Discounted Gold Developers Poised for Growth as Metal Prices Surge

• Gold developers offer significant upside potential as they advance projects toward production
• Current market conditions present an opportunity to invest in quality assets at discounted valuations
• Developers face challenges in permitting and funding but can create value through de-risking projects
• M&A activity and rising gold prices could be catalysts for developer valuations
• Investors should look for developers with quality assets, strong management, and clear paths to production

Why Investors Should Consider Gold Developers

As gold prices reach new highs, investors seek ways to gain exposure to the precious metals sector. While established gold producers offer stability and cash flow, development-stage companies present a compelling opportunity for investors looking for greater upside potential.

The Current Landscape for Gold Developers

Gold developers find themselves in an exciting position in late 2024. On one hand, gold prices have risen substantially, recently surpassing USD$2,650 per ounce. This has improved the economics of many development projects and increased interest in the sector. However, gold equities, particularly among developers, have lagged behind the rise in the metal price.

You can buy advanced-stage assets today at sub $10 an ounce. There have only been a few narrow windows in the last 20 years where investors could do that with quality advanced-stage projects. This disconnect between gold prices and developer valuations presents an opportunity for investors. Based on current gold prices, many quality development projects are trading at significant discounts to their net asset values. For example, many developers have projects with an after-tax NPV of several hundred million dollars at $1,800 to $2,000 gold, yet trade at a market cap of less than $100 million. These are worth identifying and investigating.

The Potential Upside

The primary appeal of investing in developers is the potential for outsized returns as projects advance toward production. Unlike producers who may offer steady but modest growth, developers can create substantial value by de-risking projects and moving them up the development curve.  

As developers hit key milestones like completing economic studies, securing permits, arranging project financing, and constructing mines, their valuations re-rate higher. The current depressed valuations in the sector mean significant room for share price appreciation if developers can successfully execute. Developers also offer leverage to rising gold prices. With many projects evaluated using conservative long-term gold price assumptions, higher prices can dramatically improve project economics.

Dan Wilton, CEO of First Mining Gold notes that for their Springpole and Duparquet projects:

"Our portfolio was made for a market like this. People are looking for the leverage that big assets give you. We can quantify it, - it's $250 million US of aftertax NPV for every $100 in the gold price."

Challenges & Risks

Investing in developers does come with risks that investors need to consider. Developers face two primary challenges: permitting and project financing.

• Permitting timelines have lengthened considerably in many jurisdictions. What used to be a 2-3 year process can now take 5+ years in some areas. Delays in permitting can significantly impact project timelines and valuations. Investors must carefully evaluate the permitting landscape and progress for any developer they are considering.
• Financing large capital projects is also a major hurdle, especially for single-asset developers. With equity markets challenging in recent years, some companies have had to turn to alternative financing like streams and royalties. However, this can impact long-term project economics.

Shane Williams, CEO of West Red Lake Gold Mines highlights the importance of thorough planning:

"There's a step-by-step approach that you need to follow, and it doesn't matter what project it is, it doesn't matter how big or small, you have to follow those steps."

Companies must articulate and communicate a clear path to production through self-funding or strategic partnerships. Companies demonstrating a viable route to building their projects will likely garner more investor interest.

Evaluating Developer Opportunities

When assessing gold developers, there are several key factors for investors to consider:

• ‍Asset Quality: The underlying project is crucial. Investors should look for large, economic deposits in good jurisdictions. Key metrics include resource size, grade, strip ratio, recovery rates, and projected costs.‍
• Management Team: Experienced leadership with a track record of successfully advancing projects is vital. Look for teams that have taken projects from exploration through to production before.‍
• Financial Position: Adequate funding to advance projects is critical. Companies with strong cash positions and supportive major shareholders are better positioned.‍
• Clear Development Path: The most attractive developers have a well-defined plan to advance their projects, including realistic timelines and capital requirements.‍
• Jurisdiction: The regulatory and permitting environment can significantly impact project timelines and costs. Stable mining jurisdictions with clear permitting processes are preferable.‍
• Valuation: Look for companies trading significant discounts on their project NPVs, especially relative to peer developers.Catalysts: Consider upcoming milestones that could drive re-ratings, such as resource updates, economic studies, permit approvals, or construction decisions.

Alan Carter of Cabral Gold emphasizes the importance of asset quality and jurisdiction:

"We've got a district-scale project with three gold deposits and three new discoveries where we still need to drill off enough for Maiden discoveries. Outside those, we've got another 40-plus targets with gold in drill holes and trenches."

This highlights why investors' need to look for projects with significant exploration upside in promising jurisdictions.

The Role of M&A

Big gold producers grow faster by buying other gold producers (expensive) or gold developers (efficient). Mergers and acquisitions activity is an essential consideration for investors in the developer space. Productivity development assets become attractive targets as producers seek to replenish their project pipelines.

