CHICAGO (ResourceInvestor.com)-- While the price of gold has taken off this year, topping$1,000/ounce earlier this spring, the valuation of gold minersthemselves hasn’t followed suit.
In an aberration from the norm, the equity prices ofeven the most senior miners has been sluggish over the past few months,with the level of the Gold/XAU ratio (our favourite relative valueindicator) remaining close to historical lows.
Thebiggest reasons for the strange action are likely the flight to safetyto gold, and away from equities, in the face of massive financialsector problems. And while these problems surely haven’t abated, it’smore likely than not investors will yet again remember that goldequities aren’t just like other stocks, and rather are leveraged plays on the metal itself.
In short, we’re betting that the traditionalleveraged relationship between the price of gold and the miners willbegin to reassert itself over the coming year. Already, the action inthe Gold/XAU ratio has begun to get more constructive over the pastseveral weeks, with many pundits spotting a technical breakout.
Going Small for Success
The best opportunities for success are to be foundfocused on smaller development or near-production plays. It’s worthremembering that there’s been a relative dearth of discoveries by allsenior gold miners this cycle. With many of those same miners pricedfor growth, the consolidation wave for near-term production willundoubtedly continue.
Although investors may panic every time the price ofbullion drops $25, the biggest seniors aren’t looking at every 5% swingin the price of gold as they evaluate their buy-out targets. Withrelative interest in the Toronto Venture Exchange and other juniorbourses near multi-year lows, and many of the smaller producers havingtraded sideways for some time, now’s the best time to get involved inquality plays.
We prefer going a bit larger than your typicalexploration play, to mitigate some of the drill-hole risk that onefinds farther down the scale.
Solid producers like Aurizon Mines [AMEX:AZK; TSX:ARZ] remain quite cheap, while near-term producers such as European Minerals [TSX:EPM; AIM:EUM] and Minefinders [AMEX:MFN; TSX:MFL]are trading at higher-than-warranted political and operationaldiscounts. (European Minerals, a long-time favourite, has recentlysecured additional financing to advance through commercial production,and has merged with Lero Gold to add to its exploration package).Another great up-and-coming story worth looking at is the Peak Gold[TSX:PIK], Metallica Resources [AMEX:MRB; TSX:MR] and New Gold [AMEX:NGD; TSX:NGD] three-way tie-up.
This “new Wheaton River” is the face of what couldbe one of the more innovative multi-mine junior producers to hit themarket in years, assembled by some of the best-known mine financiers inthe world. Investors obviously appreciate the combination, having bidup the shares of all participants since the deal was announced nearlytwo months ago.
And, although one could accuse me of banging awell-worn drum, the Peak/Metallica/New Gold story echoes just onereason why I continue to like Northgate Minerals [AMEX:NXG; TSX:NGX].While CEO Ken Stowe certainly lacks the deal-making flash of Ian Telferat Peak, Northgate’s done a remarkable job of assembling a globalmulti-mine package over the past couple years, all while proving theiroperating prowess at Kemess South.
Now heavily geared toward gold (instead of its priorcopper exposure), I remain confident that this company’s shares will bea solid bet going forward as the company continues to prove nay-sayerswrong.