It's been a frustrating few months for the Gold Miners Index (GDX), with a lengthy correction taking the shine off the sector, but surprisingly, some gold juniors have held up reasonably well during the carnage. In fact, valuations among the Gold Miners Index are still sitting at similar levels to the first week of December, the median valuation per ounce for gold juniors is up 15% in the same period. The good news is that while we have seen a healthy jump due to outperformance among a few names, these are still very reasonable valuations relative to historical averages above $50.00/oz. This article looks at valuations across the sector currently, outlining which explorers justify a premium and which names should be discounted or appear overvalued currently. All figures are in US dollars unless otherwise noted.
(Source: New Found Gold Company Presentation)
We've seen a significant shift in valuations over the past few months in the gold sector, given that the Australian explorers commanded a massive premium vs. their Canadian peers in Q3 2020, but this gap has closed significantly since. This is not surprising given that the median Australian junior has a median resource of fewer than 2 million ounces, but the median Canadian gold junior has a resource above 3.0 million ounces currently. While it makes sense that explorers in the #1 ranked jurisdiction in the world (Australia) would receive a premium, Australian and Canadian ounces should trade at similar levels given the discrepancy between median resource size. Fortunately for Canadian investors, these valuations have normalized since September, exacerbated by the fact that some Australian gold juniors like De Grey Mining (OTCPK:DGMLF) with insane valuations have come back to earth.
(Source: Seeking Alpha Premium)
As shown below, the average valuation for Canadian gold juniors has soared to $36.92/oz vs. $28.56/oz in December, and this figure is actually higher than the $29.81/oz in September, despite the sharp sector-wide correction we've seen. This is great news for investors in Canadian gold juniors because it shows that some projects are finally getting the respect they deserve. The most significant changes are a material increase in the valuation per ounce for Moneta Porcupine (MPUCF) following its updated resource estimate at Golden Highway, an increase in Ascot's (OTCQX:AOTVF) valuation following its project financing, and continued strength in sector leaders Skeena Resources (SKREF) and Marathon Gold (OTCQX:MGDPF). Let's take a closer look at how valuations look across the board as we head into mid-January:
(Source: Author's Chart)
As we can see from the below charts comparing Q3 2020 to Q1 2021, we haven't seen a material shift, with many of the same names commanding low valuations still sitting below $25.00/oz. However, we have seen significantly more respect for the best developers in the group, with Skeena Resources, Marathon Gold, and Ascot Resources all seeing a sharp increase in their valuation per ounce. Typically, the cream rises to the top even in a mini bear market, as we've seen in the Gold Juniors Index (GDXJ), so it's not surprising that these names have held actually gained ground in many cases. These were the three names I pointed out in my September 26th update as being stand-outs to focus on, and they're up an average of 29% since vs. a 4% decline in the Gold Juniors Index.
So, how do the valuations look today, and is there anything that's mispriced?
Q3 2020 Valuations
(Source: Author's Chart)
Current Valuations
(Source: Author's Chart)
While there are over 14 names trading below $50.00/oz currently, it's important to note that most of these names are there for a reason, either due to less exciting projects or significant upfront capex. The most notable three in this list are First Mining (OTCQX:FFMGF), Falco Resources (OTCPK:FPRGF), and Troilus Gold (OTCQX:CHXMF), which have upfront capex of $809 million, $802 million, and $333 million, respectively. This is quite high relative to the average upfront capex of undeveloped gold projects in Tier-1 jurisdictions of $236 million, explaining why these projects receive a relatively low valuation per ounce. While they could be developed eventually, they will take significant debt and most likely a partner in the former two cases (First Mining, Falco). In summary, while they're massive deposits, the chance of them heading into production before 2025 is low, which justifies most of the discount, in my view.
(Source: Author's Chart)
If we take a closer look at the scatter plot of resource size vs. enterprise value per ounce, the two most expensive companies are Battle North Gold (OTCQX:BNAUF) and New Found Gold (OTCPK:NFGFF), valued at $242.50/oz and $322.28/oz, respectively. In Battle North's case, this is a lofty valuation, though partially justified, given that the recent credit facility fully funds the ultra-low capex Bateman Gold Project in Red Lake, and Battle North could be in production by as early as H2 2022. Ascot and Battle North are currently the only two companies on this list with their projects fully funded and less than 17 months away from production. However, Battle North has exceptional grades relative to its peers, with an average gold grade of 6.90~ grams per tonne gold. This compares favorably to the peer average below 2.0~ grams per tonne gold. While I do not see Battle North as cheap at $242.50/oz, I would argue it isn't overly expensive either as it attempts to make the leap to producer status within 18 months.
