With gold prices remaining well supported in recent months despite downward pressure on the commodity markets, exposure to miners looks increasingly attractive as the low relative cost of extraction has provided large profit margins for the industry. In the current environment, demand for the dollar and dollar-denominated assets are strong enough to induce less than 2% yields on 10-year treasury bills. This has undoubtedly been a large catalyst for the yellow metal’s recent retreat from its August highs of roughly $1900/oz, but as the ballooning debt of the United States slowly shifts back into focus the dollar is poised to lose much of its strength through inflationary fears. This should ultimately result in a sustained bull market for many commodities over the next few years, including gold.
There are a variety of methods to invest in the world’s newfound interest in gold bullion. Recently, ETFs like SPDR Gold Trust (GLD) and iShares Gold Trust (IAU) have been popular with traders due to their spot-on tracking of the commodity and the high liquidity of the shares. Others have been looking to gold miners, which should theoretically offer amplified returns given a continued bull market for the precious metal. Despite the metal’s incredible 270% run over the last five years, these larger gold miners have been unable to replicate much of this success.
Consider Barrick Gold Corporation (ABX), the largest gold producer in the world. Over the last five years, shares have appreciated just under 60% -- essentially a 210% underperformance of the commodity it produces. An even more disappointing example can be found with Kinross Gold (KGC), another senior miner which delivered a measly 3% return in the last five years. These larger gold miners can attribute most of their stagnation to decreasing productivity of their properties. Due to their large size, even large spikes in gold production will not induce the kind of appreciation that we’ve seen of the actual metal itself over the last few years. This is why many investors have flocked to junior miners.
Despite some newfound interest in these types of companies, junior gold miners still trade at steep discounts compared to their larger peers due to higher operational risks. In return for risk, investors are offered the opportunity for very outsized returns on junior miner investments.
Given the increasing rarity of gold veins in more developed areas like North America, it is becoming increasingly important for miners to delve into new undeveloped regions. A small Canadian mining company called Loncor Resources (LON) is attempting to do just that in The Democratic Republic of the Congo.
Loncor controls over 20,000 square kilometers of potentially rich ground in the DRC. In neighboring Tanzania, which, according to Michael Cooper – editor of CFMonitor.com, looks like an extension to the Ngayu Greenstone belt , operators such as African Barrick and Anglogold Ashanti have previously discovered rich gold deposits yielding over 28 million ounces in Africa. According to Cooper, Peter Cowley, President of Loncor, was credited with discovering the 20 million oz Geita deposit in Tanzania when he had headed up Ashanti Exploration.
Loncor’s prospects in the DRC are tied to two major developments: the Ngayu Project and the North Kivu Project, which both sit on top of quality ore-producing greenstone belts. Since exploration is in the early stages, the true value of these deposits remains to be seen but drilling at various prospects within these regions has indeed confirmed the existence of high grade gold with average intercepts in the 10 g/t range. Investors may remain skeptical on Loncor’s operations in Africa due to the political climate and the early stage of the operation, but any investors willing to take on some risk could reap huge rewards as the company continues to roll forward positive data about what lurks beneath its acquired properties.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.