Although the price of gold has been trading rather flat in 2018, analysts are
confident gold positive market conditions will continue supporting
the yellow metal and even pushing prices higher as we move further
into the year and beyond. BMO recently raised its 2018 gold outlook by 4 percent to $1,327 an ounce on rising inflation and geopolitical risk despite a stronger dollar.
While many a gold bug swears by storing wealth in physical
metal, analysts will tell you there is considerable potential value
to be had in owning gold stocks. In fact, BMO’s analysts see the
current gold environment creating opportunities for investors in
the gold equities market, especially for undervalued stocks.
“Macroeconomic, company fundamentals and valuation all point
toward an opportunity for investors to benefit from increased
exposure to precious metal equities,” said BMO analysts in a recent
report. “A return to higher gold and silver prices may just be the
catalyst needed to reinvigorate investor interest.” The bank’s
favorites include mid-tier and majors such as Agnico Eagle (TSX:AEM),
Endeavour Mining (TSX:EDV), IAMGOLD (NYSE:IAG,TSX:IMG),
and Kirkland Lake (TSX:KL).
However, for those who can stomach a bit of risk if it means a
higher chance of reward, junior gold stocks remain an attractive way to play the gold
market–especially, the undervalued exploration-stage companies with
plenty of upside potential for value creation.
This INNspired Article is brought to you by: Granada Gold Mine Inc. (TSXV:
GGM;OTCPK:GBBFF;FRA:B6D) is a junior resource company currently developing its
flagship Granada gold property in Canada’s Quebec province. The company’s wholly owned,
previously-producing property was first acquired in 2006 and Granada Gold has been leading the mine to its upcoming first stage of production.
Undervalued gold juniors
Gold stocks offer a number of attractive investment
propositions. “One is they’re leveraged to the gold price through
their operations or through their assets, but also these companies
are able to create value through the strategic initiatives they
undertake,” Doug Groh, portfolio manager at Tocqueville Asset
Management, told INN at the Mines and Money conference in New York. “It
might be expanding their operations or [making] a discovery and
developing that discovery, or perhaps through M&A — and we see
a lot of M&A in the marketplace, and we’ve tried to capture
that opportunity as well.”
Groh added that although his firm had cut back on their exposure
to junior stocks during the contraction of the last seven years, he
believes exploration-stage companies are “a very interesting part
of the gold-mining spectrum because these are companies that are
certainly undervalued and can create significant value. And so
we’re beginning to take a look at that a little bit more
But how do you evaluate and compare junior gold stocks to choose
the best investment?
Mining asset valuation techniques
Investors often use valuation ratios to determine the true value
of a potential investment as well as compare a stock against its
peers in the market. A commonly used investment valuation ratio is
the P/E multiple which compares the current price of a company’s
shares to the amount of earnings it generates to give investors an
idea of how much they are paying for each dollar of earnings. This
may be a good tool for evaluating gold producers; but most junior
gold companies are not yet generating earnings. Their greatest
asset is still in the ground.
Junior explorers’ greatest asset is gold in the ground
Of course, there are a number of important factors an investor
needs to consider when evaluating the investment potential of a
junior gold stock. Most analysts will tell you to take a hard
look for a tightly held share structure, experienced and successful
management and technical teams, as well as the ability to raise
funds without too much dilution of the stock—all critical to the
ultimate goal of creating shareholder value.
“What we’re looking for is a company that’s going to create
value, and typically the value is initially created through the
assets,” said Groh. “The asset and the management strategy are very
important, and of course the financial position of the company to
execute that strategy is a primary concern for us.”
The most important piece of the puzzle centers on the value of
the project itself. For a junior gold stock, their true asset value
is the gold resources they’ve been able to delineate through
drilling campaigns. In this way, the mineral resource estimate
becomes a critical factor in evaluating a company’s worth. Growing
this resource estimate and converting inferred resources to
measured and indicated de-risks the project and builds investors’
confidence—and there is value in that.
If investors can determine the real value of an ounce of gold in
the ground, they can better evaluate the investment potential of a
particular gold exploration or development company.
Enterprise Value per ounce of gold in the ground
One metric investors may find useful when evaluating junior gold
stocks is the Enterprise Value per ounce of gold in the ground
To calculate Enterprise Value, start with the market
capitalization of a company (or the number of outstanding shares
multiplied by the current share price) then add its financial
liabilities (i.e. debt) and then subtract the company’s financial
assets (i.e. total cash and cash equivalents). The result is the
market value of a company’s projects. The final step is to divide
that number by the known ounces in the ground contained in the
company’s resource estimate.
EV/Au Oz helps to answer questions such as “How much am I paying
per ounce in the ground?” and “How does this cost of this
investment compare to buying physical metal?” EV/Au Oz can also be
used to compare junior gold stocks to other peers in the
This mining asset valuation technique is of course not without
its flaws and there are a few important caveats to keep in mind
when using it. For one thing, it doesn’t take into consideration
the costs required to build and operate a mine. Other variables at
play include the size, depth, grade and metallurgy of a project;
not to mention socio-political risks. The EV/Au Oz is most
effective when comparing multiple companies who have projects with
similar deposit characteristics and jurisdictions.
But the most obvious issue is that not all resources are created
equally. The proven and probable reserves of a mid-tier gold
producer are not the same as the measured and indicated resources
of an advanced-stage explorer. Again, comparing like with like is
the best strategy here. And giving more weight to those ounces with
higher confidence can also help to paint a more accurate
“We believe Granada Gold has been undervalued by the market
compared to other companies in along the Cadillac trend in the
Abitibi Greenstone Belt region of Quebec. Our enterprise value per
ounce of in-situ gold resource (2.3 million ounces) is less than
C$10 per ounce. When compared to other gold companies at a similar
stage of development, it is clear that Granada Gold has space to
grow,” said Frank J. Basa, President and CEO of
Granada Gold Mine (TSXV:GGM), speaking of his company’s position as
an undervalued junior gold company. The company has a
pre-feasibility study on the property, which included reserves of
21.6M million tonnes grading 1.3 g/t gold.
Along with assessing geology, the team and the jurisdiction,
mining asset valuation techniques such as EV/Au Oz can help
investors determine which junior gold stocks represent the most
undervalued investment opportunity.
This article provided by NewsEdge.