The Deck Of Cards Is Stacked For Gold To Go Much Higher And Gold Stocks To Move Into A Bull Market
Featured companies in this report include Agnico Eagle, Alamos Gold, SilverCrest Metals, McEwen Mining, i-80 Gold, Meridian Mining and Goliath Resources.
No matter how you look at things, whether from technical trends or supply and demand perspectives, gold is heading much higher. Meanwhile the gold stocks have been through a painful bear market, they are trading at historical lows on low trading volumes. They are ripe for remarkable moves off the lows.
Currently, the only ones that own gold stocks are the die-hards who are suffering from depression and astonished that gold is at record highs but their gold stocks haven’t joined the party. Another group that are buying are contrarians that believe gold is heading much higher and that the gold stocks offer them tremendous torque.
As gold moves higher and gold stocks move off their historic low valuations, there will be the kind of performance that brings in the generalist investors and momentum traders into gold stocks. When they do, I think we will see the cult-like action in Bitcoin, big cap tech stocks, AI stocks and other momentum stocks come into gold stocks.
Those cult stocks have stretched valuations that are priced for perfection. Actually, they have gone well beyond that and are priced for perfection that needs to last for many years just to reasonably justify their insane valuations.
They are extremely risky precisely because the crowd is so confident in them. We saw the same thing happen in the Dot-com Era. Back then, the crowd thought the only direction they could go was up. Then the Dot-com bubble burst and they got hammered in many cases into nothing. If this doesn’t sound familiar to you about what is happening in the cult stocks today, it should.
Take a wild guess which group of stocks were getting punished during the Dot-com Era. If you guessed the gold stocks, you win the prize. The sentiment in them was as bad as it is now for gold stocks. Then when the Dot-com bubble burst, the gold stocks went into a decade long bull market. I believe history is about the repeat.
I don’t believe we are far away from the network of speculators chasing momentum stocks will join the gold and gold stocks party. Those that are ahead of the curve will avoid the bubble bursting in the cultish stocks and ride a powerful wave shaping up for gold stocks.
There is one thing that you can say for the cult stock players, they are powerful stock promoters. They use social media sites to promote their latest stock bandwagon to jump on. I think they will start to better understand gold and gold stocks and when they put their promotional machine into gold stocks it will shock people.
A whole new breed of investors are about to become gold stock bulls using social media to promote them like we have never seen in the gold stock sector before.
The backdrop for this story to unfold is gold, the reasons to be bullish on gold are many. The Free Money Era after the 2008 GFC has created a Death Spiral of Debt and out of control money printing at unprecedented levels.
The BRICS nations’ central bankers are pushing gold into new record prices as they return to the Gold Standard. The people in India never stop buying because gold is so integral to their culture. Plus, the people of China are lining up to buy whatever gold they can get their hands on. Whether investors in the West understand it or not, these buyers of physical gold are putting themselves on the Gold Standard.
The unparalleled stupidity of the politicians and their accomplices at the Federal Reserve and other Western central banks have created the Death Spiral of Debt that can only be protected against by a return to the Gold Standard. They spend like they have an unlimited credit card and a money printing press that they keep cranking out cash which has created a mess that is pushing the Revenge of The Gold Standard to come to a theatre near everybody worldwide.
It is happening in real time. Gold has made a major breakout above $2100 and is on a path to see a series of new record highs throughout 2024. The trend is getting very friendly to gold bulls as we are seeing higher highs and higher lows. From a technical perspective it is clear the gold bull is gaining power.
Economics 101 teaches that when a commodity goes up, more production comes online which tempers the price. But, what is happening with gold production is that it has peaked and is in decline, head grades at the current mines are in long term decline, quality of the gold in reserves at the miners is suspect and they are having issues replacing what they mine.
Yes, the gold miners are making plenty of money, they have strong balance sheets and are able to buy back stock and pay dividends. Yet, they are not getting rewarded for this because investors want growth in production and a path to keep growing.
They struggle on the growth side because they are focused on doing that at their known mines. You can only squeeze so much growth out of the known mines for so long until you arrive at the point where we are now that it is like trying to squeeze blood from a stone.
