The first half of the year could not have gone better for investors in the gold space. The metal was up over 20% at the end of the second quarter, and the VanEck Vectors Junior Gold Miners ETF (NYSEARCA:GDXJ) was up over 90% from its January lows. Unfortunately for most investors in the space, the past 2 months have been extremely painful. Gold has just posted its largest monthly loss since June 2013, and the VanEck Vectors Gold Miners ETF (NYSEARCA:GDX) finished the month down over 15%. This 15% loss for November comes on the back of a 16% monthly drop in August and a 7% drop in October. The one fortunate thing for gold bulls is that most in the space have thrown in the towel. Bullish sentiment on gold currently sits at only 9%, and the 21-day moving average for sentiment is at the 17% level. This is the lowest reading that the 21-day sentiment moving average has recorded since December 2015. While there is no guarantee that extreme pessimism leads to higher prices right, for value investors this is a time to start nibbling.
GDXJ is currently sitting at an important level, despite being locked in a down-trending channel for most of the year. The $32.80 level represents a point where the index found support in late May of this year, and it's important that this support is held. If this support is not held, GDXJ would compound its problems by making new 6-month lows, in addition to the 3-month lows it made last month.
Looking forward to next year, it's very difficult to know what the price of gold will do. While I remain neutral-to-bullish on the commodity, I am waiting for a sentiment buy signal to give me direction and get me back long gold. Those that have been following me know that I went long gold earlier this year, but exited my position last month at $1,229/oz. The $1,240/oz level was an important level for me and told me that things would likely get uglier short term. Despite the fact that I exited my gold position, I have held onto the majority of my favorite miners. I believe most of these companies to be takeover targets, and believe suitors couldn't care less what the price of gold is.
(Source: Goldcorp Presentation)
(Source: Goldcorp Presentation)
The biggest problem for gold majors is continuing to replenish their gold reserves. As we can see from the above charts, annual gold production peaked in 2015 and is set to decline over the next decade. In addition to this, in 1995 the gold market reached peak discovery levels, with nearly 140 million ounces of gold being discovered based on the 3-year running average. As of 2013, this figure sits at roughly 10 million ounces, less than 10% of the 1995 peak. With declining discoveries made each year, it is nearly impossible for large-cap gold companies' reserves to stay at stable levels.
While this is not a very comforting statistic for gold majors, it is great news for gold juniors. Gold juniors with world-class deposits are sitting on something that is 10 times more rare than 20 years ago, as 5-10 million ounce deposits are no longer a dime a dozen. This means gold majors have absolutely no choice but to acquire these companies, as they have no other way of meaningfully replenishing reserves. This article will be the first in a two-part series where I will discuss what I believe to be the best gold juniors for next year. This article will focus on the explorers, while my second article will focus on the producers.
#2 - Gold Standard Ventures
Gold Standard Ventures (NYSEMKT:GSV) has become a household name in the mining sector this year, after the company reported one of the most impressive drill intercepts of the year this summer. The company's discovery at its North Dark Star deposit got much more exciting after it reported a monster 126 meters hole of 3.95 grams per tonne gold. Gold Standard is currently exploring in Nevada for its gold, and is located 16 kilometers south of Newmont's Rain deposit. The company has the 2nd-largest land package on the Carlin Trend and has already delineated a few bulk tonnage gold deposits on its property.
(Source: Gold Standard Ventures Presentation)
2016 has been a monumental year for Gold Standard Ventures, as it has made a sizeable addition to its previous resources. Prior to 2016, the company had global gold resources of 2.1 million ounces at a grade of 0.6 grams per tonne gold. Given the impressive drill results this year at North Dark Star, I believe there is potential to add over 1 million ounces to its previous total resources. The most significant part about its success at North Dark Star is the grade of this discovery. The company has been previously ignored due to being a low-grade bulk tonnage explorer, but North Dark Star has now put it on the map. As we can see from the above image, while North Dark Star is paltry in comparison to Pinion's size, it is at a much higher grade.
The company significantly expanded its treasury by doing a financing a couple months ago, and now has over $59 million in cash. Based on its current share count, Gold Standard has a market capitalization of $519 million at a share price of $2.27. After subtracting for its cash position, the company has an enterprise value of $460 million. While a $460 million enterprise value may seem expensive for a company with just over 2 million ounces, it makes zero sense to value Gold Standard based solely on its Dark Star and Pinion deposits. The two most exciting deposits on its property do not have resource estimates yet, and could easily hold over 1.5 million ounces between them.
