Assessing opportunities in the gold and junior mining sector

by MMC
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Last week I was in beautiful Colorado Springs to attend the 35th Annual Denver Forum, where the sentiment in all things was cautiously optimistic.

Many speakers and participants were bullish on the physical metal, highlighting gold’s resilience in the face of very high and high returns over multiple years. When the Federal Reserve begins to cut rates and the value of the greenback calms down relative to other currencies, I think that will truly be the time for dollar-denominated gold to shine, as it is currently in many countries like Argentina, Japan, China, South Africa and more.

Investing in gold and gold mining companies is a completely different matter. Total known holdings in physical gold ETFs currently stand at just under 89 million ounces, down from around 106 million ounces in April 2023, according to Bloomberg data.

Investor appetite for smaller gold miners – those producing less than a million ounces per year, if at all – has also been muted, despite the fact that small-cap explorers and producers have greater operating leverage and higher profits linked to rising gold prices. In the chart below, you can see that junior companies outperformed senior companies – sometimes by a large amount – when gold prices were rising, although junior companies also saw lower lows when the yellow metal was under pressure.Junior gold miners

If junior mining stocks end 2023 in negative territory, it would mark the third straight year of lackluster returns and the longest losing streak since the gold bear market that persisted from 2011 to 2015. Important to note is the high risk and high rewards. nature of the junior gold space. Over a 20-year period, juniors averaged about 9% per year, compared to about 4.1% for seniors.

Many speakers at the conference focused specifically on Canadian junior companies, but challenges persist in other markets as well. The Johannesburg Stock Exchange (JSE), historically anchored in the mining sector, is increasingly losing junior mining and exploration companies. Of the 39 mining companies listed on the JSE, only six were bona fide precious metals exploration or development companies, in stark contrast to more than 2,000 listings on Canadian exchanges.

With the Fed potentially nearing the end of its rate-hiking cycle and the dollar poised to correct, now could be an opportune time to start considering an allocation to smaller gold explorers and producers in anticipation of a rise in gold prices.

But how to proceed?

Anticipate before participating: the life cycle of a mine

Investing in junior mining companies requires a thorough understanding of the mine life cycle. For this, we will turn to the Lassonde curve. Named in honor of my longtime friend and mentor, Pierre Lassonde, co-founder of Franco-Nevada, this indicator illustrates seven distinct stages, from early exploration to exhaustion, each offering risks and rewards. unique opportunities.

Mine life cycle
Initially, at the “Concept” stage, geologists use geochemical and sampling techniques to locate potential gold deposits and analyze drill cores for mineral content that, if found in sufficient quantities, could hint at a viable mineral deposit. The second step, Discovery rewards the first speculators, showing the mining potential based on a significant presence of gold. This stage gives way to the “Feasibility” phase, where the studies evaluate the prospects for profitability of the deposit. Speculative investments peak here due to continued uncertainties.

The next phase of “development” is a pivotal point where many mineral deposits can falter, with companies needing to secure financing, develop a production plan and build an operational team. Successfully navigating this stage leads to the “Startup” stage, where the business begins to process more, which generates revenue. The final “Operations” phase, during which gold is actively mined from the ground, has always attracted even more institutional investors.

Are microcaps ready for a comeback after rate cuts?

I think the appeal of small-cap gold mining stocks extends to micro-cap stocks in general.

Micro-cap stocks in general, which constitute less than 2% of the total investable market capitalization of the U.S. stock market, can be an attractive part of a portfolio due to their low correlation to larger market capitalizations and their potential in as a liquid and profitable substitute for private shares. equity. However, they come with challenges such as increased volatility, limited liquidity and few options for investors seeking exposure.

The Russell Microcap Index, with more than 1,500 stocks and an average market cap of $660 million as of August, serves as a common microcap benchmark. Stocks in this group have underperformed this year, mainly due to rising borrowing costs and uncertainty in the banking sector. After all, large companies raise most of their funds in capital markets by issuing bonds, while small businesses rely largely on bank loans.Microcap Stocks
Indeed, small American businesses are currently having more and more difficulty accessing the capital necessary to operate and grow, according to a recent survey by Goldman Sachs (NYSE:). Among those that applied for a business loan in the past year, 70% of businesses reported difficulty obtaining capital, up from 61% in April 2023.

In August, the Biz2Credit Small Business Lending Index found that large banks (over $10 billion in assets) experienced a decline in small business loan approval percentages, falling to 13.2% from 13 .3% in July, a drop of almost 2% from 15.1% in August 2022. This continues a downward trend in approvals from major banks since June 2022.

In contrast, smaller banks, which often process government-backed Small Business Administration (SBA) loans, saw their approval percentages increase slightly, from 18.9% in July to 19.1% in August , although this figure is significantly lower than pre-pandemic figures.

Meanwhile, credit union approval rates hit an all-time low in August at 19.8%, down slightly from July’s 19.9%.Small Business Loan Approvals

But as is the case with gold stocks, we could see a turnaround for microcaps once the Fed starts cutting rates and borrowing costs fall. Now this could be an attractive buying opportunity.

All opinions expressed and data provided are subject to change without notice. Some of these opinions may not be suitable for all investors. By clicking on the link(s) above, you will be directed to one or more third-party websites. US Global Investors does not endorse all information provided by this website(s) and is not responsible for its/their content.

THE MVIS Global Junior Gold Miners covers the most liquid small cap companies active in the gold and silver mining sector. The index is reviewed semi-annually, the free float market capitalization is weighted and the maximum component weight is 8%. The index is comprised of the 2,000 smallest companies in the Russell 3000 Index, representing approximately 8% of the total market capitalization of the Russell 3000. The Russell Microcap Index measures the performance of the microcap segment of the U.S. stock market. It represents less than 3% of the American stock market. It includes 1,000 of the smallest small-cap Russell 2000 Index stocks based on a combination of their market capitalization and current index membership and includes the next 1,000 stocks. The index is widely considered the best single indicator of large-cap U.S. stocks and serves as the basis for a wide range of investment products. The index includes 500 leading companies and covers approximately 80% of the available market capitalization. The Biz2Credit Small Business Lending Index is an analysis of 1,000 monthly loan applications on the Biz2Credit website.

Holdings may change daily. Assets are reported at the end of the most recent quarter. The following securities mentioned in the article were held by one or more accounts managed by US Global Investors as of (06/31/2023): Franco Nevada Inc.


All opinions expressed and data provided are subject to change without notice. Some of these opinions may not be suitable for all investors. By clicking on the link(s) above, you will be directed to one or more third-party websites. US Global Investors does not endorse all information provided by this website(s) and is not responsible for its/their content.

The Global Energy Vulnerability Index 2023 is designed to help leaders and businesses assess and benchmark a country’s energy security, providing insight into potential risks, challenges and opportunities in the markets in which they operate or plan to expand in the future.

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