Today, I sent out an update for a small gold developer, and the details of this update reveal exactly why most investors simply do not understand gold stocks.
I predominately focus on gold juniors (and royalty firms) in my paid services for a simple reason.
The market does not understand how to place a value on these companies.
It doesn’t help that most of these companies are under $1 billion – which means they’re far too small for institutional investors to pay attention to.
But even for smaller investors, this whole sector of companies is a mystery – a total black box.
This mystery is why most investors who are interested in gold simply throw their hands up and buy an ETF like GDX or GDXJ.
Both of these ETFs hold a mix of companies that fit certain criteria of market cap within the sector. There’s no analysis involved.
So owning these ETFs is like buying the whole dartboard instead of trying to hit bullseye. In a roaring gold bull, you do okay. Any other time, and you own a mix of good, bad, ugly and totally garbage gold companies. Not great.
The reason these gold juniors are such a mystery: it takes work to understand the gold business. Up until a company produces gold, and the bottom line becomes obvious, you have to know what value looks like along a continuum of exploration to development to production.
In my paid services, I provide exactly this kind of update very regularly. Every day the market is open, I send out news updates for the companies I cover. Most of the time, these updates appear to be inconsequential. The news is incremental, slow and if you’re not paying close attention, it seems totally boring or pointless.
For instance, as I mentioned, this morning I sent out an update for a small developer I cover in my Golden Portfolio IV service.
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The news: the announcement of one new drill rig and a projected permit application by the end of December.
I know: it seems like a kind of unimportant update at first glance. But this company previously only had 3 drill rigs. That means they just increased their drilling capacity by 33%.
To put that in context, there is no gold major anywhere that can increase drilling capacity by 33% almost overnight. If they did, it would be headline news and every gold investor would buy shares as fast as they could.
The permitting by the end of the year is also huge. Permitting isn’t just ticking off boxes on paperwork. It requires substantial field studies, compliance audits, ongoing communication and coordination with regulators and a team of sharp managers paying close attention to all of the requirements.
Each of these “small” pieces of news are huge for this company. The market understands almost none of it. That’s a disconnect savvy investors can take advantage of.
These kinds of catalysts add up. They de-risk the project and bring the mine closer to production.
If you take nothing else away from what I’m saying: just remember that from a valuation standpoint, every gold mine is at its most valuable on the first day it produces gold.
That means if you want to profit from owning the mine, you have to buy it BEFORE first production.
You have to crack open the black box and start to understand the business of gold exploration and development. You have to read the news updates. You have to build models based on new drill results, permit applications, plant and mine construction progress.
Or at the very least, you have to find someone who’s doing this stuff already.
Best,
Garrett Goggin, CFA, CMT
Lead Analyst and Founder, Golden Portfolio
