Once again gold is on the march. It’s not been a completely straight line up since the coronavirus became a dominant factor in market thinking, but it’s been close enough. And the major gold miners have done well too. Shares in Barrick Gold (NYSE:GOLD)(TSE:ABX) spiked at over US$21 in the middle of February, less than a dollar away from a five year high, while shares in Newmont (NYSE:NMT) went through their five year high in early March. Slightly lower down in the pecking order, the mid-tiers have also been doing well. Centamin (LON:CEY) hit a two-year high in February, Endeavour (TSE:EDV) has been close to five year highs for weeks, and Kinross (NYSE:KGC) also reached a five year peak in February.
So far so good. The faith of safe haven equity investors has been well rewarded.
But there is another approach to gold investing, one that does more than just help investors cover losses in other sectors.
By investing in companies that have yet to produce any gold, but which are close, investors also open themselves up to gains from the standard market re-rating that is applied to gold companies when they make their first pour.
In a sense, it’s a question of shouldering the latter stages of the execution risk in exchange for greater returns when the cash actually starts flowing. Adding a risk element into a holding that’s traditionally supposed to be attractive for its safety isn’t for everyone, but given that the gains can be substantial, especially in a solidly bullish gold market, some investors may find it has a certain appeal.
To be fair, this approach hasn’t always worked in recent years. The Aureus development at New Liberty ended up swallowing cash as operational glitches combined with the strictures of the Ebola virus.
And Detour Gold found its fortunes more tied to the gold price than in the end it might have liked. Detour’s shares peaked at C$38.00 around 18 months before first production from the Detour Lake mine, and at no time since did they ever really recover, as the gold price fell back and the company was eventually taken out by Kirkland Lake (TSE:KL).
Similarly Harte Gold (TSE:HRT) shares peaked around a year before first production before giving up significant ground as the gold began to flow.
But there are obvious success stories too. Roxgold (TSE:RXGL) is a prime example. Investors who took an interest in Roxgold in, say, 2015, a year ahead of first production at its Yaramoko mine in Burkina Faso, would have found the ask at 0.5p. Hitting the bid a year later, after the company had poured its first gold, the same investor would have taken home more than three times his money. Yes, the shares have drifted since, but that’s largely because the political risk profile of Burkina Faso has got worse.
Or take Ariana Resources (LON:AAU), a small company by any measure, but significantly smaller before it went into production at its Kiziltepe gold mine in Turkey. Investors who bought into Ariana in early 2016 were looking at more than double their money a year later, when gold was poured in March 2017. Since early 2016 Ariana’s shares have now more than tripled, but for those who only bought in after production got underway, the gains are significantly more modest at 50%.
And over in Australia, while shares in Gold Road Resources (ASX:GOR) have done well over the past five years, the big gains occurred in the lead up to first production at the company’s jointly-owned Gruyere mine, not afterwards. If you’d invested at any time in 2018 you’d have doubled your money within a year, but the gains after first gold was poured in the summer of 2019 have been smaller, and indeed, as is often the case, the shares gave ground for a while after production began.
So, if this is the model, what companies are there that are on their way into production and likely to earn a re-rating. The answer, sadly, is that they are few and far between. Tough conditions in the mining equity markets in recent years has made it difficult to get finance for new developments, and the example of Aureus has only gone to frighten the horses further.
Nevertheless, there are still a few companies worth taking note of. Thor Explorations (CVE:THX) has been raising big equity slugs for the development of Nigeria’s first major gold mine. Condor Gold (LON:CNR) is now moving through the permitting process on its 2.3mln ounce La India project in Nicaragua. The shares are currently trading at higher than the company’s five year low, but not by much.
Corvus Gold Inc (TSE:KOR) also has advanced stage gold assets, as does Rupert Resources (CVE:RUP), and Black Dragon Gold (CVE:BDG). And then there are companies like Winston Gold (CNX:WGC) which are looking to bring old operations back on stream.
All these companies still have financing risk to contend with, and that’s often a key hurdle, so we are moving a long way out of widows and orphans territory here. But if strength in the gold price is to represent not just a hedge but an opportunity, then it’s companies like these that show up on the radar time and again.
So, it looks like we’re in for more equity raises and more progress from companies on the ground, while the rest of the market marks time and frets about viruses and elections. If nothing else, it will be an interesting ride.