Those who are focused on small cap exploration gold mining stocks may wish to observe Tanzanian Royalty Exploration (TRX), which is up over 80% year-to-date. It has far outperformed other comparable stocks. See the chart below, which plots TRX against other stocks that are in the gold mining sector and currently have a market capitalization between 100 million and 500 million USD (TRX is at approximately 439 million at the time of this writing).
Specifically, the stocks featured in the chart below are Midway Gold (MDW), Vista Gold (VGZ), Paramount Gold and Silver (PGZ), Golden Star Resources (GSS), Entree Gold (EGI), Gold Reserve (GRZ), and DRDGOLD (DRD) in addition to TRX, for a total of 8 companies. The stock that is in second place in terms of year to date returns is DRD, which is up just over 35% on the year -- still less than half of TRX.
All of this begs the question: why has TRX has outperformed its peers? And is this sustainable?
A partial explanation of the drop is likely related to the sharp drop TRX stock saw in November of last year. Geier Capital, a hedge fund that previously had a stake of approximately 10% in TRX, cashed out entirely -- leading to a swift decline in the stock. At the time I noted this was an outstanding buying opportunity, as nothing had fundamentally changed about the company.
Of course, the other reason I believe the stock has outperformed its peers is simply because it's a better company. Its CEO, James Sinclair, has 50+ years experience in the gold industry and has a track record of making outstanding calls regarding the price of gold -- from calling the top in the bull market of the 70s almost to the day to his forecast back in 2002 that gold would reach $1650 in 2011. This type of skill, in addition to being remarkably rare, is especially valuable in the current gold bull market. It suggests TRX will have the leadership that knows when to buy, when to sell, and at what price in what is likely to be an increasingly turbulent gold market.
The firm also has a stable balance sheet -- over 29 million USD in current assets and under 2 million in current liabilities -- as well as over 2 million ounces of gold in 43-101 resource estimates. Its mines in the Lake Victoria belt of Tanzania, an area that historically has been rich in gold, are near operations run by Barrick Gold (ABX), one of the largest gold mining firms in the world. This sets the stage for a sale to Barrick, if the price is right.
TRX also has a royalty agreement with Jinchuan Mining regarding a nickel property it has the rights to that can bring the firm an additional revenue stream over a 30 year period, and the firm has worked to alleviate jurisdiction risk by partnering with STAMICO, a parastatal entity. This partnership essentially makes TRX an officially recognized partner of the Tanzanian government.
I don't believe the same can be said for the majority of other gold mining firms in the exploration phase with a US listing and a market cap between 100 and 500 million USD. They generally have weaker balance sheets, geological deposits I believe will prove to be less lucrative, a lack of royalty agreements that can boost aggregate income, and-- by some measures-- may even have greater jurisdictional risk. So in this regard, I expect TRX to outperform explorers with a similar market cap. I think the prospects are outstanding for TRX to evolve into a strong producer with a market cap that runs well into the billions -- especially if the much anticipated mania in the mining sector, similar to what we saw gold stocks do in the latter half of the 70s, comes to fruition.
As a result, I consider it likely that TRX will re-visit and exceed its all-time highs of $7.82 -- a price that is still 78% above its current level. However, as its price rises the stock will come under greater scrutiny, and if news is released suggesting the company will not be able to fulfill its promise of entering production on a significant basis by 2014, we could see a sharp drop in share price. TRX remains the gold explorer I am most heavily invested in personally -- a decision I'm quite comfortable with.