A fresh look at the worth of a gold miner’s gold
Assessing the true worth of gold reserves, this U.S. advisory finds the market puts a higher value on juniors like four Canadian gold stocks.
Even in the midst of a market slump, gold is very expensive.
It opened today at US$1,490 an ounce, as the market slide continues. It has been well above the $1,500 barrier, of course.
But that’s gold bullion. The gold that is being mined around the world isn’t worth that much. Gold stocks don’t get equal respect.
So we turn to an advisory that specializes in mining stocks to get a read on the true value of gold miners’ gold.
Doug Casey’s International Speculator undertakes this kind of survey from time to time. We monitored this survey once before, several years ago (see Daily Buy-Sell Adviser, November 12, 2009).
But then gold was at a piddling $1,180 an ounce. Time for an update.
The difference in the price of bullion and the ounces of gold still in the ground isn’t too difficult to explain. It costs a lot to extract the gold, for one thing, and the quality of the deposits varies widely.
In its latest survey, this advisory comes to a surprising conclusion — the gold of senior miners has lost ground to the gold of the juniors.
It tailors its assessments on the value the market puts on the reserves of different companies. We’ll see how this works and what it means for four of the junior gold stocks the advisory follows.
Three categories
This advisory is headquartered in Arizona but its attention is riveted on the junior mining stocks of TSX Venture exchange. Mr. Andrey Dashkov, the team’s research analyst, conducts the survey.
When the survey was done, gold was at $1,535 an ounce, so the general figures would be somewhat lower today. But the conclusions would not be markedly different.
Mr. Dashkov notes at the outset that the survey has been refined to include N143-101 complaint resources of gold exclusively. This eliminates as far as possible reserves mixed with copper, silver or other metals. N143-101 is the standard in Canada for defining the value of reserves.
There are three recognized N143-101 categories:
Inferred is “the lowest-confidence category, based on just enough drilling to outline the mineralization.”
Measured & Indicated (M&I) means the higher-confidence categories that “have been sufficiently drilled to establish their geometry and continuity reasonably well.”
Proven & Probable (P&P) are “the bankable reserves — basically Measured and Indicated Resources with established commercial value.”
A renewed appetite
No sector has more stocks with high scores in the advisory’s The advisory did a similar survey this past December, so it compares those figures with its most recent findings. The results are startling.
Inferred reserves, worth US$21.90 an ounce in December, were now worth $61.90, an increase of almost 180 per cent.
Measured and Indicated reserves rose from $44.30 an ounce to $69.30 an ounce, an increase of 56 per cent.
Proven and Probable reserves gained the least, from $230.40 an ounce to $232.70, or about 1 per cent. Yet Proven and Probable is what the senior gold producers have plenty of.
Mr. Dashkov concedes that the tighter focus on gold appears to have pushed the valuations higher. “Still, it’s striking that the market clearly has renewed appetite for the junior sector, valuing gold in the riskier Inferred and M&I categories higher while P&P remained about the same.”
Thus explorers’ and developers’ gold is getting more expensive. “Drill plays” are coming into favour, which in turn implies that financing could be easier to find with positive drill results.
It does not mean that senior producers are out of favour. They are the ones making profits “and that is precisely why we want to own them.”
Nonetheless, this advisory has a clear preference for the juniors, so the results of the survey are encouraging for four of the juniors it follows.
Grossly undervalued
Andina Minerals (TSX/V-ADM) didn’t quite wow speculators with its latest results, despite having 6.6 million ounces Proven and Probable and
“good economics” for its Volcan project in Chile. The gold price used in the pre-feasibility study was rather aggressive, concludes Mr. Dashkov. Per ounce, he says, it is the best deal of all the juniors it monitors in its survey.
The share price, as high as $1.94 in February, is now $1.19.
Exeter Resources (TSX-XRC) looks “grossly undervalued,” says the author. It’s sitting on one of the world’s biggest undeveloped gold resources at Caspiche in Chile. Plus it may soon be moving some of its currently Inferred resources into the Measured and Indicated category. There are technical challenges, but “we like Exeter a lot.”
Its share price, which has fallen with the markets, is $4.41.
Extorre (TSX-XG) is a spin-off of Exeter and it has “become even richer since our last update.” Its Cerro Moro project in Chile may look somewhat overvalued for its ounces, but that doesn’t yet include the ”bonanza-grade mineralization” that has been discovered. Extorre got formal approval of its project today and can proceed with development.
Its shares rose from less than $6 in December to $10.06 last week then slipped with the market to stand at $9.06 today.
Northern Freegold (TSX/V-NFR) was overvalued at the last update, says the author, “but is now among the top undervalued companies.” It released an updated resource estimate at its Freegold Mountain project in the Yukon. It adds up to some 1.4 million ounces of gold in the Indicated category. It subsequently announced a new $8 million private placement.
This stock is cheap at $0.34 and this year’s work should “bring the market to its senses.”
Ultimately, the question for this advisory is not whether gold stocks will ever catch up with the price of gold. It is whether or not investors can reap their rewards quicker with junior gold stocks. It believes the answer is yes.
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