EDITOR NOTE: Once the market comes to grips with the “real economy,” as the author below suggests, gold can run upwards of $5,000 per ounce. Such a claim isn’t new though many who’ve made such a claim have done a soft job substantiating it. The article you’re about to read takes a stab at a more detailed rationale behind this price projection, focusing on gold mining activity amid an accelerating surge in gold demand. With major investors and even former antagonists like Warren Buffett turning to gold, it’s making investors wonder why they haven’t scooped up exposures sooner, when the writing was clearly on the wall.
The post-COVID ‘new normal’ and a flood of stimulus packages from the Federal Reserve have crushed the dollar and pushed gold to record heights.
Investors of all types are piling into safe haven assets in unprecedented numbers, and when even the most gold skeptic investors are starting to bet big on bullion, one may conclude that things have fundamentally changed.
This week, The Oracle of Omaha himself, Warren Buffett, disclosed Berkshire Hathaway’s recent investment in gold miner Barrick Gold Corp. This is the first time he has bought gold, and it is a sign that the legendary investor places significant value in the yellow metal.
One thing Buffett knows is that gold mining stocks have historically always performed better than physical gold. Currently, the best indicators such as the popular Gold Miner ETFs are outdoing physical gold by 50% ...
VanEck Vectors Gold Miners ETF (GDX) has surged over 53% in the past 52 weeks.
VanEck Vectors Junior Gold Miners ETF has surged over 52%.
And for even bigger gains, Canadian junior Amex Exploration (TSX-V:AMX) is up a staggering 7,000% over the past 12 months …
That’s because AMEX has hit very high-grade gold in three distinct zones including its iconic 100% owned Perron Gold Project located in the mining-friendly jurisdiction of Quebec.
But if you missed out on the mad Amex rally, don’t worry…it could happen again.
It’s sitting in the same gold region …
And Amex management believes this is the next major runner. In fact, they are so confident that the founders of Amex Exploration were some of the early investors in Starr Peak.
Now, Starr Peak is gearing up for its first drilling campaign, and it has little exposure--yet.
Junior Gold Mining Stocks Are Major Multipliers
Gold Mining Stocks offer the best opportunity to multiply your returns over the long run.
That’s the case because gold mining stocks act as a leveraged play on gold, multiplying gold moves by 1.5x, 2x or even 3x.
When the first round of Amex investors earned over 7000% returns, it was because the company had no exposure and did something the major miners couldn’t do: It found a huge gold deposit in the very place that the bigger drillers had failed.
The biggest risk/reward ratio for investors in junior gold is when they jump in before a major discovery, and before a company has exposure.
That’s exactly what happened with Amex. But the returns don’t stop there: With every stage of proving up and development, the stock gets another boost. In the last 12 months alone, Amex is up over 2000%.
That’s why the attention is beginning to focus on the exciting story that is unfolding with Starr Peak now--in Phase 2.0 of the Quebec gold bonanza.
And the timing is perfect: Gold hasn’t seen this kind of setup in nearly eight decades.
Government-ordered lockdowns have decimated economies everywhere, with the global economy experiencing its worst recession since WWII--and the pandemic still rages on.
Unprecedented stimulus packages are being pushed through to the tune of $15 trillion globally, which could spark the classic cobra effect culminating in a hyperinflationary economic collapse.
Central Banks are printing money at the fastest clip in history, leading to a plunge in inflation-adjusted bond yields into negative territory and the dollar’s sudden collapse.
US election concerns with talk of postponement and refusal to accept results are leading to the worst domestic political uncertainty the country has ever seen.
And amid this fog of chaos, US-China tensions have reached fever pitch once again over world dominance, espionage and, even the pandemic itself.
It all triggers alarm over stagflation--a deadly combination of sluggish growth and rising inflation that quickly erodes the value of fixed-income investments. That’s prompted investors to flee into safe havens like gold, the biggest and best of them all.
