18-month rally in select gold stocks signals ‘bifurcation’ — Steve Todoruk
John Ciampaglia, our head of ETFs, rang the bell at the New York Stock Exchange on Monday – see the video here. Our gold mining ETFs — SGDM (large stocks) and SGDJ (smaller stocks) — are now trading on the NYSE.
Our main subject today, though, is a trend we’ve been seeing in Canadian gold stocks. Some companies have reached much higher share prices over the last 18 months.
Steve Todoruk, a broker at Sprott Global Resource Investments Ltd., reveals the common thread in a handful of Canadian stocks that have risen significantly in this timeframe:
Investors have taken a shine to a handful of gold companies in Canada over the last 18 months.
Why is the market favoring these stocks?
The answer is that these companies own producing assets and they are delivering operational successes.
Some of the companies on this short list have been producing from a mine for several years. Others have recently built new mines that are now beginning to run smoothly at ramped-up levels, generating stronger cash flows.
Today’s market is rewarding companies that deliver this kind of tangible success.
I believe that some of these companies are potential takeover targets. As I mentioned in my last message, Canadian mines are attractive to major miners now because of the perceived lower risks and the weakness of the Canadian dollar.
Let’s take a look at how some of these companies have performed over the last 18 months.
Detour Gold Corp (DGC.CA) is probably the most-followed company on this short list. Their mine in eastern Canada produced around 105,000 ounces of gold in the first quarter of 20151. Detour has been increasing this number quarter-over-quarter and shareholders have taken note of this accomplishment. Detour’s share price has risen from a low of around C$4.00 in December 2013 to around C$13.50 as of today, May 13, 2015.2 I believe that many investors are speculating on a takeover, similarly to the Yamana and Agnico-Eagle takeover of Osisko in 2014.
Lake Shore Gold Corp (LSG.CA) owns the Bell Creek Complex near Timmins, Ontario. They reached 53,000 ounces of production in the first quarter3 and hope to produce even more thanks to additional discoveries of gold in nearby zones.4Investors have warmed to their story, bidding their shares up from around C$0.50 in December 2013 to around C$1.25 today.5
Richmont Mines Inc. (RIC.CA) owns the Island Gold Mine in Ontario and has ramped up production to around 26,000 ounces in the first quarter. Richmont hopes to increase production further by taking the mine deeper underground, where they have recently discovered additional gold.6 Richmont’s share price has risen on its progress from lows near C$1.20 in December 2013 to around C$3.90 today.7
Kirkland Lake Gold Inc. (KGI.CA) has ramped up annual production to 155,000 ounces per year at their Kirkland Lake mine, in Ontario.8 Investors long doubted whether Kirkland Lake would achieve the production numbers it was forecasting due to the complexity of its underground operations. Now that the company is reaching significant production levels, investors are entering the story. The share price has risen from around C$2.30 in December 2013 to around C$6.30 currently.9
Claude Resources Inc. (CRJ.CA) owns the small Seebee mine in Saskatchewan, Canada, which produced around 21,000 ounces of gold in the first quarter.10Investors have rewarded Claude’s ability to ramp up production. The share price increased from lows near C$0.15 in December 2013 to a price of around C$0.75 today.11
After a few years of a tough bear market, investors are looking for companies that are delivering measurable results. They’re holding off until a company has proven its merits.
Rubicon Metals Corp. (RBY.US and RMX.CA), for instance, has yet to prove to investors that it can deliver on its promises. The company has spent the last two years building its Phoenix gold mine in Ontario. I mentioned Rubicon as a potential takeover target in my last piece because the project is close to Goldcorp’s existing Red Lake gold mine, which may make it more appealing to Goldcorp.
Rubicon has not yet officially begun producing from the mine, and so investors have remained on the sidelines. The company is working through the trial and error process of getting the mine into production. Investors will likely wait to see if the company can deliver the 165,000 ounces of annual gold production that it forecasts. If it does, I expect that investors will begin to like the story.
Of course, past performance is no indication that these companies will continue to perform. Complications could arise with production or permitting. Mine expansions could result in poorer economics than expected. Gold prices as a whole could decline further.
Still, according to Steve, investors are no longer punishing stocks unilaterally. They are looking for signs of tangible success in the industry.
Rick Rule, Chairman of Sprott US Holdings, explained last year that we might see ‘bifurcation’ before a broad recovery. Before the sector would move higher, he said, investors would begin to dump the poorest performers and support companies that offered the most realistic chances of success.
Steve’s observation might be a sign of bifurcation in the last 18 months. If bifurcation continues, it means that a handful of companies could perform well while the overall market stays weak or sinks lower.
P.S.: Steve Todoruk offers a complimentary, no-obligation, portfolio review for your resource stocks. You can contact him to discuss your portfolio at [email protected] or 800-477-7853.
P.P.S.: Join Steve, Rick, and other members of the Sprott team at the second annual Sprott-Stansberry Vancouver Natural Resource Symposium. The four-day event takes places July 28-31 at the Fairmont Hotel Vancouver. Click here to find out more.
2, 5, 7, 9, 11 Bloomberg
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