Gold stocks: time to buy or will they get worse?

Gold has fallen from over $1,300 in mid-August to around $1,210 per ounce as of October 21, dragging many gold-related stocks down with them. Steve Todoruk joined Rick Rule at Sprott Global Resource Investments Ltd. in 2003. Should cautious investors steer clear of the sector for now? Or is this an opportunity to buy gold stocks? In a recent note, Steve weighed in:

While gold has gotten cheaper in recent weeks – partially because of US dollar strengthening — the stock prices of many major miners and small juniors are holding well above their lows of December 2013.

In my view, we are seeing the ‘higher lows’ that we would expect in share prices as we move out of the bear market and into a potential bull market. To the disappointment of many investors, this gradual rise is not the sharp upturn out of a three-year bear market, but rather a slow, frequently-interrupted climb.

For the junior mining stocks, as of October 2nd, Virginia Gold Mines stands around $12.30 (from $11.60 on December 20)2, Mag Silver is at $7.40 (from $5 on December 20)3, Rubicon Minerals Corp. is at $1.30 (from near $0.75 on December 20)4, Premier Gold Mines is at $2.70 (from $1.30 on December 20)5, Detour Gold is at $8.60 (from $3.80 on December 20)6 and Roxgold Inc. is $0.70 (was $0.42 on December 20)7. One reason many of these juniors are holding up is that some of them are potential takeover targets. A cash bid could come along and offer a payout to investors regardless of what happens to the price of gold – which explains why they have retained their value. Of course, not all companies that are potential takeover targets will do well in the coming months or year – and their performance this year is no indication that they will continue to rise.

Some of these companies were able to take advantage of strong prices earlier this year to raise significant amounts of cash in the equity markets. I believe those companies now stand to be better protected to the downside, and may benefit from the ability to spend money advancing their projects.

Mag Silver raised C$79 million in a raise that closed July 168, which may allow them to continue advancing their silver project in Mexico with their partner Fresnillo PLC.  Rubicon Minerals raised C$115 million in a new issue completed on March 129, and Royal Gold agreed to contribute $75 million in a deal that closed February 1110. I expect that this will enable Rubicon to continue building its new gold mine in eastern Canada. Roxgold raised $29 million in a deal that closed on March 25 to continue working on their gold project in West Africa.11

Many of the bigger mining companies are also trading well above their levels from December 2013. Randgold is currently near $70 (up from around $60 on December 20)12, Agnico Eagle Gold Mines is at $30 (from $25 on December 20)13, Franco Nevada is near $48 (from under $40 on December 20)14, Tahoe Resources is over $20 (from $16 on December 20)15 and Royal Gold is over $65 (from $44 on December 20)16.

This bodes well for the prospects of mergers and acquisitions, as larger companies leverage their own elevated share prices to swallow up smaller companies. On that subject, we recently saw the proposed takeover of a junior by a big mining company – a positive sign for companies awaiting takeover offers.

It came as a surprise to many veteran investors—on September 8th, Agnico Eagle Gold Mines announced that it had offered to pay $205 million to take over Cayden Resources Inc.17, a promising, but very early-stage company (no established resource has been published yet). This type of takeover rarely happens in the mining sector. Big companies don’t usually take over juniors until a resource has been established (when the deposit’s size and average grade are well understood).

The last time that I recall something like this was back in the 1990’s when Barrick Gold Corp. took over Arequipa Resources. That junior had drilled eight holes into a new gold discovery in Peru. Barrick paid around $800 million to acquire Arequipa.18

Agnico Eagle –one of the big gold miners – obviously believes it has its financial ‘house’ in order. They must be feeling that their costs are under control and that their mining operations are likely to be profitable going forward. This takeover comes just a few months after Agnico Eagle, in a partnership with Yamana Gold Inc., successfully outbid Goldcorp to take over Osisko Gold Corp. – at a cost of $3.9 billion.19

Investors who are still holding on, wondering when they’ll see that recovery they’ve been waiting for, should view these developments – share prices of certain stocks staying above their lows, and some mergers and acquisitions happening – as positive signs for the natural resource sector going forward.

P.S.: If you would like Steve to review your junior mining portfolio, please call him at 1.800.477.7853 or e-mail him at [email protected].

Steve Todoruk worked as a field geologist for major and junior mining exploration companies after he graduated with a B. Sc. in Geology from the University of British Columbia, in 1985. Steve joined Sprott Global Resource Investments Ltd. in 2003 as a Senior Investment Executive. To contact Steve, e-mail him at [email protected] or call him at 1.800.477.7853.

Companies discussed above are used for examples only and do not constitute an endorsement or recommendation.  If you would like more information, please contact a Sprott Global Resource Investments Ltd. broker.

1 Kitco Live Gold Chart []

2, 3, 4, 5, 6, 7 Bloomberg

8 Press Release: MAG Silver Closes $79 Million Common Share Offering. July 16, 2014

9 Press Release: Rubicon Minerals Announces Closing of C$115 Million Bought Deal Financing. March 12, 2014.

10 Press Release: RoyalGold Acquires Gold Stream on Rubicon Minerals’ Phoenix Gold Project. February 11, 2014.

11 Press Release: Roxgold Inc. Completed C$29 Million Bough Deal Offering. March 25, 2014.

12, 13, 14, 15, 16 Bloomberg

17 Press Release: Agnico Eagle to Acquire Cayden Resources. September 08, 2014.

18 The New York Times: For Canada’s brash young mining companies, that pot of gold may depend on acquisitions. August 30, 1996.

19 Financial Post: Yamana, Agnico Eagle team up to buy Osisko in $3.9-billion friendly deal. April 16, 2014.