Surprisingly there aren't any boards online or on investorshub dedicated to Gold Stocks.
For those of you who are avid gold stock investors, you know that this sector represents some of the best opportunities out there given that conventional analysis and fundamental metrics attributed to regular stocks don't apply.
Over the past few years with the increased value of spot Gold some of these stocks have seen colossal gains. But the truth is that all throughout time gold stocks tend to be either extremely undervalued or extremely overvalued. As a gold stock investor its our job to find these hidden gems when the market is truly missing them.
In general, the most reputable gold stocks are found on the Canadian exchange, however increasingly more and more US and Australian companies are finding their way to solid properties with substantial resources.
Before we display some examples of some amazing returns on Gold stocks over the past 5 years its important that everyone understand some basic industry definitions and jargon.
1) Exploration - Most junior gold companies are simply exploration companies. That means that they go out and either option or lease a piece of land due to the belief that this land may contain an ore body with an economical gold resource. These companies are not what we are looking for. Too many times companies in this space rely on "Closeology" and not "Geology", they will claim to be within close proximity to a major gold mine and 9 times out of 10 that ends up being a huge waste of time. In the case of a reputable grass roots exploration program, as an investor that is more like gambling than investing, because even though a company may be using quality geologists and established methodologies, there is just too much risk and time to wait for drilling results that either may or may not develop into an ore body. While there have been some great exploration plays out there, I don't believe, given the huge amount of exploration companies out there that an investor can make efficient decisions with their capital to single out a candidate. Finally, even when these exploration companies are able to tap into and define an ore body it is then a long way towards constructing and building an economical mine that will provide a decent return on capital to investors.
2) Producing - The other group of gold companies are producing companies. These companies have already gone through the route of identifying a resource and bringing it up to production. What has become clear over the years, is that these companies tend to trade more like utilities and at multiples that are very similar. As an investor looking for the next great gold stock, these are good to have in a portfolio as safe capital investments, but are not going to bring you amazing returns.
What we do Like:
There are two situations that gold companies can find themselves in where history has shown tremendous returns can be achieved as an investor finding these scenarios.
3)Pre-Production - These are companies that have gone through exploration, resource definition, and have raised most of the money needed for constructing a mine. The great part about these situations is that in most cases, the market will value these stocks at a valuation that is in between junior exploration - and junior producer. The market tends to treat these companies as though they are just not going to make it on the production side. And when the numbers start rolling in the market usually agressively corrects its valuation and as a result these stocks soar. These are great situations to be in and we should attempt to find most of the stocks that are in this stage of their lifecycle. There have been many 1,000-3,000% gainers for gold stocks that were in this scenario, from a buy point of buying after most of the capital was raised, but production has yet to commence, until production commences and numbers are reported to the market.
4) Resource Banks - These situations have historically been the best performers for a gold stock investor. These are companies that have successfully defined a resource according to 43-101 standards and either just sit on the resource or continue to prove up and increase the "ounces in the ground". In general the market likes to value these companies at a valuation per ounce of gold in the ground. This valuation is always a large discount to the value of the gold mined for obvious reasons. Many times these companies simply do not have the balance sheet to produce, and in some circumstances the board of directors may even decide that they don't want to produce. The fact of the matter is, quality resource banks either get bought out or tend to rise aggressively when there is a major increase in the price of gold. Given that these companies often trade at a fraction to their ounces in the ground, when the price of gold appreciates the valuation of these companies tends to outperform given the increased wealth which had been generated. Robert McEwen, one of the greatest gold investors in the world, has done a great job of building several of these companies and has even created an index to track them.
Here are some examples of Pre-Production, and Resource Bank scenarios where investors generated amazing returns:
Allied Nevada Gold (ANV) - In 2007 ANV was trading at 1.90$ per share even though they had secured all the capital required to start production on their 2.1 million ounce Hycroft Mine in Nevada. The market then valued ANV at only $150m even though they were on the verge of initial production on roughly $2.1 Billion of mineral wealth. What happened since was clear, once production had started and ANV reported their first quarterly revenue the stock soared to about $14 a share and a valuation of $1.0 Billion which is where it is today. The total return here was over 700% in less than two and a half years.
Gold Resource Corp. (GORO) - This company went public at only 1$ per share in 2006. They had defined a resource in Mexico with over 1 million ounces and had raised sufficient capital to construct a mine. By December 2008 they were on the verge of production and the stock was trading at only $2 per share. Once the company began reporting gold sales and that production was on target the stock soared to $10.50 which is where its at today. The total return here was over 500% in less than 12 months.
There are many more examples which I am sure you can all find. But lets move to the real movers. The Resource Banks.
Seabridge Gold - (SA:US, SEA:CN) - Probably one of the greatest examples of intelligent gold investing. In 2002, Seabridge acquired a property from a major gold company for about $2,000,000 cash and some shares. This property had about 1.2 million ounces of gold at the time. Gold was trading at a fraction of the price but nevertheless there was substantial proven mineral wealth there. The stock was trading at about .30 -.50 cents per share. The market had treated Seabridge as though gold was was either never going to rise, and furthermore that the company's properties were uneconomical. Well two things happened, the price of gold began to rise, which allowed the company to raise more money. Once they had raised enough money they started drilling into their existing property and ended up increasing their defined resource from about 1.2 million ounces to over 10 million ounces of gold. The stock ran from .50 cents a share in 2002 to as high as $30 this year. Thats about a 6,000% return. Now its important to realize that unlike other situations in the stock market, a lot of seasoned gold investors recognized Seabridge early on and bet large on its success. Those investors are sitting pretty today.
NovaGold - (NG) - Another fantastic example of a resource bank situation. Novagold had defined a resource of about 30 million ounces with a major partner. Their ownership of 50% makes them one of the largest owners of gold in the ground on earth! In 2008 the stock had dropped hard due to the global financial panic. Investors stopped caring about the fact that NovaGold had over $15 Billion in mineral wealth ready to be tapped and they drove the total valuation of the company to only $80 million dollars. Yes $80 million dollar total valuation for a company with $15-16 Billion in potential mineral wealth. The ensuing result was obvious to any seasoned gold investor. The stock rose from .40 cents to $5.69 which is where it is today. A total return of about 1,100% in less than 13 months. Some feel that NG is still undervalued given its dramatic resource bank.
There are many other similar situations and if you really understand gold investing you will realize that this may be one of the last industries in the world where conventional stock analysis doesn't cut it. Analysts look for earnings, book value per share, profitability, and competitive advantages. These metrics don't apply to gold investing. For gold investors whats important is proven resources trading at a severe discount. We are all operating under the assumption that the price of gold will continue to rise, so if that is the case these unique situations can produce wonderful results.
I hope we can all work together to find gold stocks that are trading in these scenarios and share our thoughts.
Happy Gold Investing!