I think we will see consolidation in the gold mining sector, in which major producer firms -- well-capitalized companies with robust infrastructure like Barrick Gold (ABX), Newmont Mining (NEM), and Goldcorp (GG) -- acquire explorer firms. As such, I think there is a great opportunity to generate outstanding returns within a few years by finding junior companies ripe for appreciation fueled by acquisition by a major. To find such companies, here's what I look for:
- A market capitalization of under $350 million. For this trade, companies with lower market capitalizations may constitute an even better opportunity.
- Operations near a major producer, or having a major producer already a shareholder.
- Teams with star geologists. If geological talent is a key component of what management is bringing to the table, they may be able to find and setup projects that are irresistable -- meaning the gold is very accessible their cost per ounce will thus be lower -- to major producers that have the infrastructure capable of getting the most out of such projects.
There are a number of companies that meet these requirements, and it is an investment theme I plan to utilize repeatedly over the next twelve months. The first investment I just made with this in mind is in Evolving Gold (EVOGF.PK). Evolving Gold currently has a market capitalization of approximately $50 million, is trading near all-time lows at $0.36 per share, and its largest shareholders include Goldcorp (14%) and Sprott Asset Management (7.5%).
The firm also has a joint venture agreement with Agnico Eagle (AEM) -- a robust producer that can leverage the discovery/geological talent. The company is also near Newmont's mining operations, which sets the stage for this explorer firm to work with Newmont to generate outstanding returns for both parties.
My exit strategy here is not clearly defined at the outset; I am simply looking for setups that could yield outstanding returns due to an acquisition in a short amount of time. Either way, at its current price, Evolving Gold is a great opportunity.
Disclosure: I am long EVOGF.PK, ABX, NEM, GG, GDX, GLDX.