Wall Street is already full-on bullish on the precious metal.
Goldman Sachs has revised its 12-month forecast to $2300 per ounce--or a 20% gain.
UBS has a $2,000 price target on gold for the end of September, while Deutsche Bank is targeting $2,000-$2,100.
JPMorgan has a $2,000 price target, and Bank of America says gold prices could hit $3,000-an-ounce over the next 18 months.
And if that gold is still in the ground--even better. That’s the gold that can seriously multiply if the owner’s price doesn’t reflect the net price.
Gold prices going to $3,000 when Amex netted the earliest investors in the neighborhood of 7000% would have multiplied that massive return even more. And now, Starr Peak is positioning itself as a mini-Amex in more ways than one. So, this could be a re-run on a smaller scale.
Acquisition After Acquisition in Quebec’s Best Gold Play
That was prescient because it was done before Amex made its first big discovery, and even before it started drilling aggressively.
Anytime later and that would have been prime real estate with a prime price. Which is what it is, precisely, now.
Starr Peak’s NewMétal Property is immediately east of AMEX’s Perron Property, and also hosts the past-producing Normétal Mine, which Starr Peak just acquired on August 10th, 2020.
The acquisition hunger here has been incredibly aggressive. Even though Starr Peak and its early staged investors were already confident that the company was sitting on an Amex-style re-run, they still moved fast to keep expanding their position.
It’s been a series of acquisitions over the past 12 months, including a huge package that looks like a pincer movement around Quebec’s best-positioned gold play.
In June 2020, it expanded the first property by strategically acquiring a property that almost doubled its existing land position next to the world-class deposit discovered by Amex.
There were dozens of companies trying to get their hands on the property, but Starr Peak already had a leg up in the area.
On August 10th, 2020, Starr Peak acquired a 100% interest in three prospective gold properties, in a major coup for a small-cap company:
- The Normetal/Normetmar Property (the past-producing gold mine I mentioned above)
- The Rousseau gold property
- The Turgeon Lake gold property
And that’s the pincer movement that not only further expands the already large NewMétal property that adjoins Amex, but adds additional prospective gold claims to the portfolio in the former of Rousseau and Turgeon Lake.
- Rousseau alone is a bloc of 12 claims covering over 470 hectares in the Rollmac gold zone of 31,298 tonnes grading 11.99 g/t Au (historical).
- Turgeon Lake is another 2 claims east of Rousseau covering almost 113 hectares with samples at the water line assaying up to 168.3 g/t Au, 30.2 g/t Au and 23.7 g/t Au (GM 52490) and a drill hole assaying 18.7 g/t Au over 3.09 m, including 68.9 g/t Au and 10.48 g/t Ag over 0.4 m.
Time to Drill Down on The Play That Made Amex Investors Rich
Now, it’s time to drill.
Amex is already drilling with a frenzy, but it’s Starr Peak’s upcoming drill that offers the best off-the-radar exposure.
Both are fully funded to drill, too.
But let’s back up a bit to the Amex discovery, which we think sheds more light on what is anticipated with Starr Peak.
First of all: Amex did what major miners thought impossible in this gold-rich area of Quebec. They’d given up while Amex kept drilling until it hit high-grade gold in a series of holes in a stunning discovery.
It was no secret that there was gold here, and tons of historical production was pretty easy to follow. But the majors weren’t tackling the drilling right.
Anyone who was savvy enough to bet on this small company trumping the big gold miners was rewarded wonderfully because AMEX hit very high-grade gold in three distinct zones here, on its Perron Gold Project.
Amex currently has $25 million in cash and is now fully funded for its ongoing 200,000-meter drill program. They have 6 drill rigs working around the clock and have basically announced high-grade results hole after hole--with no sign of anything slowing down.
What’s happening now is this:
With Amex founders also shareholders in Starr Peak, Amex is drilling closer and closer to Starr Peak’s property. The trend and strike direction of the discovery is heading due East towards Starr Peak’s property.
