of $800 an ounce. At a gold price of $1,700 an ounce, the company should see almost its entire market capitalization in cash flow in the first year.
Oliver noted that the company needs an additional $10 million to complete construction, which may be one reason its stock price has been cut in half since February. He added that the company has no debt, so financing costs on the project should be minimal. Although West Africa may be a cause of concern for some investors, Oliver said the project is located in "one of the better areas," adding that jurisdiction is "a diversifiable risk."
Mystery Companies
The second junior gold miner Oliver wrote about was more difficult to identify. He said the company was exploring a 1 million-ounce open-pittable gold resource of over one gram per ton in the western U.S. According to Oliver, that's twice the grade of most western U.S. gold operations.
The deposit is actually on private land, which means the state rather than the federal government is the lead permitting agency. Oliver sees that as a significant advantage due to the current administration. He also reported that the company had secured the water rights needed to support the production of 100,000 ounces per year. Additionally, it made another discovery nearby recently that Oliver expects to add a significant number of ounces to the project.
He said the company's project is on federal land and was recently purchased for $85 million. Its market capitalization is $30 million, and it has $10 million in cash. Management has stated its intentions to double the company's resource, de-risk it further, and sell the company before additional financing is required.
The third company Oliver mentioned was also difficult to identify with the information he provided. It operates a mine in South America and has a development project in a second South American country. The operating mine produced $170 million in EBITDA last year, and its reserve replacement is running faster than its mining operations. The company also holds an equity interest in two other public companies.
Other Junior Gold Miners
It's important to realize that junior gold miners can be at all stages of operation. Some are still in the exploration stage, making it challenging to invest in them because it's unclear whether they will hit it rich. On the other hand, the VanEck Junior Gold Miners ETF contains some rather large names that some investors might not realize are classified as junior gold miners.
There is no standardized definition for "junior" gold miners, although size plays a critical role. That said, many junior gold miners have multi-billion-dollar market caps, potentially making them better plays than those in earlier stages of development.
Among the companies included in the VanEck ETF are Yamana Gold, Kinross Gold, Pan American Silver, SSR Mining, Endeavour Mining, B2Gold, Evolution Mining, Alamos Gold, Hecla Mining and First Majestic Silver. Of course, the general theme among all these stocks is that they are in the red for the year, but if or when the gold price starts to recover, junior gold miners should too.
FXEmpire noted recently that the current technicals are in favor of a rally in gold prices, which have invalidated the breakdown below their mid-2021 lows and the 61.8% Fibonacci retracement level from the 2020 rally. In all the recent situations in which gold rallied after its Relative Strength Index was below or close to 30, It rallied until the RSI was at least close to 50. Since that hasn't happened yet, the author suggested that gold has more room to run higher.
Given that junior gold miners tend to be even more sensitive to gold price movements than their larger peers, it seems possible that the sector could rally in the event of a firm reversal in the gold price. Of course, only time will tell, and we have macro factors like the potential for a recession to consider as well.
