Throughout history, gold has acted as a source of value, maintaining its purchasing power over time. It is why gold is quite often viewed as a ‘safe haven’ asset. I’m sure you’ve heard this all before. What I would say is gold is generally a bit of a niche; its value often, but not always, rises when traditional investments fall. Although your investment allocation should not entirely be dedicated to gold, it is still a good way to balance a portfolio by diversifying risk as the price of gold does not fall dramatically, as you can with real estate and stock market investments. The excitement around gold is encompassed by the commodity being a highly liquid and scarce resource, possessing minimal credit risk.
As the past year in the pandemic has shown, markets hate uncertainty. It is why investors hold or reallocate wealth into gold, it is not just a means of diversification, it can be an investment strategy to hedge against inflation or uncertainty. If you’ve been following the markets, current uncertainty is one of the prime reasons why the gold price is approaching new highs, since they peaked in 2012. It is this mix of investment avenues that truly drives the pro-gold agenda.
Gold is not as straightforward of an asset as it may first seem. People are typically hesitant to begin gold investments as in itself, it’s an unproductive asset due to the fact it doesn’t pay a dividend or interest – something Warren Buffet has always criticised. Typically it is kept in storage, slowly gaining value over time. We dig it out of the ground, process it and then effectively put it back in the ground (in a vault)! So why the fuss?
It can be a little confusing due to the sheer breadth of investment options such as: buying physical gold, investing in Exchange Traded Fund (ETFs), Physical Gold Trust (PGTs), or investing in a gold mining company’s shares.
- Investors can opt to buy physical gold – bullion or even jewellery, as their value is timeless, providing a wealth insurance. However, the difficulty with owning physical gold is storage, and its associated costs.
- ETFs on the other hand removes this constraint, as they’re listed and traded on a stock exchange as you would expect with shares. They track the price of a particular commodity by holding them directly or gaining derivative exposure.
- Physical Gold Trusts are designed to provide a secure, convenient and exchange-traded investment alternative for investors who want to hold physical gold but without the hassle.
- Investing in gold mining companies can give you the leverage you are looking for. Early-stage companies mean high risks but potentially high reward. Whereas large producing gold companies tend to provide lower leverage to your investment but may pay you a dividend and still have some blue sky potential.
Today I will focus on gold mining companies. Currently, there are more than 2,000 gold mining companies listed and publicly traded. We have found 6 that may have some potential for different reasons.
The level of global gold production has grown 1.9% year on year over the past decade (2011-2021). It is important to bear in mind that production levels are increasingly constrained and new discoveries in gold deposits are in themselves, rare. However, the growth in gold production despite these challenges highlights the increasing potential for good returns and even dividends. The year on year annual growth rate is expected to increase to 2.5% by 2029. Of course, it’s hard to unpack the price impact. However, production is a key factor of what makes a gold company worth investing in; if the cost of production can be kept low, especially when it is ramped up, the endeavours are likely to be profitable. Ultimately, what makes a good company is a good management, a good ore body and the ability to fund activities.
When deciding which gold companies to invest in, consider these fundamentals:
- Effective management
- Cost of production
- Resource and reserves
- Mine exploration and project development
- Hedging activities
Based on this, we have identified 6 companies that satisfy some or all of these fundamentals. They are at different stages, have different return profiles and came across and solved different problems, but are interesting to explore.
Companies to Watch
This is currently one of our 2021 turnaround stories. With declining gold grades leading to lower production in 2019 and 2020, it was not a surprise to see this gold producer see its enterprise value fall dramatically.
As a 30-year-old gold producer located in the world-class Western Australian goldfields, the Plutonic Gold Mine, formerly owned by Northern Star and Barrick Gold, has a significant opportunity for growth. With Interim CEO Tamara Brown restructuring the strategy in the past year, Superior Gold is getting back on track.
It already possesses significant infrastructure with 450 km of underground development, 2 mills, gas and power and other related facilities and surface infrastructure. The replacement value for the infrastructure is over $2 Bn. To achieve the potential returns from this site, Superior Gold has developed a well-defined low-cost organic growth strategy. It is entirely down to ‘getting back to basics’ with respect to the geology of the mine and investing in mining assets to expand operations. The first thing on the list was to do a geological model. There wasn’t one previously, so you could argue they were drilling blind.
With this in place, Superior Gold has seen steady improvements in operational success throughout 2020, with a 16% increase in quarterly production, 25% increase in Mill grades and a 47% increase in Stope Grade when comparing Q1/21 to Q2/20. These achievements have been down to investments in the right places. Adopting the latest technology, with 3D modelling, in particular, has allowed the mining teams to truly utilise their 30 years’ worth of historical geological data. This enabled them to update their models to improve mine planning and drilling targeting, improving predictions in production stopes. Already, the targeting stope grade average increased from 3.0 g/t to 3.5 g/t, published in Superior Gold’s Q1/21 report.
Additional strategies in royalty buyback schemes have provided the capital to invest in a 3rd drill rig, dedicated to exploration and the uncovering of new gold deposits. This is a follow up to previous success in their Indian Zone, achieving 56.3 g/t over 15.1 metres. The 3rd drill rig will create a new stope inventory by opening up new mining fronts.
