- Gold stocks provide leverage to the price of gold.
- Some gold stocks are simply not worth the risk, however.
- I list 5 gold stocks I think investors should avoid in 2018 and beyond.
5 Gold Stocks to Avoid in 2018
The point of buying a gold stock is to gain leverage to physical gold prices (GLD). For example, every 10% gain or so in prices should lead to a 20% to 30% or higher gain in your shares.
When gold rises, a gold miner's margin per ounce should also rise, leading to higher profits; gold projects (not yet in production) should also rise in value, and it's typically easier for those companies to raise money to fund exploration (for example, a project's net present value may be $150 million at $1,200 gold, but then rise to $250 million or higher at $1,350 gold).
But some gold stocks just simply aren't worth an investment due to various issues and risks, whether it be excessive debt and little cash on hand, uneconomical gold projects with low grades, poor infrastructure or other issues, a lack of exploration upside, a poor or inexperienced management team, risky mining jurisdictions, capex overruns, or some other issue.
Before I get into my list of five gold stocks to avoid this year, here's a few of my past "bearish" calls on gold stocks and how they turned out.
- In 2015, I told readers to avoid Allied Nevada Gold at $.99, Banro at $.15 and Tanzanian Royalty Exploration at $.56. Allied Nevada went bankrupt, Banro and Tanzanian both trade about 50% lower currently.
- In 2016, I recommended avoiding Primero Mining, Continental Gold, Rubicon Minerals, Tanzanian Exploration, and Timmins Gold. Primero fell from over $1 per share to $.20, Rubicon went from $5+ share to the current price of $.99 following a restructuring and dilution to shareholders, Tanzanian continued its decline. Timmins (now Alio Gold) and Continental did both perform better than I expected, with positive returns.
- In June of 2016, I said "no" to Tahoe at $13.64 per share and said to avoid shares. In April of 2017, I still said "no" to Tahoe at $8.43 per share; the stock now trades at $4.64 as of writing.
- In September 2016, I reversed a previous bullish call on New Gold (NGD) at $4.59 per share, and in January of 2017, I expressed bearishness on New Gold (NGD) at $2.59; the stock now trades at $2.55 and has underperformed.
I skipped doing a list in 2017, but here are my "top" 5 gold stocks I think investors should avoid for 2018 (and in the foreseeable future).
To be clear, the stocks are highly volatile and may trade higher at times. I do not think these stocks will outperform the benchmark VanEck gold miners index (GDX) by year's end, as well as past this year. However, I do not necessarily recommending shorting any of these stocks, as short-selling carries risks, and there's always a possibility (albeit small) that one of these companies will get bought out by a larger miner.
1. Imperial Metals (OTCPK:IPMLF)
Imperial Metals' stock is stuck in a nasty downward spiral, with no end in sight.
The company operates the Red Chris, Mount Polley and Huckleberry copper mines (with other base metals and precious metals by-product) in British Columbia, and also owns a 50% interest in the Ruddock Creek lead/zinc property. It produced 93.7 million pounds of copper in 2017 and 81,425 ounces of gold, with similar production expected this year.
Production looks strong, however, Imperial's cash flow has been falling and its balance sheet is an absolute mess. For the first nine months of 2017, Imperial reported $45.3 million in cash flow, a big drop from $107.9 million for the first nine months of 2016; it ended last quarter with $858.29 million in total debt compared to a measly cash balance of $9.1 million; it has a massive working capital deficiency of $919 million.
Imperial simply may not have enough cash flow to service its debt in the future. It looks like it is struggling mightily at the moment, and I think it will likely need to raise money via equity numerous time throughout the year. So, I think the stock is likely to continue its downward spiral this year. Keep an eye on its financials.
2. Tahoe Resources (TAHO)
Tahoe produced 445,000 ounces of gold in 2017 and is targeting growth to 500,000 ounces by 2019 with AISC below $1,000 per ounce; its production comes from the Shahuindo and La Arena mines in Peru, and the Timmins West and Bell Creek mines in Canada.
Tahoe also owns the massive Escobal silver mine (292 million ounces in silver reserves) in Guatemala, which has had its production suspended since last summer as Tahoe faces a criminal trial in Guatemala and a civil lawsuit in Canada (more details here).
Meanwhile, the company has diluted shareholders significantly over the past few years to effectively buy its growth, through the acquisition of Lake Shore Gold to acquire the Timmins West and Bell Creek mines, and the deal to buy Rio Alto Mining for $1.12 billion in 2015, for its La Arena mine.
While these acquisitions have certainly helped the company grow its production, they have done nothing to help the stock price, and they are starting to look like really bad, expensive deals that were done with gold trading at higher prices.
As I've told readers before, I believe this stock is "cheap" for a reason. I feel like buying shares here would be throwing good money after bad. I don't expect there to be a long-term solution to the issues at Escobal, and I don't think the company has done anything at this point to earn investors trust.
3. New Gold (NGD)
New Gold is the one stock on this list that I would consider re-evaluating this year following its earnings. For now, it's still worthy of making this list, however.
