We've Heard It Before, But RBC Thinks Worst Is Over for Junior Golds

Junior golds - the worst may be over!

OK, so we've heard that one before. But RBC Capital Markets analyst Mike Curran makes a good argument that a number of companies are in a position to get re-rated by the market and/or taken over at a big premium.

He tracks a number of non-producing gold companies in terms of their adjusted market cap per total resource ounce. The group average has traditionally been in the range of $50 to $70 an ounce, but it plummeted all the way to $12 an ounce in November. It sits at just $18 an ounce right now.

"We now believe [November] may have been the 'low water mark' for the non-producer group,'" he wrote in a note to clients.

The ridiculously low valuations are logical given that so many juniors have almost no chance to raise money right now. But the good often gets dragged down with the bad. Mr. Curran split the junior golds into two groups based on what he calls the "credibility gap," or those trading above and below $10 an ounce.

Right now the companies are almost evenly split between these two groups. Mr. Curran considers this an opportunity for investors to identify the companies that are undervalued and can get re-rated by the market. Those stocks are likely to make massive gains.

At the same time, he wrote that more M&A activity remains likely given that larger producers have not had much exploration success and need more reserves and resources.

"We would focus investments towards junior golds with higher-grade deposits, lower political risk locales, and/or bigger deposits," Mr. Curran wrote.

RBC's favourite junior golds include Andean Resources Ltd. (ANDPF.PK), Osisko Mining Corp. (OSKFF.PK), European Goldfields Ltd. (EGFDF.PK), and Central Rand Gold Ltd.

Comments

[Conan the B...:]

Buy a Basket, but be sure to include Silver producers as well.

Jan 30 03:21 AM

[Ian R. Camp...:]

Because of my involvement with a mining and oil & gas research website I have developed (see Website) I talk to junior gold company Presidents most days. What I am being told by a few of them is that capital is now freeing up, although at least one told me he thinks the window may close again soon. My own view, developed from continuously reviewing data on the approximate 650 gold companies whose data is embedded in our website, is that the junior golds were mercilessly beaten down last fall as a result of fund cash calls and overall market malaise. There has been some recovery from the bottoms for the junior golds in the past few weeks – but my sense is that the price range for many of them has closely co-related with the gold price, irrespective of any ‘new news’ they may release. Accordingly, if today's rise in the gold price (to approximately $920 in the futures market at 7:30 a.m. Eastern time) holds up I would expect a number of Junior Golds to see share price increases today, and would expect the reverse if there is a gold price decline. That said, as an investor with a long term outlook I look for the same things as Curran apparently suggests. In addition to what Curran mentioned I look closely at a host of other things including existing external and internal infrastructure and management. If you invest in junior golds (or silver, base metals, etc) you might consider visiting stockresearchportalblo... and read the Post Series found there under the ‘Valuation of Mining Companies’ blog category.

Jan 30 08:10 AM

[auto44:]

Thanks FP and Ian R. Campbell for enlightening information.

Jan 30 12:06 PM

[Conan the B...:]

Before going off the deep end into this sector, you should also be aware of the Politics of the mining locations.

For instance, I would avoid Mining operations in Venezuela like the plague.

Go to the Website of each firm, they will list their operations, mining sites, potential reserves, etc.

In the 70's, penny gold miners could move up by 100% and more and vanish within a month. Gold via shotgun was common. Buy a still listed shell company for pennies, rename it with gold in the new name. Wander down a mine shaft with a shotgun with shells loaded with gold dust, fire willy nilly. Then lead some investors to the shiny stuff. They buy, stock jumps, rumors fly, stock jumps, gets news coverage, stock jumps. The originators have sold their shares and vanished, the investors are outraged but defrauded.

Be very carefull. IMO

Jan 30 05:41 PM