It’s now only about 1 kilometer away from Starr Peak’s property border and with each easterly move it makes toward Starr Peak, the numbers get better. The grades are getting higher and the gold mineralization is open at depth. The grades are so high it is deemed to be some of the richest grades found in the Abitibi Greenstone Belt.
As everyone knows, the best place to find a discovery is often right next to another discovery …
That’s Starr Peak.
Anyone who’s already gotten in on this one is eyeing a potential high-grade repeat of the Amex discovery, which came back with drill results of 32.2 g/t Au over 5.90 meters and 30.98 g/t Au over 8.50 meters. They’re also eyeing the high grades historically produced by Starr Peak’s Normétal Mine, which produced 10.1 million tonnes over the span of four decades.
Now, Starr Peak is funded and fully loaded to begin drilling and just signed on the top geological consulting firm in Quebec, Laurentia Exploration--the same company behind the Amex discovery--to ramp it up. This is a huge advantage for Starr Peak because Laurentia’s team knows the geology in the area so they will be able to hit the ground running.
At this very moment, they are identifying drill targets for an ambitious upcoming winter drill campaign.
When that happens, the cat will be out of the bag and investors will have to deal with a company with a lot of exposure that could lead to Amex-style price movement. (Again, that was over 7000% returns for early investors in only five years, and over 2000% upwards stock price movement in just the past 12 months.)
The Golden End Game: Watch the News Flow
This is all happening in the beating heart of Quebec’s gold bonanza.
Just as gold, in general, has moved from Wall Street to Main Street, Amex has followed suit--attracting institutional investors to keep it off the radar while it grew serious legs.
Starr Peak shares have been on a tear since they doubled down on Perron, surging 386% over the past 12 months.
Yet, at a market cap of $40.3 million, Starr Peak could be seriously undervalued, depending on drilling results.
And Starr Peak presents a highly asymmetrical risk-reward profile with risk capped on the downside but offering potential for outsized returns.
Consider that AMEX is sitting potentially on ~10 million ounces of gold and has a current market cap of $264 million.
The opportunity for Amex is still mind-blowing even after all the success they have already had. There is potential for its market cap to grow exponentially with all the drilling that they are currently doing and in the future as their stellar high-grade results keep rolling in.
Yet, Starr Peak’s property could be sitting on a similar discovery … with a much smaller market cap...
Currently, It has a $40 million market cap and they haven’t even begun to scratch the surface. As the drills at Amex come closer and closer to their property line, it just adds to the probability of another potential discovery.
And spurring it all along is this: The gold rally could have plenty of space to run still; so if you missed out on the mania so far, or if you missed out on Amex, this train hasn’t left the station.
Global bond yields were on a downtrend even before Covid-19 struck, leaving income seekers with few avenues to make a buck. Even if bondholders are generating a positive nominal return, they're likely to lose real money to inflation over a longer period of time. These persistently low yields make gold, an asset that doesn't offer a yield, all the more attractive as a store of value or as an investment.
Many analysts think gold prices still have plenty of room to run, and $2,000+ could become the new normal.
Meanwhile, early-stage gold explorers like Starr Peak (TSX:STE.V; OTCMKTS:STRPF) with a good discovery could make outsized returns for investors who get in early--especially when they set up shop right next to a major discovery that eluded the majors the first time around.
But watch what happens next as the news flow maintains a fast and furious pace: As Amex continues to drill, and with expectations of a substantial resource calculation by the end of the year, Starr Peak stock is hoping to be the biggest beneficiary.
Other gold companies set to benefit from higher gold prices:
Newmont Goldcorp (NYSE:NEM; TSX:NGT) is the world’s largest gold miner following last year’s merger between Newmont and Goldcorp. Thanks to the merger, in addition to growing economic concerns fueling a wider gold rally, its revenue increase of 43%. The spike in income paid off for investors, who saw share prices increase drastically as well as a dividend hike of 79%, making its dividend yield higher than any of its top-tier competitors. Newmont recently updated its 2020 outlook, aiming for stable production of 6 million ounces while cutting back costs into 2020.
