Gold is up an amazing 27 percent this year, having seen the most rapid appreciation in three and a half decades--and analysts agree: there may be no upper limit on its price. It could even reach $1,400/ounce.
The positive sentiment has returned. Gold is again our favorite safe haven, and junior miner Sandspring Resources (TSX-V:SSP) (OTC:SSPXF) is positioned impressively, with one of the biggest undeveloped in-situ gold deposits in the world owned 100% by an independent junior company.
While there’s been a bit of pullback in recent weeks, and volatility continues to alternately boost and hamper the rally thanks to the Federal Reserve’s vagueness over a future interest rate hike, the rally has been real and sustained. Gold is back.
But it’s sentiment about fundamentals rather than the fundamentals themselves – which have always been good – that pushed gold to years of losses and then a sudden rally in the second quarter of this year.
“An environment of low and negative rates narrows the gap between holding gold vs other assets, making having gold in a portfolio an attractive proposition amid heightened global macro uncertainty,” UBS strategist Joni Teves wrote in a research note carried by CNBC.
Gold has no upper limit on its price, according to Harvard economist Kenneth Rogoff, who told the Financial Times recently that emerging economies would be better off making the shift to gold reserves as “an extremely low-risk asset.”
After posting three consecutive years of losses from 2013 to 2015, gold is finally getting the attention it deserves and so are the companies mining the yellow metal.
The global economy has not recovered from the 2008 crisis, and it’s not clear when it will. The U.S. Fed is not sure when it will be bold enough to raise interest rates again, since it would base its decision on strong economic data that has yet to be forthcoming.
Investors are jittery, oil is on the seesaw, and so are pretty much all industrial metals. The financial market hasn’t been this volatile in a long time, which is why we’ve seen some withdrawal over the past several weeks of bets on gold by speculative investors – or maybe they’re just cashing in on the rally.
All of this creates a heyday for gold miners, many of whom have enjoyed spikes in their stock prices, albeit with some ups and downs after the initial rally.
But it’s not just the producers who are enjoying rising gold prices. Advanced explorers such as Sandspring Resources are also riding the wave as the market takes a second look at the companies that can rapidly advance to production to capitalize on strong metal prices.
1. Gold is back where it belongs.
When investors are scared, they forget about sky-high returns on junk bonds and derivatives. When investors are scared they buy gold and gold-mining stocks. Right now, investors are really scared and equally risk-averse. No wonder gold skyrocketed to a two-year high and is now headed to $1,400. Gold mining stocks followed suit. It’s definitely gold time. When in doubt, scream, shout and buy gold.
2. The greenback’s got a long face.
Gold and the U.S. dollar tend to move in opposite directions. When the greenback is strong – which means the economy is growing or at least giving clear signs of a recovery – gold moves down. Commodities are priced in dollars internationally, so the more expensive the currency the less affordable it is for buyers operating in other currencies. Right now, the U.S. economy is not doing so well. Some even expect it to slip into a recession. Again. There’s nothing like a good recession to strengthen gold.
3. Smaller is better.
Leaving aside investment in physical gold, which is generally the prerogative of central banks, commodity traders and jewelers, investment in mining stocks provides the most direct exposure to gold. There’s a choice of several giants like Goldcorp (NYSE:GG), Barrick (NYSE:ABX) and Newmont (NYSE:NEM). But the smaller pure-play gold companies could ultimately be a much better bet than the giants: they’re cheaper, they’ve got more room to grow, and they can be as flexible as they like in their business models.
Large gold producers have to constantly explore and acquire deposits to maintain their massive production profiles. It will take a lot more energy to double a massive producer like Goldcorp at $17 billion in market capitalization and continuously depleting its reserves, compared to Sandspring, at around a $75 million market cap, with a very significant gold resource and huge exploration potential.