(Source: Author's Chart)
In New Found Gold's case, the valuation is quite perplexing, and I've discussed this in more detail in my recent article "New Found Gold: Priced For Near Perfection". Based on 148 million shares outstanding, New Found Gold is trading at an enterprise value above $450 million, which is quite lofty for a company that's strictly a drill-bit story. While there's no question that the company's Queensway Project could be a very significant discovery, the average gold producer is trading for a valuation per resource ounce of less than $300.00, and New Found Gold is trading at $322.28/oz based on my estimate that they can prove up 1.4 million ounces within 18 months. Even if we assume they beat this estimate, investors are paying more for projected ounces at Queensway than current ounces held by producers paying dividends and generating significant free cash flow. While this doesn't preclude the stock from going higher, I continue to see New Found Gold as very high risk above US$3.40.
(Source: Author's Chart)
If we take another look at the peer group, we can compare where companies are relative to peers with similar grades and see what names might be overvalued or undervalued. As shown below, New Found Gold is the massive outlier, as discussed above, with a valuation per ounce that's miles above the logarithmic trend line, despite the stock being pre-resource. The other outlier is Battle North Gold, though it is the closest to production on the list other than Ascot, so some premium is justified. Finally, the other outlier among lower-grade projects is Tudor Gold (OTCPK:TDRRF), a name that I discussed in the fall, pointing out that it was extremely over-valued. As shown below, Tudor trades at a valuation per ounce of over $80.00 despite a sub 1.0 gram per tonne projected resource, and peers with low-grade resources typically trade well below $40.00/oz. In fact, Artemis Gold (OTCPK:ARGTF) has a larger resource (12.5 million ounces) and is further along the development curve but trades at a discount to Tudor. This suggests that either Tudor is very overvalued or Artemis is undervalued. I would argue that it's mostly the former case.
(Source: Author's Chart)
So, are there any cheap names in Canada?
(Source: Author's Chart)
Given the sharp rise that we've seen over the past couple of months for the leading names, I don't see any names that are screaming buys at current levels. My favorite ideas in Canada continue to be Skeena Resources and Marathon Gold, with the two most attractive projects among their peers, but I would prefer to look to add on dips than be starting new positions at current levels. As shown above, these projects both rank very well from an upfront capex and margin standpoint, well below the trendline, which highlights the peer average for upfront capex and operating costs. This doesn't preclude these stocks from going much higher as they continue along the development curve. For patient investors, I continue to see fair value for Marathon Gold once in production (assuming it's not taken over) of US$3.35.
(Source: Author's Chart)
If we venture outside of Canada, there is one name that remains relatively cheap, valued at barely $40.00/oz despite being a top takeover target. This company is Integra Resources (ITRG), a junior miner in Idaho that's exploring its DeLamar Project which holds over 4.2 million gold-equivalent ounces. The company's modest upfront capex of $161 million combined with industry-leading costs of $742/oz makes it a rare breed among its peers. Besides, Integra's resource is likely to grow, pushing the stock's valuation below $35.00/oz if it stays at current levels. Therefore, while I don't see any massive deals in Canada currently, given the time to add to positions in Marathon Gold, Skeena, and Ascot was in November, I do see Integra as a top idea outside of Canada for those looking for value in the sector.
(Source: Osisko Mining Company Presentation)
While the average miner has been beaten to a pulp since September, the median valuation among Canadian gold juniors actually gained ground, up over 15% in the period. Unfortunately, this has made it more difficult to find deals in the sector, though I still see four names as dirt-cheap from my top-12 takeover targets list, even if Skeena and Marathon have re-rated to closer to fair value. Based on the above charts and comparisons, I continue to see New Found Gold as very high risk at current valuations, and I continue to see Marathon Gold and Skeena as holds, given that they're set to grow their resources in H1 2020 with resource updates incoming. Outside of Canada, Integra Resources looks like one of the more compelling opportunities, and I remain long from an average cost of US$2.70.