Recent examples like Argonaut Gold's sale of the Magino project to Alamos Gold demonstrate the potential for significant premiums in developer takeouts. M&A can benefit the sector in multiple ways. It provides exits for some developers, puts cash back into the hands of investors to redeploy, and signals relative valuations between producers and developers. Even for companies that aren't acquired, increased M&A activity tends to lift valuations.

The Macro Picture for Gold

The positive outlook for gold prices underpins much of the enthusiasm for developers. Also, prices are rising faster than costs for the first time in several years, boosting many producers' bottom line.

This margin expansion drives increased profitability for producers, which could spur more investment in the sector. It may also attract generalist investors to gold equities, improving overall sentiment and valuations.

Of course, there is good practical news for gold producers, too. As Mike Hodges, CEO of Serabi Gold, says, "If this gold price keeps running, we will fund our development out of increased margin, so we're getting quite excited about it."

Global economic uncertainty, inflation concerns, and continued central bank buying bring hope to a sector in the doldrums for several years. However, we caution that developers must also be viable at lower gold prices. Many use conservative price assumptions in the $1,600-$1,800 range for economic studies to demonstrate project robustness. S factor this into your own analysis.

Balancing Exploration & Development

An interesting dynamic for many developers is balancing ongoing exploration with advancing existing resources. Most companies will pursue both strategies in parallel, moving their large existing resource toward production while also drilling to expand and upgrade the deposit.

This two-pronged approach can be beneficial, as exploration success can improve overall project economics or extend mine life. However, exploration mustn't come at the expense of advancing the core project. Investors should look for companies that strike an appropriate balance and allocate capital efficiently between the two objectives.

The Importance of Jurisdiction

The regulatory and permitting environment is a critical consideration for developers. Mexico, for example, where jurisdiction has weighed on valuations in recent years. However, they also note that sentiment can shift quickly when positive developments occur, such as the election of the new President, Claudia Sheinbaum.

Investors need to evaluate the jurisdictional risks for any developer carefully. Projects in stable mining jurisdictions with transparent permitting processes will likely face fewer hurdles and delays. However, there can also be opportunities in jurisdictions that are improving their regulatory frameworks, as this can lead to valuation re-ratings across the sector.

Looking Ahead

As we move into 2025, several potential catalysts exist for the developer space. These include:

• Continued strength in gold prices driving improved project economics
• Increased M&A activity as producers look to bolster their pipelines
• More permits being issued in key jurisdictions like Mexico
• Completion of updated economic studies showcasing project viability
• Construction decisions and transitions to producer status for advanced developers

For investors considering the space, the coming months could present opportunities to gain exposure before potential re-ratings occur. However, given the risks inherent in the development process, selectivity remains key. Gold developers present an intriguing opportunity for investors seeking exposure to the precious metals sector with greater upside potential than established producers. The disconnect between rising gold prices and depressed developer valuations creates a potentially attractive entry point.

However, investing in developers requires careful due diligence. Investors must evaluate asset quality, management teams, jurisdictions, and development paths. Those companies that can successfully navigate the challenges of permitting and financing to advance quality projects toward production are likely to deliver the most robust returns. While risks remain, the potential for outsized gains as projects move up the value curve makes developers worthy of consideration for investors bullish on gold's prospects. Proper portfolio allocation and risk management are crucial when investing in this higher-risk, higher-reward segment of the gold sector.

The Investment Thesis for Gold

• Gold prices have risen substantially, improving project economics for developers
• Many quality development projects are trading at significant discounts to their net asset values
• Successful advancement of projects can lead to substantial share price appreciation
• Developers offer leverage to further gold price increases
• M&A activity could provide catalysts and exit opportunities
• Margin expansion in the gold sector may attract more investment
• Balancing of exploration and development can enhance overall project value
• Jurisdictional improvements can lead to valuation re-ratings
• Upcoming catalysts in 2025 could drive increased interest in the space

Actionable Advice

• Focus on developers with quality assets in good jurisdictions
• Look for experienced management teams with track records of success
• Prioritize companies with clear paths to production and adequate funding
• Consider jurisdictional risks and permitting timelines
• Evaluate upcoming catalysts that could drive re-ratings
• Monitor M&A activity in the sector for potential opportunities
• Maintain appropriate portfolio allocation given the higher-risk nature of developers

Gold developers offer investors a unique opportunity to gain leveraged exposure to rising precious metals prices. The current market presents a potential value opportunity, with many quality projects trading at significant discounts to their intrinsic values. However, investing in developers requires careful due diligence to navigate the risks of permitting, financing, and project execution. By focusing on companies with strong assets, experienced management, and clear development paths, investors can potentially benefit from the value creation as projects advance toward production.