I’m no fan of index funds that own a bunch of gold mining stocks that own the best in breed and those in the middle of the pack and worst in breed as well.
Why own the good and the bad when you can focus on the best in breed. Take for example the biggest of the gold miners. Newmont is the largest gold miner, but they have taken over Newcrest and it takes time for that kind of acquisition to be merged into the new company to create shareholder value. While they are moving through that process, Agnico Eagle is performing much better.
Agnico Eagle has record production, record reserves and record operating cash flow. They are firing on all cylinders as a gold miner. Looking at their stock performance in comparison to Barrick, Newmont and the GDX, they show more relative strength when the gold stocks are being pushed down and when they rally. This is a great example of why to avoid going with an index fund that is hunting with a shotgun when you can hunt with a rifle to pick off the best in breed.
Going down the big gold miner stock food chain Alamos Gold stands out as a best in breed. They are a low cost producer, which is a key metric I focus on because if you look backward for the best performers, you will find low cost producers that significantly outperform their peers.
A good example is Goldcorp. When they were mining the bonanza-grade gold portion of their Red Lake mine, they were one of the lowest cost gold miners in the business. They generated impressive free cash flow which rewarded their shareholders as they were one of the top performing gold miners.
Another example of a lowest cost gold producer was Kirkland Lake Gold. When they were mining the bonanza-grade gold portion of the Fosterville mine, they were producing high-grade gold at low costs, which generated remarkable free cash flow and made them one of the best performing gold mining stocks in the sector.
If you want outperformance like Goldcorp and Kirkland Lake Gold you need to focus on low cost producers that are generating a lot of free cash flow. In the current gold market, Alamos Gold fits that bill.
My preference is to go further down the gold stock food chain because the further you go down the chain, especially in a tough market, is exactly where you will find the biggest disconnect between value and reality.
My favourite low cost producer is SilverCrest Metals. They produce gold and silver with around a 50-50 mix. They report their financials on a silver basis. Currently they are producing on that metric with a cost close to half of what they are selling their silver equivalent precious metals for. They have exceptional torque to gold and silver rising.
Currently, gold is making record highs, while silver is half the price of its record highs. I’m very bullish on gold and silver, SilverCrest Metals gives investors exposure to both.
What makes them my favourite low cost producer is that a few quarters ago they had around $100 million in debt. Since then, they have paid off all the debt and built up cash, and gold and silver holdings to have more of those assets than their debt was when they started full commercial production.
I also appreciate that they are sitting on a stockpile of gold and silver bullion. They have lots of cash, they don’t need to sell their gold and silver to convert it to cash. They can sit on it and see added economic benefits while the price of gold and silver go higher. If more gold and silver miners did the same thing, the prices of those metals would go up even faster.
Further down the gold miner food chain is McEwen Mining. They are a significant producer of gold, but they have a relatively high cost. They have made substantial progress on bringing down their costs and increasing production.
In late 2022, I started doing a series of interviews with Rob McEwen. Back then, their stock price was in the dumps at around CAD $4.00. On Friday, they closed at nearly CAD $12.00 per share. The gold mining operations were what drove the stock down to those low levels and their copper asset Los Azules is what helped them rise from the ashes like a phoenix.
Los Azules is owned by McEwen Copper, with McEwen Mining owning 47% of McEwen Copper. Los Azules is a special copper development project. It is in the top 10 of undeveloped copper projects worldwide and is in the lowest quartile of projects on the list.
I love it when Rob McEwen compares it to what it would like if it was a gold mine. The basics are that on a gold equivalent basis, it would produce gold at around $600 per ounce, with a mine life measured in decades. If you look at it from a gold perspective, it would be a tier 1 asset in production while being one of the lowest cost miners.
They have been able to attract big investments from Nuton, a Rio Tinto venture, and Stellantis, one of the largest car makers in the world.
