Gold Mining Optionality Plays (September 2024)

seekingalpha09-09

Optionality plays in gold mining involve companies with gold valued below drilling costs, offering excellent risk-reward profiles, especially if gold prices rise to $3,000.Gold is in a strong bull ...

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LockieCurrie Optionality Defined Note: You can skip this section if you just read my article on Silver Optionality Plays. Optionality means that a company has gold  in the ground that is valued significantly below the drilling cost. You determine the value of the gold in the ground by dividing the number of ounces by their FD  market cap. For instance, $100M mkt cap / 2M oz = $50 per oz. What is the current drilling cost to find an oz of gold?","collect":0,"end_time":0,"defaultTopTitle":"seekingalpha.com","property":[],"viewcount":null,"language":"en","relate_stocks":{"BYAGF":"Banyan Gold Corp.","GFI":"金田","NXGCF":"Nexgold Mining Corp","BK4017":"黄金","BK4585":"ETF&股票定投概念","LU1223083913.SGD":"Schroder ISF Global Gold A Acc SGD-H","THM":"International Tower Hill Mines","LU1223082196.USD":"施罗德环球黄金A Acc","BK4588":"碎股","BK4188":"贵重金属与矿石","OBNNF":"Osisko Mng Inc","TDRRF":"TUDOR GOLD CORP NEW","BK4168":"多种金属与采矿","CHPGF":"Chesapeake Gold Corp.","FGOVF":"Freegold Ventures Ltd.","RVLGF":"Revival Gold Inc.","STLRF":"STLLR GOLD INC.","BK4570":"地缘局势概念股"},"translate_title":"金矿开采期权（2024年9月）","themeId":null,"isJumpTheme":false,"ttsUrl":null,"symbols_score_info":{"GFI":1,"THM":1,"TDRRF":1,"STLRF":1,"RVLGF":1,"OBNNF":1,"NXGCF":1,"FGOVF":1,"CHPGF":1,"BYAGF":1},"content_text":"Optionality plays in gold mining involve companies with gold valued below drilling costs, offering excellent risk-reward profiles, especially if gold prices rise to $3,000.Gold is in a strong bull market, suggesting that undervalued gold mining stocks, particularly juniors, are poised for significant gains.The provided list includes 37 gold stocks with gold in the ground valued below $25 per oz, highlighting potential high-return investments.   LockieCurrie Optionality Defined Note: You can skip this section if you just read my article on Silver Optionality Plays. Optionality means that a company has gold (XAUUSD:CUR) in the ground that is valued significantly below the drilling cost. You determine the value of the gold in the ground by dividing the number of ounces by their FD (fully diluted) market cap. For instance, $100M mkt cap / 2M oz = $50 per oz. What is the current drilling cost to find an oz of gold? It varies by location and depth. It costs more money to drill in Canada/ Australia/ USA than in emerging markets, and it costs more to drill deeper holes. What we do know is the average cost is above $50 per oz to find gold. Even a company that is drilling a known deposit and expects to find gold is lucky if they can find 1 oz per $50 spent on drilling. If you can find large gold deposits in the ground valued below drilling costs, then those companies can be strong optionality plays. Your risk-reward can be excellent, especially if those projects are already economic. But, even if they are not economic today, you can speculate that they will be at higher metal prices. Thus, this is a good way to speculate on higher gold prices. There are several types of optionality plays. First, you can have optionality plays for producers, developers, or explorers. None of these category types are the ideal optionality play. The ideal optionality play can be any category and be ideal for numerous reasons, but the biggest factor is often strong insiders with diamond hands (they won’t give away their project). Last month, I posted one of those ideal optionality plays (Freegold Ventures) on Seeking Alpha. Refer to it here. I explain in detail why it was ideal. In addition to optionality plays by category, you also have optionality by location, grade, economics, risk-reward, long-term, short-term, strong insiders, and other factors. One of the reasons gold mining stocks are so interesting is the differences between each company. They each have particular characteristics. When you look at the stocks below, you will find that each one has its reasons for being either attractive or holding too much risk for your investment strategy. Gold Bull Market Gold has been a juggernaut since it broke out at $2070 back in March (see chart below) reaching an ATH. Since then, it has been hitting ATHs and refusing a deep correction. It’s currently just below $2500, and near an ATH. We can also look at the potential two places where this bull market began. Some analysts say it broke out in 2016, and others say 2019 (see green arrows below). I’m in the 2019 camp, but the 2016 move above the 200/100/50 DMAs is compelling. It really doesn’t matter whether it was 2016 or 2019; what’s of significance is that those breakouts have been confirmed in 2024. We are in a bull market in gold! Trading View Gold has been telling us a story that is difficult to ignore, and that story is that it wants to go higher (this gold bull market is not ready to die). I could give you a long list of macro reasons why gold aims to go higher, but I’ll assume you are reading this article because you are a believer in the strong gold PA (price action) and expect higher gold prices. If the trend for gold is higher (a correction is always possible in the near term), then it is likely the gold miners are finally going to join the fun and begin their bull market. The HUI (gold miners index) remains in a correction that began in August 2020! Wow, a 4-year correction. Below is the chart, you will see that the cycle in 2020 was 360 (today we are at 293), and the ATH was 635 in 2011. Incredibly, the HUI has been in 10+ year correction channel. Many analysts have been bullish on the miners, and I have said that until the HUI breaks out, we are still in wait mode. In other words, we are still early! Not that the HUI is a large cap gold miner index. The juniors have lagged the gold price even more. In fact, nearly all the stocks my optionality list below