North Dark Star Deposit
(Source: Company Presentation)
The newly discovered North Dark Star deposit is looking like it has a 480-meter strike length, with 160 meter width and 150 meter depth. To be conservative, I believe it is fair to use an average grade at North Dark Star of 1.15 grams per tonne gold. While we have seen many high-grade hits above 2.5 grams per tonne gold, the majority of the drill holes have averaged between 0.6 and 0.9 grams per tonne gold. A deposit of this size and grade should hold 1,082,000 ounces. This is a back-of-the-napkin calculation, but I believe it to be quite conservative in nature.
North Bullion Deposit
(Source: Company Presentation)
Gold Standard has stated that the current mineralized low-grade zone at North Bullion spans an area of 1,000 meter lengths and 300 meter widths. In attempting to calculate the total ounces at North Bullion, we can use an ultra-conservative approach and move the average grade of the whole deposit down to 1.20 grams per tonne gold. This is done as roughly 15% of the deposit holds high-grade material, while the majority of the deposit averages a grade of 1.0 grams per tonne gold. After calculating a weighted average of the deposit conservatively, we arrive at an average of 1.2 grams per tonne gold for the whole deposit. For this back-of-the-napkin resource calculation, I have chosen to use dimensions lower than the current mineralized zone to be conservative. If we use a strike length of 700 meters, width of 200 meters and a vertical depth of 50 meters, we arrive at a resource of 637,000 ounces at a grade of 1.2 grams per tonne gold.
I believe Gold Standard Ventures has much closer to 4 million ounces across its 4 deposits. Gold deposits in Nevada command a massive premium compared to other mining jurisdictions. In addition to Gold Standard being in the best mining jurisdiction in the world, most of its gold has been shown to be oxide. This is another significant benefit for the company and should command a premium on any takeovers. Based on a 4 million ounce deposit, I believe Gold Standard Ventures should easily get $150/oz at its Railroad-Pinion Project. Fronteer Gold was taken out by Newmont (NYSE:NEM) for $2 billion, at a value of $416/oz. I have assigned a conservative value of $160/oz for Gold Standard Ventures, as its grade is roughly half of the grade of Fronteer's deposits. Using a value of $160/oz and an estimate of 4 million ounces, Gold Standard's fair value is closer to $640 million. After adding back its current cash position, this equals a market capitalization of $700 million. Based on the company's 229 million shares fully diluted, my fair value on Gold Standard is $3.06 (US).
#1 - Mariana Resources
Mariana Resources (OTCPK:MRLDF) only recently came under my radar, but has since taken over top spot as my favorite junior miner. The company is currently sitting on the largest discovery in the past decade, and is hitting the highest-grade drill results I've seen since Ventana Gold. For those not familiar with Ventana Gold, the company was taken over in 2011 by Eike Batista for $1.43 billion. At the time, Ventana had a resource of 3.9 gold equivalent ounces, at an average grade of 4.0 grams per tonne gold.
The above chart is of Ventana Gold, which provided shareholders with a 7000% return over the course of only 3 years. The discovery was the largest one since Aurelian Resources, and received a takeover price of $366/oz. Mariana Resources has only just started drilling its Hot Maden Project in Turkey, but thus far, the results are jaw-dropping. The grades reported at Hot Maden are nearly double that of Ventana's drill results, in addition to being over thicker intersections. I have shown drill intercepts from each company below to compare the two.
The following are examples of Ventana Gold's five most significant drill intercepts during its 2009-2011 drill campaign:
- LB-051: 51.6 meters of 7.85 grams per tonne gold
- LB-047: 56.5 meters of 6.60 grams per tonne gold
- LB-143: 84 meters of 13.66 grams per tonne gold
- LB-01: 107 meters of 7.81 grams per tonne gold
- LB-112: 94.5 meters of 5.83 grams per tonne gold
Most junior explorers would dream of hitting even one of these intercepts, yet Ventana had several of them on the path to delineating its nearly 4 million ounce resource. In 2015, investors were introduced by Mariana's Hot Maden Project, and thus far, we have seen results like these:
- HTD-04: 109 meters of 9.0 grams per tonne gold
- HTD-05: 82 meters of 20.4 grams per tonne gold
- HTD-15: 117 meters of 13.9 grams per tonne gold
- HTD-34: 71 meters of 32.7 grams per tonne gold
- HTD-71: 69 meters of 62.7 grams per tonne gold
Taking a look at the above drill results, Mariana's drill intercepts are thicker intersections with over double the grades. While Ventana's LB-047 hit a 56 meter intercept of 6.60 grams per tonne gold, Mariana hit a 69-meter intercept of 62.7 grams per tonne. This is a slightly thicker intercept with 900% higher grades, and was released just last week. The other impressive part about Mariana when compared to Ventana is the minimal exploration work that has been done at Mariana's Hot Maden. Ventana needed over 150 holes to prove up these five intercepts and a resource of over 3.5 million ounces gold equivalent. Thus far, it has taken Mariana Resources 70 holes to release more impressive drill results and delineate the same size resource.
(Source: Company Presentation)
The most recent drill results reported from Hot Maden were also the highest-grade drill results at the property to date. Mariana reported 69 meters of 62 grams per tonne gold, which is the highest-grade drill result I have ever seen since I started looking at gold stocks. Given this most recent intercept, I believe there is a possibility the project is very close to the 4 million ounce mark already.
Mariana Resources currently has 121 million shares outstanding, giving the company a market capitalization of $145 million (CAD) at its current share price. While it only owns 30% of the Hot Maden Project, this is still a far way from the $1.4 billion price tag that Ventana fetched in 2011. Mariana Resources' most recent resource estimate was an eye-opener for shareholders. The new resource for Hot Maden stands at 3.5 million ounces at 15.0 grams per tonne gold. Currently, Mariana's 30% ownership at Hot Maden is worth roughly $145 million (CAD). This means the total project is worth $478 million. While I agree that a discount should be given, as the company is in different mining jurisdictions, I believe the current discount to be far too large.
I believe Mariana's ounces have a fair value of $325.00/oz compared to Ventana Gold's $366.66/oz. While I believe it is fair to place a 30% discount on Mariana's ounces compared to Ventana's due to country risk, 25% of this discount should be added back to account for grade disparity. Mariana Resources' grades are almost 400% higher than that of Ventana's with a resource that is almost the exact same size. This should make a significant difference when comparing cash costs for the two companies, and I expect the PEA should show all-in sustaining cash costs at Hot Maden of under $500/oz. By applying my fair value of $325/oz to Hot Maden, the project should have a value of $1.13 billion. This means Mariana's 30% ownership should be worth $341 million, more than double its current market capitalization. For this re-rating to occur, if my assessment is correct, Mariana Resources would command a share price of $2.85 (CAD).
(Source: Company Presentation)
(Source: Company Presentation)
Mariana Resources is currently moving towards development with the expectation that a PEA will be released for Hot Maden within the next month. This should give investors a much better idea of what mining will look like at the project and where costs might come in for this ultra-high grade gold deposit. I expect all-in sustaining cash costs will be projected at below $500/oz, which would be the lowest all-in sustaining cash costs in the industry currently. The pre-feasibility study is also planned for 2017, and this should put Mariana even more on gold majors' radar. Typically, gold majors want to see as much as a gold junior's hand as possible before making a move on its deposit. The pre-feasibility study will be significant enough for gold majors to decide whether they want to make a move on Mariana's 30% stake.
Honorable Mentions and Runners-Up
3. Osisko Mining (OTC:OBNNF)
4. Integra Gold (OTCQX:ICGQF)
At a time when the Gold Miners Index is getting slaughtered and sentiment is despondent, those with a long-term view should be getting their shopping carts out. Despite gold making more lows the past week, GDX continues to hold onto its November 14 low, which is very encouraging. It is possible that the miners are already pricing in $1,150/oz gold and may be bottoming before the metals. Having said that, GDX still remains below its important support level at $22.50. Until this level is broken on the upside, it's hard to remain more than neutral on the index as a whole.
While GDX is making new 3-month lows, both Mariana Resources and Gold Standard Ventures have not. This tells me that the market also believes they are the best of breed in the sector.
Mariana Resources is currently the largest gold position across my portfolios, and I believe it to be the best gold explorer currently on the market. In over 10 years of investing in gold stocks, I have never seen anything comparable to the grades the company continues to intercept. Gold Standard Ventures is my second favorite explorer, predominantly due to its jurisdiction. The company has proved that a sizeable resource is the best mining jurisdiction in the world, and as of 2016, has the potential for a higher-grade starter pit.
Regardless of what gold does over the next year, I believe Mariana Resources and Gold Standard Ventures to be excellent long candidates to weather the storm. Both companies have world-class deposits, and gold majors have no choice but to add ounces in the best places possible. Gold Standard Ventures is a gold major's dream, as it has a fair-sized resource in the best mining jurisdiction in the world. Mariana Resources' strength lies in the fact that there is no gold explorer with a resource that currently rivals its grades under a $500 million price tag.
(Source: CIBC Investors Edge Account)
(Source: TD WebBroker Account)
For full transparency, I have shown my accounts above so that readers know my money is where my mouth is.
Disclosure: I am/we are long MRLDF, ICGQF, GSV.
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.
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