Currently, I believe they are mainly priced based on their holdings of McEwen Copper with the gold mining part of the business being priced at virtually zero. If you just look at them for the size of their Los Azules copper project, and consider the grade, and projected low cost. They are being priced much cheaper than their peers in the Lundin Group of companies that are also in Argentina, on a relative basis comparing projects to projects.
I think they are being held back because of the struggles they have gone through over the past few years at their gold mines. This isn’t the first time Rob McEwen has gone through struggles at a gold mine. His Goldcorp was a struggling gold miner before they drilled deeper into the Red Lake Mine and hit the bonanza-grade part of the mine, which propelled them to fabulous success.
It hasn’t gone unnoticed by me that McEwen Mining has been spending a lot of money on exploration at their gold mines. I’m seeing signs that they could be hitting exciting stuff with their exploration drilling. Few are giving the company much of a chance to reproduce Goldcorp type success.
In reality, they only need to keep drilling into rock that can help them bring down their cost of production and increase production. In my opinion they are already doing that, with the added potential to find something special as they drill deeper.
i-80 Gold is currently a small gold miner. But they are simultaneously developing three world class projects at McCoy-Cove, Granite Creek and Ruby Hill, all in Nevada. When they get those three projects into production, they will have a peer leading growth production profile. Yet, they are being valued at less than some pure gold explorers.
Sometimes valuation can get very out of whack in the gold stocks, especially when going through a tough bear market like the one of the past couple years. But, it is crazy to me that some investors would rather own a gold exploration stock with a considerably higher valuation than i-80 Gold when they haven’t found nearly as much gold as i-80 Gold has in resources.
Plus, they have many years to go through in the development discount window of the Lassonde Curve, and i-80 Gold has permitted mines and two processing facilities. While they have a short window of a couple years to ramp up production to make them one of the highest production growth companies in the gold mining sector.
When it comes to comparing projects to projects, I think i-80 Gold already has far superior assets to certain exploration companies with higher valuations. Then looking at projects in the development stages, and considering the timelines to get them in production, they have high quality assets and a much faster path to getting them in production.
All things considered, i-80 Gold looks like it is on a growth trajectory that is hard to find. A key catalyst they are working on to dramatically change their prospects is that they have signed a term sheet with a yet to be disclosed partner for their Ruby Hill project. It will be interesting to see the terms of the deal. I think the consummation of that deal is likely to happen in the second quarter of this year.
My top pick for a company with a project in development is Meridian Mining. Their Cabacal project is a gold-copper VMS. What drew my attention to the company is the remarkable numbers from the PEA.
Cabacal has a low cost of production and an IRR around 60%, with a rapid payback of capital costs to bring it into production in under a year. Part of the reason for that fast payback of capex is that it has a low cost to bring it into production. Of course the low cost of operating the mine with such a high IRR is another key reason.
Most mines these days start at around $1 billion to build and go up from there. To have one at less than $200 million to bring it into production is nearly impossible to find in the mining space. Most new mines need to be built by major mining companies. Cabacal as envisioned in their PEA has a price tag that could be brought into production by a junior.
In the old days, juniors could find these kinds of projects, then use the success of building it and operating it to catapult them to grow into mid-tier or even major mining companies. That path is hard to follow these days because capex to build mines is out of reach of most juniors. Cabacal offers Meridian Mining the opportunity to grow from a junior into a much bigger company.
The companies above are more advanced than explorers. But, before closing I wanted to mention Goliath Resources. They are my highest conviction gold discovery story due to the success they have had at their Golddigger project in the Golden Triangle of British Columbia.
This is a very prolific mining camp, known for big, high-grade mines. One of the things that makes Golddigger so impressive is its close proximity to infrastructure being at the southern tip of the Golden Triangle.
Very rarely do exploration companies find grassroots projects. Newmont did a study of all the mines worldwide and on average it was the seventh company that owned a project that found the mine and built it.
The reason Golddigger was not found until Goliath Resources discovered it is because it was covered by glaciers. They have receded and opened up the bedrock to be seen by the geological team at Goliath Resources.
