Just as the housing market tanked back in 2008 leaving both institutions and individuals nursing sub-prime burns and suspicious of opportunity, so ESG considerations and an inflationary environment have brought risk-off sentiment today. 

With both miners and investors exercising caution and a pervasive green monoculture that has mining consigned to the dustbin of history, the lazy narrative sees it sitting in a bear market without end. 

I venture this is nonsense. Mining is uber-cyclical and when the economy picks up, so too will the demand for mined materials. Yet, there’s no value in waiting for the herd to recognise this.

Caution and a depressed market combine to create opportunity and a chance for contrarian investors to get ahead of the pack for maximum returns in heavily discounted companies. It’s knowing which companies to invest that is the key.

Why Gold?

Gold equities have put on a dire show over the last year, underperforming the S&P 500 and in no small part due to the depressed gold price. For the contrarians among us, this constitutes fertile big discount territory. For this, you need to believe 3 things:

1.    That gold is normally a good investment in an economic downturn. 

2.    That over time gold price trends ups.

3.    That this depressed equity cycle will recover as it normally does.

Many gold producers have been engaged in debt reduction, courtesy of improved margins linked to 2020’s all-time gold price high, a process that is now largely complete. This means that alongside rewarding shareholders, fresh exploration, acquisitions, and reserve replacement are once again moving up the priority list.

Moreover, as Dan Wilton, CEO at First Mining Gold points out, if one looks beyond gold’s relationship with the US Dollar, with respect to other currencies it is performing at or near all-time highs; states of affair that are not reflected in the share price of those gold companies advancing projects.

Get in before the gold rush

Explorers - On the exploration front, even in the current climate, there are those able to point to new discoveries and significant potential that are holding on to market caps in the range of$500 million to $1 billion, and thus worth a closer look for their multi-bagger potential.

Developers - In my view, it’s with the developers where the biggest opportunities lie in the gold space for great assets at heavily discounted prices. 

Producers - When gold prices are lower, as they are now, the grade of the ore needs to be higher for the mine to remain profitable i.e. when it comes to producers, if you can identify a gold miner that’s already winning in the current bear climate, when things go bull, you’ll be laughing all the way to the bank. Even if you don’t subscribe to the view that grade is king, it’s certainly an important criterion.

ESG & Permitting

What you want to be looking for here are companies that can demonstrate progress on the permitting front, since that speaks to addressing ESG concerns, failure to act on which represents the biggest obstacle these days to getting a tier one mine into production. 

This is what institutional investors will be paying very close attention to. And you must too. For while, in isolation, securing permits may not drive share price appreciation, measurable headway on this front acts as your window into the prevailing regulatory landscape, and points to value.

In the current inflationary environment this information is an even better friend to you than a definitive feasibility study, which can quickly become redundant.

Finance  

There is also significant merit in fixing on well-financed companies with a successful management track record, a clearly articulated plan, and a portfolio of other projects on the go.

This means developers able to present alternatives to equity dilution, as opposed to those offering up the family silver in order to raise sufficient equity to keep a project going – a project that perhaps represents all that company’s eggs in one basket. 

Honing in on those de-risked companies with the capacity to ride out the current storm that includes spiralling – and potentially crippling - energy and wage costs, might see you determining on developers able to avail themselves of onsite microgrid power solutions, or rejecting those with any sniff of historical labour disputes.

By buying now and biding your time until capital and investor interest returns, as surely it will, you are perfectly positioned to be ahead of the curve just as those around you will be losing their heads in the latest gold rush.

Contrarians need cool heads 

While the market may look bleak right now, so too did it in 2015 when basic capital for advancing projects was very difficult to come by after over 3 years of ever-deepening doldrums.

A quicklook at the ten year stock history of Newmont evidences the market landscape at that time. However, the smart money knew this was exactly the time to strike, and it was proved right. History will repeat itself. 

If you share my view that gold is ripe for action and act upon it when the crowd calls it differently, congratulations, you are now a contrarian.

By embracing that which others are dismissing, you position yourself for advantage. You’re not being contrary for the sake of it - that would be belligerence - but rather, because you fundamentally recognise the mining market to be cyclical and you’ve done your homework on where to invest.

FAQs
Become a better investor
What is Crux Investor?
Crux Investor an app that provides monthly stock recommendations from world-class analysts in quick, easy-to-understand Memos. The truth is – everyone wants to invest, but it's almost impossible to know what to invest in unless you’re a professional. Crux fills the gap and makes building a long-term investing portfolio effortless.
Continue
You might also like
Analyst's Notes: Skeena Resources
November 29, 2022
Canada Nickel - Company Note
November 14, 2022
Uranium’s Compelling Investment Case
November 11, 2022
Copper for Contrarians
November 9, 2022
Mawson Gold - Company Note
November 3, 2022
Become an investing expert
Invest like a professional with the top long-term stock pick every month, from WSJ "Best On The Street" winning analysts.
Continue