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

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 |  Includes: ANDPF, EGFDF, GDX, GLD, OSKFF
by: FP Trading Desk

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. (OTC:ANDPF), Osisko Mining Corp. (OTCPK:OSKFF), European Goldfields Ltd. (OTC:EGFDF), and Central Rand Gold Ltd.