Friday, July 2, 2010

Emerging Gold Stocks: 'Show Me The Money!'

¹²Emerging Gold Stocks: 'Show Me The Money!'

By Marc Davis | 2 July 2010

In a jittery stock market, the only gold stocks that investors should own are for companies that really do have the goods. This is the consensus view among various gold investment industry commentators and analysts. In particular, "advanced stage" gold development stocks offer the best bets for speculative investors, argues Al Korelin. He is the publisher of the Korelin Economics Report, a longstanding radio show that covers politics and business news, with a particular focus on the mining investment sector.

By definition, advanced stage gold companies have sufficiently defined deposits to clearly demonstrate the size and potential viability of their deposits. "Just like gold producer stocks, development stocks are also a pretty safe bet in this market," Korelin says. "Right now I'm most comfortable with companies that are exploring to enlarge an existing asset, as opposed to the ones that are exploring to find an asset."

Better still are companies that have sizeable enough gold assets to be takeover targets for mid to large sized gold producers, he adds. Especially as the world's biggest, deep-pocketed gold miners are scrambling to replenish dwindling inventories. And the easiest way to do that is to gobble up much smaller would-be producers that own sizeable gold projects.

"A particularly good example that's a pretty safe bet is be a company that has a significant discovery like Exeter Resource" Korelin says. Exeter Resource Corp. (TSX.V: XRC) (NYSE-A: XRA) is advancing the Caspiche gold-copper discovery in northern Chile's prolific Maricunga gold belt (where over 100 million gold ounces are defined). This veritable monster, which is still growing in size through new drilling, already weighs-in at 24.3 million ounces gold, making it the second largest of its kind in Latin America.

Only the nearby Cerro Casale gold mine in-the-making edges Caspiche in size. Jointly owned by global gold mining powerhouses, Barrick Gold (ABX) and Kinross Gold Corp. (KGC), it boasts 26.4 million ounces of gold. "The bigger the better" is a sentiment that is also echoed by Marshall Berol and Malcolm Gissen, who manage the San Francisco-based Encompass Fund. This small mutual fund, which has a heavy weighting in mining equities, was ranked as the top performer in 2009 among 722 global equity funds that are tracked by Morningstar, a financial sector ratings agency.

"Every year, just to stay even from a revenue and cash flow standpoint, major mining companies need to acquire large undeveloped gold deposits with a lot of ounces in the ground to replace their mined-out reserves" Berol says. "And it's increasingly difficult to find large gold discoveries. There really aren't that many left anywhere in the world."

"So the few junior mining companies that have made those larger discoveries are the ones that are going to be extremely attractive takeover targets for the large miners,"
he adds. "One of those companies for example is Exeter Resource."

"The company's Caspiche project is an exceptional resource that sits right between one currently producing gold mine and another deposit that's moving towards production, both of which are owned by major gold companies,"
says Berol. "So it seems to us that a logical progression is that some major gold producer is going to buy out either Exeter or the project."

Other gold juniors that are developing huge world-class gold deposits include Novagold Resources Inc. (NG), which has two company-maker deposits in Alaska with combined resources of over 31 million ounces, and Ivanhoe Mines Ltd. (IVN), which is the majority owner of a sprawling 45-million-ounce deposit in Mongolia. However, quality can be just as important as quantity when it comes to assessing the merits of a gold deposit, according to David West, a mining analyst for the Vancouver-based investment bank, Salman Partners. He says that with less prolific gold discoveries, investors can often benefit from a very favorable risk/reward trade-off by betting on higher-grade deposits in mining-friendly jurisdictions. Especially since, the higher the gold grades, the more insulated the project is likely to be to any volatility in the gold price.

"High-grade deposits can lend themselves to solid economics, even if the price of gold drops somewhat," West says. He cites Extorre Gold Mines (TSX:XG) as an example of an aspiring gold miner that looks like a winner with the emergence of its modestly-sized, but richly-mineralized gold/silver Cerro Morro deposit in pro-mining Santa Cruz Province in southern Argentina. "What sets Extorre apart from similar companies is that the Cerro Morro deposit has exceptional gold grades, which takes a lot of potential mine development risk out of the equation. Its high-grade and exploration upside makes Cerro Moro one of the better projects."

Additionally, holding gold juniors that have solid fundamentals should provide investors with considerable gains over and above holding just bullion itself, West adds. "There's much greater potential upside for the share prices of these stocks, compared with the potential upside of owning physical gold. Investors who take further risks by holding equities require risk premiums, and should receive them over time."

Another key advantage is that an asset-rich junior gold stock's upside does not necessarily have a strong correlation to bullion prices, he says. If a company develops a rich enough deposit to warrant a mine, its share price should likely enjoy re-rating once the mine is developed, regardless of the prevailing trend in gold prices. Meanwhile, gold's current trend is an investor's best friend, according to Lawrence Roulston. Lawrence is a certified geologist and an independent mining analyst who publishes the Resource Opportunities mining investment newsletter.

He says anxious investors in gold development stocks have little to fear. They should take comfort in the fact that these equities are underpinned by underlying gold assets, which are becoming increasingly valuable in a rising tide market for bullion prices. Not only do gold development stocks offer considerable leverage to the price of bullion, but many are likely to seriously outperform the broad markets over time, Roulston adds.

"There are incredible opportunities at this time for investors who look at a specific resource company investment, rather than looking for moves in markets. The upside potential for a successful junior gold stock is measured in a several fold return or better, whereas the volatility in the market can be measured in single-digit percents, or at best in tens of per cent."


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