As the correction in gold stocks continues and as it’s likely to endure for the time being, we take a step back and share some tips for selecting individual junior gold companies.
The current correction may provide the last chance to buy before the bull market in Gold is confirmed and capital pours into the junior sector and pushes up prices.
Here are three of our best tips to help you spot the big winners before the crowd.
With regards to junior producers, the most important variable to screen for is production growth. The market loves growth and in the mining business if you aren’t growing, you’re literally dying (albeit slowly).
The production growth has to be organic. It cannot be growth just for the sake of growth. If the growth occurs at the expense of the capital structure then it’s not real growth. In essence, it’s more fat.
Recently, some of the best performing junior producers have seen their growth or growth potential, turbo-charged by exploration success. A new discovery can accelerate a producer’s organic growth.
Kirkland Lake’s exploration success at Fosterville is the best example. There are a few other examples but not that many.
The junior mining industry has had a very difficult time over the past 8 years so there aren’t too many examples of juniors with strong production growth profiles.
However, if Gold confirms its recent breakout by holding above $1370-$1400/oz, then more companies would have an easier time growing production.
Small Deposits or Discoveries with Upside Potential
With regards to junior explorers, I prefer to screen for companies that already have a defined value or small discovery, but with significant expansion potential.
Big discoveries don’t happen in an instant. They start as small discoveries and then get much larger. The odds of a small or medium-sized discovery growing considerably are better than starting out from nothing but only a few drill holes.
If the timeline of a discovery is akin to a wave then we want to try and “ride the wave.”
Something the Industry Wants
Generally, the industry wants 2-3M oz Au deposits with good margins and production potential of at least 100K oz Au/yr. If something is smaller but has strong economics, it will be coveted but just not by the majors.
For the most part, grade and recovery will determine the economics. Thus, in most cases low grade deposits and small deposits (without sufficient exploration upside) should be avoided.
Ultimately, if a deposit or operating mine has enough size and margin potential with no fatal flaws, then it could be something the industry wants.
Keep an eye on the companies that have performed well recently (and fit this criteria) but are correcting now while digesting their recent gains. The best time to buy the leaders is during a sector correction.
Also, use this time to tweak your portfolio and err on the side of buying quality at a discount. To learn the stocks we own and intend to buy that have 3x to 5x potential, consider learning more about our premium service.