Last week, I discussed a huge trend resource investors should keep an eye on: the coming Yukon mining boom.
Several big new discoveries in the Canadian province are generating tremendous interest... and big stock profits like ATAC Resources' (TSX: V.ATC, Stock Forum) 500%-plus return.
Today, I'll tell you about another region you should watch closely: Africa.
While just the word "Africa" scares off most investors, it's actually enjoying a big mining boom right now... and will for a long time.
Much of the continent has been ravaged by wars and dictators for the past century... so huge swaths of the continent are unexplored by modern techniques. And companies like Red Back Mining are finding incredible gold deposits. The company holds several terrific ones located in the West African nations of Ghana and Mauritania. These deposits were so impressive that gold giant Kinross Gold just bought the company for $7.1 billion.
Despite this huge takeover, Africa-focused mining stocks get little respect in the market compared to their North American compatriots. Here's a quick look:
Unlike African companies, the market puts a premium on North American-focused companies. Take $10 billion gold explorer Agnico Eagle, for example. Its resources sell for over $1,000 per ounce. That's two times the value of the next-most-expensive African resources, owned by Red Back. That takes into account the 30% acquisition premium Kinross paid for it.
You probably won't see an African gold miner trading for $1,000 per reserve ounce. Companies in scary places trade at substantial discounts. Take Banro (TSX: T.BAA, Stock Forum), for example. This company controls several huge deposits in the Democratic Republic of Congo... which in the late 1990s was ground zero for the world's deadliest war since World War II. It's a scary place, and Banro's gold is priced to reflect that, at $33 per ounce.
Fear discounts are tricky. Fear is an emotion. It's easy to invest the wrong way listening to an emotion. For example, investors are riding another emotion up in the Yukon... excitement. The fever pitch surrounding ATAC's gold discovery sent this small company from 49 cents per share to $7.35 per share this year. It's currently around a $600 million market value.
Now, the company doesn't have a resource estimate. However, at $600 million, it would need to have 1.2 million ounces to trade close to Red Back's price per resource ounce. And Red Back's resources are in production.
My point is, Red Back is cheaper because Africa is scary... and ATAC is expensive because it's not scary.
By any calm, cool analysis, we can see gold in Africa sells at a discount to gold in North America. If you leave your fear bias at home, you can find some excellent gold companies there. Super investor David Einhorn owns a gold producer named African Barrick Gold, which trades on the London exchange under ABG. Einhorn is a value investor, and I'm sure he saw some "Africa discount" in the stock.
My personal favorite regions to focus on are in West Africa – Ghana, Mali, and Cote d'Ivoire. These countries have big mining operations by companies like Newmont, Barrick, and Goldcorp. If you focus on those areas, you can find great opportunities... often for 50% off or more.
Disclosure: The author does not hold positions in any of the stocks mentioned