It’s been a tough stretch for gold mining stocks over the last few months, since May of this year gold equities (VanEck Gold Miners ETF) are down -23%. As tough as it’s been we believe gold equities are at a clear inflection point, in this report we highlight 5 key indicators that point to significant upside ahead.
We also highlight 3 gold stocks poised to benefit from the potential breakout: Cerrado Gold (TSXV:CERT), West Red Lake Gold (TSXV:WRLG) and Viva Gold (TSXV:VAU).
Gold Price Remains Resilient
Market veteran Fred Hickey highlighted this important graph showing that gold bullion has decoupled from historical correlated assets like the USD, CPI and real yields; how can this be explained? Massive gold buying from emerging markets.
Fred asks the important question – what happens when Western countries start buying again?
Telling chart. Usual gold correlations ($, real yields etc.) stopped working, though Western investors did abandon gold (&miners) as they normally do given these conditions. Massive gold buying by rest of world has more than offset. Now what happens when Western buying returns? pic.twitter.com/ybYSlkBhu8
— fred hickey (@htsfhickey) August 3, 2023
Inflation: Then & Now
One key catalyst for gold buying in developed markets is a reacceleration of inflation. Bank of America’s fund manager survey highlights that virtually all institutional investors have tame inflation expectations… a great contra-indicator of things to come.
Comparing the current backdrop of inflation to the 1970s; after an initial spike of inflation in the early 70’s the consumer was faced with a stronger 2nd wave of inflation later in the decade. We believe a similar backdrop exists today, driven by oil and commodities.
Technical Indicators Aligned for Gold Miners
Key technical indicators show that gold mining stocks are in deeply oversold territory. The gold mining stocks (GDX) vs. gold bullion ratio is back at the levels of early March where the stocks staged a significant rally vs. bullion.
Additionally, The gold miners bullish percentage index is currently 28.6 – lower than it was in March.
Three Gold Miner Ideas
Cerrado Gold (Ticker: CERT, CRDOF)
Cerrado is one of the fastest growing mid-tier gold producers in the world. The company is on track to grow production from 68,000 ounces this year to 225,000 ounces in three years, a 3x increase.
The rapid production growth will also lead to a significant fall in production costs, a 30% decline according to management.
Production Forecast
Cerrado also trades at a significant discount to net asset value. Against both junior developers and producers trading in Canada, Cerrado is a relative bargain.
Cerrado Price/NAV vs Peers
Cerrado’s cheap price and peer leading growth looks especially attractive to us given management’s track record building valuable mines from nothing.
CEO Mark Brennan took Vanadium miner Largo Inc, from a C$10 million explorer to a C$350 million market leader in 10 years. Largo reached a peak valuation of over C$2 billion.
With Cerrado currently in the feasibility/construction phase of their next major project- typically a market value trough for the average miner- now looks like a potential turning point for the company’s valuation by the market.
West Red Lake Gold Mines (Ticker: WRLG,WRLGF)
West Red Lake is a particularly unique precious metals miner. Management has chosen a two pronged strategy that essentially give investors two ways to win.
Strategy #1 is to continue with recent exploration success at the Rowan project, located in a Canadian gold district known for significant gold finds and successful production. Rowan is a past producing gold property with 826,000 grams of inferred gold at 9.2g per ton.
With a 10,000 meter exploration program planned later in the year, the potential for resource expansion at Rowan is high.
West Red Lake Asset Map (Rowan and Madsen Projects in Close Proximity)
Strategy #2 is the most unique, and involves rehabilitating a valuable, but poorly managed mine, the Madsen mine.
The mine was previously valued at over $1 billion in the last gold bull market and $350 million has already been invested to fully construct and operate the mine briefly in 2020.
West Red Lake purchased Madsen for only C$42 million in what certainly looks like a well-timed acquisition. The company is now conducting additional drilling to de-risk the restart of the mill and to make sure operations are completely optimized and ready to generate cash.
West Red Lake will be able to use the Madsen mine to process ore from the nearby Rowan mine, driving synergies and lower overall costs for both projects.
West Red Lake is a unique mine turnaround story, that in our view offers lower execution risk than owning the typical pure gold exploration company, with much of the upside to rising gold price driven by out of control central government money printing and rising global inflation.
Next Steps for the Madsen Mine
Viva Gold (Ticker: VAU,VAUCF)
Viva Gold made it on our list as a deep value gold developer in the prolific Walker Lane Trend in Southern Nevada. Nevada is a top 3 mining jurisdiction globally due to the ease of permitting and access to infrastructure.
The Walker Lane Trend has seen significant deal activity over the last three years which is a key consideration when investing in exploration and development stage companies. Often value is realized through a partnership or buyout before the project even begins production, so the more operators in the region the better.
Viva is rapidly moving the Tonopah Gold Project through the development process and has been adding resources through the drillbit in tandem, now at 600,000 measured, indicated and inferred ounces of gold.
The company recently conducted a preliminary economic assessment on Tonopah which found an after tax NPV (net present value) of US$36 million at $1,400 gold and US$105 million at current gold prices, far higher than Viva’s US$7.7 million trading value.
Viva has some important catalysts coming up with the release of an updated PEA (Preliminary Economic Assessment) using 2023 drill results, metallurgical testing results coming soon and the commencement of a feasibility study later this year.
Viva Gold Tonopah PEA Estimates
Viva is planning to make a construction decision on the property as early as next year which typically leads to a rising stock price (see project lifecycle graphic below).
Viva Gold’s strong discovery track record, a management team with past success building successful producing mines and a location in the heart of “mining country” all come together to offer investors discounted exposure to rising gold prices in our view.
Why Did Viva Buy the Tonopah Project?
Cerrado Gold is a market awareness client of Capital 10X.
West Red Lake Gold is a market awareness client of Capital 10X. For more information, including potential conflicts of interest please see our Content Disclaimer.
