GDXJ re-balancing pummels these 5 gold developers

The Market Vectors Junior Gold Miners ETF (or GDXJ) is an ETF administered by Van Eck and created to replicate the Global Junior Gold Miners Index which is a basket of small-cap gold exploration, development and production companies.  The GDXJ tries to maintain an average market cap of its holdings above $150 million.

According to recent filings, the ETF’s largest holdings are Centamin, IAMGOLD, Hecla and AuRico, but included in the 69 total equity positions are exploration names such as Bear Creek Mining and Focus Minerals.

Needless to say, the ETF which mirrors the junior resource markets, hasn’t performed well.

Year-to-date, it is down 18.18% but in the past 3 months the ETF is down over 40%.

Recently, the GDXJ was re-balanced in order to maintain their average market capitalization hurdle. 

Given the performance of the underlying equities, the pre-revenue, development stories that have become less and less liquid were sold in favor of more liquid, higher market capitalization names such as IAMGOLD, AuRico and Alamos.

As a result, some of these development companies have been crushed by this relentless selling.

Asanko, Premier Gold, Torex, Rubicon and Midway were among them.  Shares in those companies are down 23%, 25%, 22%, 17% and 15%, respectively over the past 30 days.

Last Friday saw huge volume traded in these names as well.

Asanko traded 28 million shares on Friday alone. The average daily volume traded over the past 3 months in Asanko is just 156,500 shares (the other names were similar).

These companies have all outperformed the GDXJ year-to-date.

    • Torex is up 24%,
    • Premier up 19%,
    • Rubicon up 8%,
    • Asanko is flat on the year,
    • Midway down 11%.
    • The GDXJ on the other hand was down 25%.

So perhaps the decision to cut these outperforming names wasn’t the best call afterall?

Regardless, these teams have significantly de-risked their projects.  Below is a summary of the milestones achieved this year:

  1. Torex (TXG.TSX) – closed a $145 million equity financing and another $375 million project finance facility to build their Morelos project which is one of the highest-grade undeveloped open-pit gold projects in the world.  They moved the construction of their project forward on time and on budget for a mid-2016 commercial production start-up.  They also got $85 million worth of at-the-money warrants exercised (of $90 million) and made significant strides towards the development of their second mine, Media Luna.  I doubt this company would get acquired before they complete construction and ramp-up, but come mid-to-late 2016 when the mine is running smoothly, I would expect a major to take them out (and likely at a significant premium).
    1. Since June 30, 2014, the GDXJ has sold 65.9 million Torex Gold shares in the market reducing their position by 57
  2. Premier Gold (PG.TSX) – released a positive PEA on their Hardrock and Brookbank projects and followed that up with meaningful exploration results at their Cove Gold project.  Recently, they were able to raise $9 million to continue de-risking these Canadian high-grade gold projects.  Although earlier-stage, Premier could see a takeover bid come from one of the many companies looking for Canadian exposure to add to their project pipelines.
    1. Since June 30, 2014, the ETF sold 29.6 million shares, reducing their position by 73%.
  3. Rubicon Minerals (RMX.TSX) – started the year with a $75 million streaming deal from Royal Gold, then followed that up with a $115 million bought deal financing.  They continued to advance the construction of their Phoenix Gold project which they are touting as “Canada’s next high-grade gold mine”.  With what management has delivered on so far and the expected production start-date of mid-2015, we believe that statement could prove to be true.  Given the recent flight to safety by many global miners (see Osisko takeover battle), we view Rubicon as another likely takeover candidate given its postal code.
    1. 31.5 million shares of Rubicon have hit the market since June 30th, courtesy of the GDXJ.  They reduced their position by 56%.
  4. Asanko Gold (AKG.TSX) – had a truly transformational year.  They successfully closed the acquisition of PMI Gold for roughly $180 million worth of stock in order to consolidate the two companies neighbouring gold assets in Ghana.  Shortly after, the company decided that the newly acquired, higher-grade mine from PMI would become the phase 1 project and outlined a path to get to 200,000 ounces of annual gold production by 2016.  The company continued to de-risk the phase 1 development and worked on developing an integration plan for the second phase development which could see the company’s production double from 200,000 ounces to 400,000 ounces of gold annually, effectively catapulting the company into the mid-tier ranks.  Next year looks to be another exciting year as the company completes construction and formally outlines the integration plan of the second phase of production.  With Asanko’s board and management, this company could be a takeover target or could continue acquiring assets to grow their production profile.
    1. Asanko Gold saw its weighting in the GDXJ reduced by 37.9 million shares or roughly 77% since June 30th.
  5. Midway (MDW.TSX) – broke ground on their heap leach gold project in Nevada and followed that up with the formalization of a joint venture with Barrick on the Spring Valley project which will see Midway carried to production at a 25% interest should Barrick chose to build it.  Midway also announced the finalization of a project finance facility of $55 million and $25 million bought deal financing which allows the company to finish building Pan.  The project is one of very few run-of-mine projects (means no crushing necessary) which enables it to be both technically straight forward as well as lower cost than other mines, making it a takeover candidate for anyone looking for simple heap leach projects in safe jurisdictions (of which there are many companies).
    1. Midway Gold saw the fewest shares hit the market with just 8.7% of its weighting in the GDXJ eliminated (roughly 1.1 million shares).

Overall, the recent selloff in these names should be taken in context.  All of the above teams are delivering on their promises, meeting or exceeding expectations, de-risking their projects and moving towards cash flow.

An unrelated index re-balancing sale of these companies’ shares provide an opportunity for us as resource speculators.  This is one of those times where I, as a speculator, finding myself questioning my investment thesis.  Am I missing something?  Does the market know something I don’t?

In this case, I believe the selloff in the names is unrelated to the specific companies themselves or even the broader markets in general; it’s just a portfolio manager with a heavy finger.

As a result, this re-balancing combined with the fact we are in the final days of tax-loss season provides an opportunity to gain exposure to high-quality gold development names.

Below is an interview with Van Eck’s Joe Foster who is their senior gold analyst and portfolio manager: