Over the past year, the market for junior gold miners has been all over the place. As shown below, the Market Vectors Junior Gold Miners ETF (NYSEARCA:GDXJ) has moved from $25 per share to its recent price of $15.58, representing a loss of close to 40%.
Ironically, this change has occurred in a time when countries are printing massive amounts of currency, something that historically has equated to higher gold prices. Only to further this opinion, the World Gold Council just recently reported that gold demand hit a record level in 2012. This, driven by the purchases of Central Banks who are the ones printing the money.
Official sector purchases stood at 145.0t in Q4, up 29% on the corresponding quarter in the previous year, making this the eighth consecutive quarter in which central banks have been net purchasers of gold. Central bank buying for the full year rose by 17% compared to 2011, totaling 534.6t, the highest level since 1964.
In an effort to make money on a future rise in gold prices its best to come up with a few guidelines for potential investments.
1. The miner is in a safe territory.
2. A smaller cap miner is preferred as it would potentially be susceptible to greater share appreciation.
3. Miner must be well funded.
With these guidelines in place, a few interesting plays came up immediately but, the one that really stood out the most was NovaGold (NYSEMKT:NG).
1. This mine is located in Alaska and Canada placing it in one of the safest territories in the world.
2. Market cap is only $1 billion dollars.
3. NovaGold has ample money to supply it throughout the permitting process. Because of this, and the fact that Baupost and Paulson & Company are major holders, one might assume any shortage of cash would be easily provided.
1. While still in the permitting process, no gold is actually being mined and the permitting process is projected to take 3-4 more years.
2. Mining costs could be incorrectly calculated and subject to price increases as a result of inflation.
1. The estimated future life of this mine is 27 years and, testing has indicated that production could yield over one million ounces throughout this lifetime. This would make it one of only a few mines in the world to achieve this amount per year.
2. Gold is cheap and as indicated by the Gold Council, prices look like they are setting up for a substantial rebound.
3. Investor sentiment is highly variable and because of this, once the gold bug bites, it's not hard to imagine a substantial rise in all miners shares.
4. Barrick Gold (NYSE:ABX) already tried to purchase NovaGold, before it spun-off NovaCopper (NYSEMKT:NCQ) in 2006 for approximately $1.5 billion. Currently, gold prices are higher than when the proposal was made and tests on reserves have indicated much more gold than there previously was.
5. Current share prices are much lower than when both Baupost and Paulson & Company first purchased shares, something that any value investor would consider a positive. The shares have fallen from their 52 week highs of $8.69 per share to current prices of $3.91 per share. This amounts to a 55% drop in price.
This miner looks too be in a prime position to take advantage of the current economic cycle and make a run in the very near future. Due to its location, massive funding, current economic factors, high prospects, and value investor approval, its hard not to feel like this will certainly be one of the plays of the years.
Disclaimer: The author is not a registered investment advisor and does not provide specific investment advice. Data is sourced from Yahoo Finance and company reports. This information is for informational purposes only. As always, please do not invest more than you can afford to lose!
Disclosure: I am long NG, ABX, NCQ. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.