Steve Todoruk, a broker at Sprott Global Resource Investments Ltd., has been calling attention to a trend that few investors have noticed in small gold miners.
His last note focused on Canada, but this trend has been taking place all around the world.
What’s the story?
We are seeing a select group of producing miners – and companies that are close to production – catch higher bids in the stock market.
The losers are still getting punished but the most solid companies are moving higher.
Smaller gold miners that are successfully producing and generating revenues are bottoming out and going higher. The chart below shows the recent history of a few of these companies over the last year and a half (source: Bloomberg).
Looking at recent news from these companies, we see that they are moving higher by improving their gold output and cash flows.
A couple of examples from this group are the following:
Klondex Mines (KDX.CA) owns a producing mine in Nevada and is currently building a second one. The company produced over 27,000 ounces of gold and nearly 355,000 ounces of silver in the first quarter of 2015.1 Thanks to revenues from production it has a cash balance of C$55 million.
Evolution Mining (EVN.AU) operates six gold and silver mines in Australia. In the first quarter of 2015, Evolution was in-line with its production goal, generating over 103,000 ounces of gold. It currently has A$32.5 million in cash.2 Its performance and improving balance sheet have pleased shareholders.
Many of the companies that are significantly higher over the last 12 to 18 months have similar stories.
Not all producing gold mines are seeing higher share prices. Some continue to see low share prices as they try to improve their mining operations, hoping to generate respectable earnings. The chart below shows some of these stocks.
This group includes the following:
Midway Gold (MDW.CA) began producing from its mine in Nevada this month, but analysts worry about whether cash flows will meet expectations based on the numbers we have seen so far.
Argonaut Gold (AR.CA) has disappointed shareholders overall, as analysts doubt the company’s ability to meet projected production.
As you can see, investors are rewarding companies that are delivering production as promised. They are punishing companies where projects are looking less attractive.
This is a sign of ‘bifurcation’ in the resource sector, as investors begin to discern which companies deserve their investing dollars.
A new group of small producers with strong balance sheets may begin to look for acquisitions. They will have the cash and share strength to re-invest in new projects.
Evolution Mining, for instance, recently announced it will acquire the Cowal mine from Barrick Gold for US$550 million. The mine is located in New South Wales, Australia.3
We should expect to see bifurcation in exploration and development companies as well. The most deserving companies, teams, and projects may begin to attract bids while the broad market remains tepid.
As you can see from the following chart, there is less and less cash in the sector. The TSX Venture, where most Canadian miners and explorers trade, has seen aggregate cash levels decline dramatically (source: Bloomberg):
As bifurcation occurs in gold juniors, only some projects will likely attract funding from investors. For those that do not, it will likely mean “lights out.”
As the broad sector sinks lower, a select number of juniors with the most appealing projects and talent could break out higher. Most investors will only see the broad decline and will stay on the sidelines. By the time they notice that the overall market is in better shape, the most attractive juniors may no longer be cheap.
How can you prepare for bifurcation in resource companies? Steve Todoruk has been following this trend closely and offers a complimentary portfolio review. You can contact him at 800-477-7853 or e-mail him at [email protected].
Also consider joining us this summer in Vancouver, where you can find out about some of the most high-quality teams and projects in exploration (click here).
Exploration and development could see bifurcation in the coming months, clearing up the field for an eventual broad recovery.
As we have seen with gold producers, a select group of companies can begin to move higher before the worst companies hit “rock bottom.” Companies now stand to outperform or sink lower based on their individual merits.
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