are juniors that have lagged and are extremely undervalued versus the gold price. Trading View The List The list below shows 37 gold stocks with gold in the ground (column H) valued below $25 an oz, and many below $10 an oz. Recently, Gold Fields paid (GFI) paid around $400 per oz for a developer, Osisko Mining (OTCPK:OBNNF). I consider that the upper range a company would pay today for gold in the ground for a developer. What will they pay if gold goes to $3,000? Is $800 an oz fantasy talk? Probably not. Of course, Osisko Mining is a quality development project in an ideal location that demands a hefty premium for each oz in the ground. Many of the optionality plays on my list are of a similar quality, although perhaps not as advanced. Most of the stocks on my list will increase in value 3x or more if gold goes to $3,000. Which ones? That is for you to figure out, doing your own personal DD (due diligence). I will tell you my favorites on this list, which are Freegold Ventures (OTCQX:FGOVF), Banyan Gold (OTCQB:BYAGF), Tudor Gold (OTCPK:TDRRF), Chesapeake Gold (OTCQX:CHPGF), Revival Gold (OTCQX:RVLGF), NexGold Mining (OTCQX:NXGCF), STLLR Gold (OTCQX:STLRF), and International Tower Hill (THM). But my favorites may not do as well as the others. When stocks are this cheap, the high-flyers tend to surprise you. I always say, you can’t pick winners, you can only pick potential winners, and then let the winners appear. I need to mention here that all gold mining stocks are speculation bets because of their reliance on the gold price, which is highly volatile. No gold miner has low risk or guaranteed returns. For this reason, keep your allocations low and always expect to lose money. You are chasing big alpha, and that does not come without high risk. The best gold mining investor is someone who believes gold prices are going to $3,000. If you have a high conviction of this outcome, then optionality plays have one of the better risk-reward profiles. Why? Because they are likely to participate in that outcome. Their low valuations tend to put a floor under them, and their upside is only limited by how high silver goes. Listen to this podcast last week. Eric Sprott is effusive in his belief in optionality plays -- because he believes gold and silver prices are going higher. In the list below, you will notice that I am only valuing companies using future valuations of $100 to $200 per oz (column I) in the ground. I consider this conservative, and their valuation could be double these estimates. Some of these companies have significant exploration potential, which is not reflected in column G, which is my estimated future oz’s (millions). This can add another element of a conservative expectation of a company's future valuation. There is only one producer on this list. Generally, optionality plays are mostly developers and explorers. However, I could have included additional producers that are under $50 per oz, and are close to being strong optionality plays. Exploration stocks and developers are often cheap because they are not economically viable at current gold prices. This is typically due to low grade, but sometimes because of high capex requirements. However, these can be excellent speculation bets that gold prices are going to rise. Large gold deposits will become highly valuable at higher gold prices. We are simply betting on that outcome. Before I display the stock list, I want to explain columns J, K, and L. Column J is my estimated future market cap (in millions). It is a calculated column using column G (Future Estimated Oz’s) and column I (Estimated Future FD Mkt Cap Per oz). Because Column J does not account for future share dilution, I don’t think it is a good number to use as a future valuation. For this reason, I have created columns K and L, which add 25% and 50% share dilution. In most cases, column K should be a good number to use, and this is why it is colored green. However, if you think a company is going to dilute 50%, then use column L. Click on the image for better resolution. Top of List www.goldstockdata.com Bottom of List Goldstockdata.com Columns Explained A: Company Name B: Company Category: PG (Exploration), Dev (Development), SP (Small Producer) C: Type: Gold Miner D: GSD (GoldStockData) Rating. Refer to the Upside/Downside screenshot below. The grade A through B- is an extra rating that can be used in tandem with the Downside to give you a second rating for risk-reward. I consider B or better to be okay. B- means additional risk. E: Current FD (fully diluted) Market Cap. F: Current Oz’s (millions). My estimate. G: Future Oz’s (millions). My estimate. H: Current FD Market Cap Per oz. (FD Mkt Cap / Current Oz’s) I: Estimated Future FD Mkt Cap Per oz. ($100 to $200). My estimate. J: Estimated Future Value (MM) Without Dilution (Future Oz’s x Estimated Future FD Mkt Cap Per oz). K: Estimated Future Upside Potential With 25% Dilution (column J minus 25%). L: Estimated Future Upside Potential With 50% Dilution (column J minus 50%). GSD Ratings Chart   www.goldstockdata.com Conclusion The purpose of this article is to give you a list of potential gold optionality plays, and then you research each one and see which ones you like. I’m basically giving you leads, and mostly excellent ones. You should not bet/speculate on optionality plays if you do not believe in higher gold prices (at least $3,000) and are not patient enough to wait for that outcome. You need to be both risk-averse and patient. Most good optionality plays pay off in the long term when gold prices explode higher. However, they can be painfully slow to pay off. Just look at the Freegold Ventures stock chart below. For the last 4 years, it did nothing. The strong gold price has brought it back to life. Note that this stock has one main thing going for it: a lot of gold in the ground that is undervalued.   Trading View  Editor's Note: This article discusses one or more securities that do not trade on a major U.S. exchange. 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