It's Time To Buy Uneconomic Gold Companies

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Includes: THM, XRA
by: Palisade Radio

Summary

Buying assets for the price of gold today, and enjoying the extreme and leveraged upside when gold prices increase.

Focus on companies with low G&A costs and minimal project expenditures.

Most of all, be patient!

gold It may sound counterintuitive, but now is the time to buy companies where gold will remain in the ground for the foreseeable future. It is a strange phenomenon, but for companies that own mega-sized gold projects, the best thing to do is nothing!

No, this is not the worst investment strategy in the world; it is intended to fully take advantage of the power of optionality or buying assets for the price of gold today, and enjoying the extreme and leveraged upside when gold prices increase. A pure optionality play is characterized by low G&A costs and minimal project expenditures - hence companies where management is lean and doing nothing.

To put this into context, let's look at a simplified case study.

Chesapeake Gold Corp. (OTCQX:CHPGF) is a company led by industry veteran and serially successful, Randy Reifel. Chesapeake Gold owns 100% of the Metates Gold-Silver project in Mexico. The project boasts ~20 million ounces of gold with a cash cost of $517 per ounce. Unfortunately, it also comes with a $4.3 billion price tag.

In light of current market conditions and with a current market cap of C$80 million, Chesapeake's project is not financeable. This is despite having an in-situ value of C$31 billion. During late 2011, Chesapeake Gold's market cap peaked at ~C$750 million with the same asset. Since 2011, Metates has progressed considerably, thus a rebound in gold prices can easily warrant a ten-fold increase in share price. At that time, financing will once again become accessible and the market will reward advancing the project towards production.

Looking at the top 30 mega-projects currently in development, there is in excess of over 1 billion ounces waiting to be extracted. Here is a list -

Property

Company

Reserves & Resources (Au Oz.)

Pebble

Northern Dynasty Minerals (NYSEMKT:NAK)

107,630,000

Potchefstroom Goldfield

Sibanye Gold (NYSE:SBGL)

76,149,204

KSM

Seabridge Gold (NYSEMKT:SA)

75,282,000

Sukhoi Log

Government of Russia

61,729,000

Baimskaya

Millhouse Capital

49,834,000

Donlin

Novagold Resources (NYSEMKT:NG), Barrick Gold (NYSE:ABX)

45,000,000

Reko Diq

Antofagasta (OTCPK:ANFGY), Balochistan Dev. Authority, Barrick Gold

41,373,000

Klerksdorp

Sibanye Gold

39,671,492

ERPM Extension

DRDGold (NYSE:DRD)

39,112,207

Natalka

Polyus Gold (OTC:PGILF)

36,800,000

Snowfield

Pretium Resources (NYSE:PVG)

35,097,000

La Colosa

AngloGold Ashanti (NYSE:AU)

33,150,000

Cerro Casale

Barrick Gold, Kinross Gold (NYSE:KGC)

32,607,000

Armgold/Orkney

Black Economic Empowerment

31,764,000

Oyu Tolgoi

Turquoise Hill Resources (NYSE:TRQ), Government of Mongolia

30,126,300

Evander

Pan African Resources (OTC:PAFRF)

29,743,000

Tujuh Bukit

Private Interest, PT Indo Multi Niaga

29,531,250

Wafi-Golpu

Newcrest Mining (OTCPK:NCMGY), Harmony Gold Mining (OTC:HGMCF)

28,458,000

Las Cristinas

Crystallex De Venezuela

27,061,000

Caspiche

Exeter Resource (NYSEMKT:XRA)

25,081,600

Lookout Hill

Turquoise Hill Resources, Entrée Gold (NYSEMKT:EGI), Sandstorm Gold (NYSEMKT:SAND)

24,667,000

Buffelsfontein

Village Main Reef (OTC:VMRFF)

23,156,000

Pascua Lama

Barrick Gold, Silver Wheaton (NYSE:SLW)

22,818,000

Frieda River

Guangdong Rising Assets Manage, Highlands Pacific (OTC:HLPCF)

20,497,020

Bougainville

Rio Tinto (NYSE:RIO), Private Interest, Government of Papua New Guinea

20,175,850

Livengood

International Tower Hill Mines (NYSEMKT:THM)

20,147,087

Metates

Chesapeake Gold (NYSE:CHK)

19,827,900

Far Southeast

Gold Fields (NYSE:GFI), Lepanto Consolidated Mining (OTC:LECBY)

19,800,000

Elang-Dodo

Newmont Mining (NYSE:NEM), Sumitomo (OTCPK:SMMYY)

19,711,000

Barlevsky

Supatcha Resources (OTC:SAEI), Local Interest

19,700,000

Click to enlarge

Source: SNL Financial

Subscribers should be familiar with several names we zeroed in on when we first wrote about optionality back in November 2015 in an article titled The Power Of Optionality: Exeter Resources (NYSEMKT:XRA), International Tower Hill Mines (NYSEMKT:THM), and of course Chesapeake Gold. All companies that have felt the wrath of the bear market, but are not without prolific gold projects.

Obviously there is more due diligence to do here; however, we emphasize optionality speculation should be part of every investor's gold portfolio. The possibility of a ten to twenty-fold increase in just one position can negate several dogs, and given the current markets there will never be a better opportunity to take advantage of this. This has been a tried and tested investment strategy for the largest names in resources, including Rick Rule and Eric Sprott.

In an interview we conducted with Rick Rule on Palisade Radio, Rick listed the ingredients for a strong optionality play as a company with enough cash to weather the storm, a disciplined management team with low G&A, and lots of patience!

In resources, you are either a contrarian or a victim. Which will you be?

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

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.

Editor's Note: This article covers one or more stocks trading at less than $1 per share and/or with less than a $100 million market cap. Please be aware of the risks associated with these stocks.