Initially, what they found was an outcrop of the Surebet Zone that comes to the surface for around 1.8 kilometres from one side of a mountain, up to the top of the mountain and down the other side of the mountain. They first drilled below that outcrop and found widespread high-grade gold in the sediments in 2021.
In 2022, they drilled under the sediments and at the contact between the sediments and volcanics they hit the Bonanza Shear Zone. In 2023, they expanded on the Surebet and Bonanza Shear zones. Additionally, they drill below the Bonanza Shear Zone and hit the Golden Gate Zone which is entirely in the volcanics.
In the three drilling seasons they have shown the gold mineralizing system continues from the sediments, to the contact of the sediments and volcanics, and then further into the volcanics.
Recently, they announced the results of updated 3D modelling using all the drill hole data from the three seasons of drilling. What it shows is a series of stacked gold zones in the sediments, and at the contact of the sediments and the volcanics.
Collectively, they have a very large volume of rocks in the stacked gold zones. If you use the known specific gravity and average grades, it can easily be considered a tier 1 gold project in the making.
With a series of stacked zones in the sediments and the contact of the sediments and volcanics, the next important question to answer is what fed the gold into those zones. To have such large zones above, the potential answer could be that there are also stacked feeder zones below.
This year, they will have a key focus on drilling into the volcanics. It is not difficult to argue that the top of the system could have an even bigger feeder system below and below that a heat engine that caused all the mineralization.
A couple things that impress me is that this year’s drilling could very well unlock the question of what fed the gold mineralization into the near surface stacked zones. I would also like to know if as you get deeper into the system and closer to the heat engine if the grades increase. Of course, it would be nice to see if they can tag the top of the heat engine with this year’s drilling as well.
In Closing
I presented in this report a good menu of what I consider best in breed at various sizes in the gold mining food chain.
Including a top major mining company in Agnico Eagle. Which has record highs in production and reserves as well as record highs in operating cash flow.
Then a low cost gold miner in Alamos that is generating remarkable profits that is fuelling their growth plans.
In SilverCrest Metals, you have a new gold and silver producer that is only a few quarters into full commercial production. They went from starting full commercial production with $100 million in debt, paid it all off, and then built their cash plus gold and silver bullion to over $100 million. That tells you a great deal about the quality of their Las Chispas mine.
McEwen Mining has a turnaround story underway on their gold mining operations. Plus, they have an exceptional undeveloped copper project at their 47% owned McEwen Copper. A lot of the big gold miners want to add copper to their mining portfolios, McEwen Mining is ahead of the curve on that trend.
i-80 Gold is developing three world class mines, all in Nevada at the same time. They have been doing a lot of drilling and underground development. The exploration drilling has grown the deposits at McCoy-Cove, Granite Creek and Ruby Hill. This company consistently puts out fantastic drill results from their three projects and I think that will continue.
Meridian Mining is a pure play gold-copper development story. The pipeline of development level gold-copper projects is pretty bare, the industry needs more. The numbers from their PEA gave them peer leading statistics in IRR and timeline to pay back capital costs to build a mine.
Goliath Resources is my highest conviction gold discovery story. I follow gold exploration very closely and have for many years. I know how rare it is for gold explorers to make a discovery like they have at their Golddigger project. With more drilling, I think it will attract the attention of investors and bigger gold mining companies that come around to realizing how impressive what they have found is when it comes to gold discoveries.
I keyed on this group of companies because as I mentioned earlier in the report I believe we are on the verge of a bear market in gold stocks to get more bullish very soon, driven by gold breaking through technical milestones on a regular basis.
When things get more bullish for gold stocks, it will be because generalist investors and momentum traders start moving into gold stocks. When they arrive, they will find a small menu to choose from.
The companies that I discussed in this report are what I consider best in breed for their respective positions in the gold stock food chain.
All the best,
Allan Barry Laboucan
Disclosure
i-80 Gold is a sponsor of Rocks And Stocks News. Goliath Resources is a sponsor of Rocks And Stocks News, and Allan Barry Laboucan is a shareholder and holds warrants to purchase additional shares. Meridian Mining is a sponsor of Rocks And Stocks News.
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