Their investment strategy isn’t solely dedicated to new ventures. Resources have been allocated to revitalizing their existing underground fleet by adding 2 new trucks, as well as completing construction of a new tailing storage facility and upgraded their airstrip, to accommodate for future production growth. They have two large mills to feed, which also gives them the potential of tolling from mines within 200-250 km as well as processing their own ore. Going forward is all about generating cash.
There is no sign of Superior Gold’s progress slowing down any time soon, with 2021 growth and next phase plans well underway, this momentum will likely continue. The facilitation of a second mill possessing maintenance with 1.2 Mtpa capacity in line with exploration plans as part of the main push back in infill drilling is due to occur halfway through the year. The potential ore sources for this investment include projects within the Plutonic Main Pit and Plutonic-Marymia Gold Belt.
The new CEO, Chris Jordaan, will start on the 31st of July, with Tamara Brown remaining on the board informing on her strategic plans. Jordaan has experience as an operator on the ground in Perth and presents the potential to increase the speed of achieving these planned deliverables. With all these developments in place, Superior Gold is a company to watch.
Troilus Gold is a junior mining company based in Quebec, Canada, which is considered one of the most attractive mining jurisdictions in the world. They hold a strategic land position of 142,000 ha and are planning to restart production of the Troilus mine. Between 1996 and 2010, over 2 Moz of gold and 70,000 t of copper were extracted at the Troilus mine, and as such, it was believed to be exhausted. Taking on a historic site requires an innovative approach led by a strong management team to truly re-vitalise the property. Troilus Gold acquired this property in 2017, and since then the inherited indicated mineral resources have increased 142% and the inferred mineral resources have increased 350% following drilling of over 80,500 m.
With production infrastructure already in place thanks to the former operating mine, Troilus Gold benefits from good road access, a permitted tailings pond and facility with a water-treatment plant; +85 km of power lines maintained by Hydro-Quebec, an active mining lease and a 60-person exploration camp.
The Troilus Gold project is one of the largest undeveloped gold resources in Canada with promising expansion potential. Positive PEA results place the potential for Troilus among the top gold producing Canadian mines. Based on the gold price of $1,750/oz, post-tax IRR is 32.2% with an NPV5 of $915 M. The average annual gold production for the site is 220,000 oz during the first 5 years and 246,000 oz gold produced in the first 14 years. The site has a mine life of 22 years. The mineral resource estimation based on July 2020 updates estimated 4.96 Moz AuEq indicated and 3.15Moz AuEq inferred.
The company has a drill programme underway with 4 rigs operating, averaging 10,000 m of infill drilling each month as part of their J Zone exploration. We’ve already seen some promising results: they have completed 200,000m of drilling which added 6.5 Moz of additional gold reserves. Latest results in this zone show significant growth, with mineral continuity across a 700 m strike length. CEO Justin Reid expects the zone to have a meaningful impact on the economic modelling, identifying areas within the PEA pit shell that used to be considered waste due as there was not enough data. The Pre Feasibility study is underway. Troilus Gold is promising.
O3 Mining, an Osisko Group company, is a gold explorer and developer who owns 100% interest in all of its properties over 137,000 ha in Québec, Canada. The team, led by President and CEO Jose Vizquerra, has over 240 years of international mining experience combined with expertise in exploration, mine building and development. They are committed to bringing long term value to shareholders.
O3 Mining’s portfolio of assets in Québec hosts 2.4 Moz of M&I resources and a further 1.5 Moz of inferred resources. They have 2 large drill programs at their flagship Marban project and their Alpha project giving the company plenty of exploration upside.
The Marban project is located in the Malartic gold mining camp covering 7,525 ha. Its PEA highlighted production of 115,000 oz of gold per year on average spanning over 15.2 year mine life. They drilled 86,000 m between 2019-2020 and plan to expand their existing resources of 2.4 Moz measured and 1.5 Moz inferred, as well as making new discoveries.
Currently, a drill program of 80,000 m is being conducted at the site, and have made good progress with 20,091 m already drilled. Up to 8 drill rigs are planned to test for PEM, to convert 1/3 of resources from inferred to measured and indicated. O3 Mining aims to be the leading gold producer with this site, putting Marban into production by 2026. Through local collaboration and creativity, they hope to create synergies with the facilities around them, helping to reduce their capital expenditure.
Alpha is located 8 km east of Val-d’Or and 3 km south of the El Dorado Lamaque Mine. There is an existing option agreement granting the right to acquire 100% interest in the Aurbel Mill located just 10 km from Alpha for $5 M over the next 5 years. The project is primarily dedicated to grassroots exploration, deposit delineation and resource expansion. The plan is to have up to 3 drill rigs to test for new discoveries using existing PEM drilling strategy.
The strategy moving forward is to increase open-pit excavation of low-grade Gold, alongside deeper explorations seeking high-grade seams. With high M&A potential and a lot planned for 2021, O3 Mining is definitely worth keeping watch.
Brazil is in the top 10 for the biggest mining nations in the world. Global gold producers Kinross Gold, Yamana Gold, AngloGold Ashanti and Equinox Gold all operate in the country, with M&A activity on the rise. With competitive tax rates and the devaluation of Brazilian real against the US and Canadian dollars, the country provides great production and exportation potential. Cabral Gold is the youngest public gold story on this list. They sit within the Tapajos region, the site of the world’s largest gold rush which produced 20-30 Moz during the 1980s. Cabral Gold was also named 2nd best performing mining stock on the 2021 TSX Venture 50 annual ranking thanks to a market cap increase of 1,047% and a share price increase of 492% during 2020.
Their flagship asset is the Cuiú Cuiú project in North Brazil, which they have a 100% interest in. The management team regard the geology of Cuiú Cuiú as highly prospective. The property has 2 primary Gold deposits, 2 hard rock Gold deposits, but they believe there may be around 6 to 8 of these types of deposits within their project area. What makes the Cuiú Cuiú stand out from the other assets gold mining companies have on this list, is the presence of ‘a blanket’ of oxide deposits. The cost of mining is a lot lower, as it’s easier to get the gold out. The oxide blanket covers an area of 400 m x 500 m with a 50 m thickness. Recent results for 60 m found 3.5 g/t gold.
The market opportunity with Cabral Gold lies with its district-scale opportunity of hard rock gold deposits, with a high-grade potential. The oxide blanket has strong potential for quick and cheap exploitation in the short term, especially since they are near the surface. With over 100 people on the site, alongside dedicated geologists, the opportunity for further gold deposit discoveries is very real. The Cabral management team has been involved in 5 Gold deposit discoveries in Brazil.
Currently, they have $3.2 M in the bank so they will potentially need to raise more money soon. Their largest shareholder, CEO Alan Carter has invested $1.7 M of his own money, followed by a further $500,000 across two financing rounds. They are keen to take advantage of their discoveries but recognise timing is everything to get this right.
Tesoro Resources is an Australian gold explorer with assets located in Chile. Founded in 2017 by a team of mine builders, they focus on developing high-grade gold assets with the potential to be mining projects at a district scale. What originally got investors excited about Tesoro Resources was the option to earn up to 80% interest in the El Zorro Gold project.
Share prices spiked at AUD$0.50 and have since been on a gradual downward trend, due to concerns over the political situation in Chile and the national election at the end of the year. But following investigations in Chile, we see this as an opportunity to buy cheap. The firm is well funded, enabling it to ride market slumps. Managing Director Zeff Reeves has reassured that the growth of El Zorro over the next 12-18 months is very well planned.
El Zorro covers 500 km and is located 100 km north of Santiago; known to be one of the best mining regions in Chile. The Chilean government is investing in the country’s mining industry and wants to attract further investment. With no royalties on minerals and Tesoro Resources’ good relationship with the Director of Mines for the region, future prospects look promising.
Tesoro Resources raised $31.6 M since March with 87% of capital invested into the ground. They currently have 6 rigs drilling 24/7, with 52 km of Diamond Drilling already completed.
For the year ahead, Tesoro Resources plans to increase the Drill Program in Ternera by more than 30 km to expand and delineate the entire mineralised system at the location. Further exploration and studies across Ternera and El Zorro District are underway to assist with growing the business towards production. The combination of project scale, grade, operating costs and CapEx set up Tesoro Resources for a robust year ahead.
Gold explorer Rupert Resources is targeting large, high-value deposits in a Tier-1 jurisdiction. Located in Finland, 50 km away from Europe’s largest gold mine (the Kittilä mine, owned by Agnico Eagle) the company is targeting multi-million ounce gold discoveries in close proximity to their 100% owned and permitted mill in Northern Finland at the Pahtavaara mine.
Finland is one of the world's most advanced, low-risk mining jurisdictions, which provides Rupert Resources the opportunity to develop a low cost, top tier, highly sustainable gold mine with low emissions. This is due to the proximity to infrastructure and renewable power.
The Pahtavaara mine was bought in 2016 by Rupert Resources and since then the company has been looking for new discoveries outside the mine area. With a wealth of historical data, the team undertook a comprehensive review resulting in a new geological model. This proven systematic approach to exploration is helping the company deliver on their strategy of demonstrating the economic potential of the Pahtavaara project.
The Ikkari discovery is just over a year old and has attracted a lot of attention from the market following some excellent drill results. Rupert Resources continues to demonstrate the potential at Ikkari and is moving towards a maiden resource due to be released in Summer 2021. The preliminary testwork indicates extremely favourable metallurgy, suggesting Ikkari is one of the major new discoveries of this cycle.
Rupert Resources is well funded to help the team continue work on the Ikkari discovery. With further exploration upside coming from the drilling of new discoveries on their 451 km² land package, there is potential for more high-value deposits.
Although the company is already valued at $800 m - $900 m market cap, there is still leverage in this story for investors. The market cap has risen to these heights because their grades have been that good. There is still a process to go through and there is more value to create for shareholders. We are paying attention.
We like these companies for various reasons, but as you may have established, they all have something in common. They have strong infrastructure and solid mining projects backed by experienced management teams, all of which have been clear on outlining how they’ll make the most out of their opportunities.