The company has been plagued with CAPEX overruns at the Rainy River mine. I wasn't a fan of the deal when it happened, and I'm certainly not a fan of it now, as it's starting to look like one of the worst deals I've seen in recent memory.
As I pointed out in past coverage, the estimate capital requirements for the mine soared to over $1.2 billion, which was about $350 million higher than what was originally expected in the feasibility study. When you combine New Gold's purchase price of the project of $310 million, the cost to get this mine up and running has exceeded $1.5 billion.
This is a ton of money for a project that only carries a NPV of $438 million (pre-tax, $1,300 gold price), based on the feasibility study, and for a mine that'll likely produce 325,000 ounces of gold annually. The $1.5 billion investment values each gold reserve ounce by approximately $400/oz ($1.5 billion, divided by gold reserves of 3.8 million, not including silver reserves of 9.4 million ounces). For that price, you can buy a gold miner outright, or several juniors together, and achieve greater production levels.
New Gold also owns the massive Blackwater gold project (7+ million ounces of gold), and while that project carries a near-$1 billion value ($1,300 gold, pre-tax, 5% discount), the development costs of $1.865 billion likely means the project is not going anywhere in the foreseeable future.
New Gold has seen a bump in its production from Rainy River, which reached commercial production in October 2017, but the company now has just over $1 billion in debt and I think this will hurt its future growth prospects. To be clear, I'm not expecting a free-fall in New Gold's stock price, as the company is still a profitable producer, but I expect the stock to continue to underperform peers.
4. Northern Dynasty Minerals (NAK)
Quite frankly, this is one of the most speculative gold stocks I think I've ever seen. I do not believe the Pebble project will ever turn into an actual producing gold mine as the obstacles are likely too huge. In the meantime, the stock will likely to be controlled by short-term traders looking to make a quick buck.
I do not doubt the size of this deposit. It has 71 million ounces of gold, 57 billion pounds of copper, and 345 million ounces of silver, all in measured and indicated resources. Overall, it's the 8th largest undeveloped copper resource and the largest undeveloped precious metals resource in the world, according to the company's presentation.
But sometimes, size isn't everything. My main issue with the project is the amount of capital it is likely to require, as well as permitting issues and local opposition.
The original PEA on Pebble stated $4.7 billion in upfront capex requirements, and that was released some 7 years ago. The company is looking at potentially starting as a smaller operation, which would presumably require less capital and leave a smaller development footprint, which may give it a better shot of landing permits. Pebble is located near rivers that make up about half of the world's sockeye salmon harvest, and has reportedly drawn strong opposition from locals.
First Quantum has entered into an option agreement, in which it can earn 50% in the project for $1.35 billion. Assuming the company somehow gets all of its permits and lands financing for Pebble, production would occur by 2025, according to the company.
I want to stress again that this stock is highly volatile and could experience big swings in both directions. Since I do not think Pebble will ever reach production given the permitting and financing risks (even with the First Quantum option deal), I recommend avoiding the stock.
5. Tanzanian Royalty Exploration (TRX)
Tanzanian owns 55% of the Buckreef gold project in Tanzania. Based on a newly released feasibility study, Buckreef has 1.06 million ounces of gold that will be mined over 15 years, with a NPV of $243 million at $1,250 gold (which pegs the company's 55% interest at $133.6 million).
My reasons for bearishness are pretty much the same now as they were in the past. I don't view this company as a legitimate gold company - its track record is abysmal in my opinion, as you can tell from the stock chart above, the stock has gone nowhere but down over the past few years.
The company is trying to produce gold in one of the highest-risk mining jurisdictions in the world in Tanzania, where Acacia Mining has been caught in a tax dispute with the government, and as the government tries to claim a bigger stake in companies.
Tanzania ranks at the bottom for African countries for investment attractiveness in The Fraser Institute's Mining Survey 2017. According to comments in the study, taxation is excessive and legislative changes in the country have created uncertainty and instability. The company says it is unaffected by the new laws in Tanzania but I find this hard to believe. I would go as far to say that Tanzania is currently an uninvestable country.
I've also found Tanzania's website is confusing and out-of-date, and doesn't list key information, such as the company's current share count, its market cap, a corporate presentation or fact sheet. You be the judge. Personally, I still view shares as a strong sell.
Subscribers of my marketplace offering get access to my full top gold stocks of 2018 list, as well as a full list of my real-life holdings and weightings via article updates. I also indicate which stocks I plan on buying and selling in posts and in the live chat, and I'm available to discuss positions over email as well.
Editor's Note: This article covers one or more microcap stocks. Please be aware of the risks associated with these stocks.
This article was written by
With over a decade of experience in the investment industry, I am a highly skilled private investor with a proven track record of success in the commodities and hard assets sector. My areas of expertise include investing in gold and silver miners, royalty and streaming companies, pure exploration companies, as well as oil and gas producers and MLPs. My comprehensive understanding of these markets and my ability to identify and capitalize on profitable opportunities have enabled me to consistently deliver strong returns for my subscribers.
Analyst’s 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.
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