How Gold Investment Gurus Turn Lemons Into Lemonade
By Marc Davis
The global economic recovery is stumbling badly. We all know that.
Even in the U.S., weakening corporate earnings are deflating stock prices. We can all see that, too.
What's not so obvious to most stock market investors is what to do next. How can they leverage a bad situation into profits, especially outsized ones?
Increasingly, the "smart money" is betting on gold. That is because gold bullion has traditionally been prized as a hedge against both economic malaise and political crises.
Among gold's most vocal enthusiasts in recent months are Mark Cuban, a fabulously successful entrepreneur and TV celebrity, and George Soros, a long-time investment guru.
So far they've been right on the money. Gold's spot price saw its biggest quarterly growth in Q1 of 2016 in thirty years. Also, demand for bullion in the U.S. has surged to its highest level in several decades.
The yellow metal has therefore easily outperformed America's two leading bellwether indices, the Dow Jones Industrial Average Index and the S&P 500 Index, so far this year. That said, gold bullion is currently in a cyclical consolidation phase, having given up some of its recent gains.
Gold is expected to continue to rally later this year, albeit at a more moderate pace, according to Rob Chang. He's a mining analyst at the investment bank Cantor Fitzgerald and is one of the world's top-ranked gold forecasters, according to Bloomberg.
Why Gold Gurus Are Betting Big
In fact, gold's coming rebound should herald a rally that will last at least several years. So says Rick Rule (pictured below), a globally-recognized authority on precious metals. He is also a director of Sprott, Inc. -- a $9-billion aggregation of investment funds with a heavy weighting towards the natural resources (minerals) sector.
"Gold is still closer to the beginning of its bull market run than the end," he says.
However, the best way to enjoy plenty of leverage over gold's resurgence as a safe-haven investment in troubled times is to own asset-rich gold stocks, Rule says.
"Over a two to three year time frame, I think a bull market in gold equities is absolutely inevitable," he adds.
In particular, investors can realize what he refers to as "spectacular gains" by investing in small-cap gold companies that have emerging gold discoveries which exhibit the potential to become much larger. (Such companies are typically gold explorers and developers, rather than actual producers.)
"By de-risking gold development projects with modest capital exploration expenditures, small gold juniors can unlock significant value in the ground," he says. "And a rising gold price will continue to make such projects increasingly attractive takeover candidates for major mining companies."
How Gold Stocks Optimize Leverage To Gold
Rule points to Brazil Resources (TSX.V: BRI) as a good example of a company that is successfully following such a strategy -- one that promises to give its investors an exit strategy at higher share price multiples.
What's key to Brazil Resources' appeal is that the company was able to acquire several potentially world-class gold projects at fire sale prices from struggling peer-group companies during the recent four-year mining recession.
Rule also points out that the company is led by Amir Adnani, who has a proven track record, having built a tiny uranium exploration company, Uranium Energy Corp., into a producer that now trades on the New York Stock Exchange.
Rule says, "The prospect of a large-scale discovery on a property that's purchased cheaply and husbanded prudently . . . is the reason that people in bear markets back high-quality entrepreneurs to see these types of projects come to fruition. And that's what can really lead to significant share price escalations."
His view is shared by Cantor Fitzgerald's Chang, who recently published a one-year $3.25 forecast for Brazil Resources' share price.
Another key supporter is Marin Katusa, who is one of the most successful portfolio managers in the natural resources investment sector in recent years. A fund manager with Vancouver-based KCR Fund LLC, he is also a New York Times bestselling author.
Katusa says the best gold exploration and development companies are gradually amassing sizeable gold inventories -- albeit gold that is still in the ground and is years away from being monetized.
What's equally important is for each gold discovery to be located within expansive, geologically-fertile gold fields that offers the prospect of additional discoveries, he adds.
That rationale is that up to several mines can run at full tilt while enjoying cost-cutting synergies by sharing much of the same proximal infrastructure, such as a mill and energy needs.
The Lure Of Low-Hanging Fruit
Katusa agrees that Brazil Resources is a good example of an up-and-comer that meets these key criteria for success. This is why he's already earmarking the company as one that will eventually be bought out by a big-league, supply-hungry gold producer.
Four of the company's projects are located within the Gurupi Gold Belt in Para State, north-eastern Brazil, where a few significant gold deposits have been discovered over the last few decades.
This is where Brazil Resources has so far outlined approximately 1.5 million ounces of "indicated" (clearly-defined) gold and a further 2.42 million of "inferred" ounces (meaning that additional drilling is needed to more clearly define this resource estimate).
Elsewhere, the company has an expansive property in south-central Alaska where its Whistler, Raintree West and Island Mountain deposits are located. To date, they host 2.25 million ounces of indicated gold "equivalent" (the combined value of the gold and other co-mingled metals), as well as a further 3.35 million of inferred ounces.
Much of this Alaskan gold has only recently been added to the company's asset base, which helps explain the stock's parabolic rise of over 325 per cent since the start of the year.
All told, these properties have collectively seen upwards of $200 million spent on exploration and development, mostly by past owners. Yet there still exits plenty of potential to unearth more gold deposits on these under-explored, district-scale properties.
This is why deep-pocketed majors are most likely to come knocking sooner or later, Katusa says.
To put this into perspective, global gold output has been on a steep decline since 2012, so big producers are struggling to replenish dwindling reserves. And they're starting to aggressively target takeover candidates with undeveloped multi-million ounce discoveries, rather than merely relying on organic growth.
For example, one very recent headline-grabbing deal saw the Vancouver-based mining giant Goldcorp Inc. (TSX: G) (NYSE: GG) scoop up a small Canadian gold explorer/developer, Kaminak Gold Corp, for the princely sum of $520 million.
For Brazil Resources, the potentiality of a similar outcome is already starting to be factored into its buoyant share prices, Katusa says.
"And the recent takeover of Kaminak is a clear signal that the majors don't mind spending big to make the right strategic acquisitions," he adds.
Once gold resumes its upward trajectory, companies like Brazil Resources are just going to become even riper plums for the picking, Katusa concludes.