Tom Palmer, President and Chief Executive Officer noted, “We are pleased to be ramping up operations at our four sites previously placed in care and maintenance and we remain committed to protecting our workforce and neighboring communities,” adding “We continue to respond to this pandemic from a position of strength and Newmont’s diverse portfolio in top-tier jurisdictions provides a long-term, stable production profile with the potential to generate significant free cash flow over time.”
Though Newmont took the throne as the world’s largest gold miner from Barrick Gold (NYSE:GOLD; TSX:ABX) last year, Barrick is still a force to be reckoned with. In fact, it’s even caught the attention of legendary investor and notorious gold bear Warren Buffett, whose Berkshire Hathaway invested over $560 million in the company, securing a clean 20.9 million shares, sending Barrick’s stock price up by 12% in a single day.
Buffett’s investment in Barrick and change in tune on the gold front shouldn’t come as much of a surprise, however. As the future of the economy looks more-and-more uncertain, and the Federal Reserve continues to print money at a record rate, solid gold miners like Barrick have drawn a lot of attention for investors, especially considering the healthy 0.96% dividend per share that comes with the purchase.
Kinross Gold (NYSE:KGC; TSX:K) is another veteran in the gold game. Though it does not boast a strong dividend like Newmont or Barrick, it has had incredible earnings reports this year, and aas a result, has seen substantial gains in its stock price. In its most recent report on its second-quarter earnings, Kinross reported a revenue of a whopping $195.7 million.
Not only did Kinross blow earnings estimates out of the water, it did so while maintaining a healthy balance sheet, with an operating cash flow of $432.8 million and adjusted operating cash flow of $416.9 million, a 30% and 45% increase, respectively, compared with Q2 2019.
Though Kinross has withdrawn its full-year guidance as a precautionary measure given the global uncertainties caused by the COVID-19 pandemic, it’s still on track to meet, or even exceed, its 2020 projections.
Agnico Eagle Mines (NYSE:AEM; TSX:AEM) is an especially noteworthy company for investors. Why? Between 1991-2010, the company paid out dividends every year. Though it is set to cut its dividends slightly following its poor 2019 performance, it is still treating its investors right.
Despite reducing overall dividend yield, Agnico’s earnings-per-share and overall dividends-per-share have increased significantly this year. Agnico Eagle Mines has grown its earnings rapidly, up 37% a year for the past five years. And as gold prices continue to rise, Agnico remains as attractive as ever. If the current economic situation fails to turn around soon, as analysts have already pointed out, gold prices could soar to $3,000 or even $5,000 - which would be great news for Agnico - and by extension, its shareholders.
Eldorado Gold (NYSE:EGO; TSX:ELD) is another Canadian giant that has had a stellar year. Despite the global COVID-19 pandemic and the extensive measures it’s taken to protect its workers, Eldorado still managed to pull down over $43 million in the second quarter alone. All while maintaining a healthy cash flow of $63.4-million in Q2 2020, increasing significantly from $4.8-million in Q2 2019 and $7.2-million in Q1 2020 as a result of higher sales volume and a higher gold price.
“Our outstanding operational performance during the quarter positions us to continue to generate significant value for our stakeholders. Even while managing COVID-19, we achieved strong quarterly production while seeing lower all-in sustaining costs,” said George Burns, President and CEO, adding “We are pleased to have made our first scheduled term loan repayment in June. Additionally, we have issued a redemption notice to repay $59 million dollars of principal in August under the equity clawback provision of our senior secured notes. We are committed to reducing our debt, while at the same time maintaining a strong liquidity position as we continue to grow our business."
Originally posted on OilPrice.com