4. A tiny window of opportunity, major operating leverage.
Gold demand in the first quarter of 2016 grew 21% on an annual basis, according to the World Gold Council’s first quarterly report. This growth continued in Q2, up another 15% to the second highest first half on record – ever. Gold prices posted the strongest performance in over 35 years. The largest component of gold demand for the last two quarters has been investment and that, according to the World Gold Council, is unprecedented.
Gold-mining stocks have been riding high as a result with some of these, namely the majors, getting prohibitively expensive for most individual investors. It’s only a matter of time before smaller players like Sandspring – whose market cap right now is around US$75 million – start getting too expensive as well.
Then there’s operating leverage. For pure-play miners such as Sandspring Resources, every dollar that gold gains in price trickles down to the bottom line. The more gold rises the faster this trickle becomes a flood, offering huge upside potential for the company’s stock. To put this in perspective: at US$1,100 an ounce of gold and with all-in sustaining costs of US$890 an ounce, for instance, Sandspring’s net profit would be relatively modest. But this will change significantly when gold reaches US$1,400, which it is about to do. The cost stays the same but the bottom line looks very different when gold appreciates, even if output remains flat.
5. Tasty acquisition morsel.
Consolidation is the bed fellow of an industry crisis, but it’s also a favored tool of inorganic growth when things are looking up. Sandspring’s Toroparu project in Guyana has 6.9 million ounces of M&I gold resources (including 4.1 million ounces of gold reserves), making it one of the largest undeveloped gold deposits in the world owned 100% by an independent junior company. It’s also in a safe jurisdiction and has good gold grades, checking all of the boxes that the senior companies look for when hunting for new projects. An acquisition is just one of the possibilities, and the potential returns for existing Sandspring shareholders could be exciting.
6. Support from strategic partners.
Part of any due diligence process is seeing who else has invested in a stock. If major institutional investors have bought into a project, you know they’ve done a lot of research and verification before making that investment. In 2013 Silver Wheaton agreed to invest US$153.5 million toward construction of Sandspring’s Toroparu project in exchange for 10% of life-of-mine gold production and 50% of silver production. Silver Wheaton’s team would have torn Sandspring’s pre-feasibility study apart and re-run the numbers, providing independent verification of Sandspring’s economic and mining estimates. And in 2015 one of Canada’s best known investors, Frank Giustra, bought a significant chunk of the company and increased his holding to nearly 13% in 2016, choosing Sandspring as his first re-entry to the gold market and a call on rising gold prices.
7. Attractive Capex and Payback Time.
Sandspring has estimated that gold mined from Toroparu will be profitable at current gold price levels with the initial capex of the project, US$464 million, to be paid back in less than three years if prices hit US$1,400 an ounce. With Silver Wheaton’s contribution, project capex is reduced by approximately 30%, payback is less than two years, and all-in sustaining costs also drop to well below the industry average.
8. Guyana is the place to be.
This tiny country on the coast of northern South America has the mineralization potential of Venezuela and West Africa, yet has seen only limited exploration to date. In addition to its prospective geology, Guyana is also a great place to do business. It’s the only English speaking country in South America and is part of the British Commonwealth. The government is also supportive of mining, with a reasonable tax and royalty structure, recognizing the benefits to the country and its people of natural resources development. Indeed, two new gold mines have advanced to production in the last 12 months, paving the way for Sandspring’s project. We don’t have to look much further than the success of another Canadian gold miner, Guyana Goldfields (TSX:GUY), to see where Sandspring could be heading. GUY is one of the most-watched small-caps in Canada, having enjoyed 190% share price appreciation in 2016 on the back of rising gold prices.
9. Short timeline to production.
Sandspring’s development of the Toroparu Gold Project in Guyana has put the company on the map as a junior that owns one of the biggest undeveloped in-situ gold deposits in the world. A 2013 pre-feasibility study outlined the production of 228,000 ounces of gold per year over an initial 16-year mine life, and the project already has its Environmental Authorization, Mineral Agreement and Fiscal Stability Agreement in place. While other junior companies have years of drilling and economic studies ahead of them, Sandspring is finalizing its feasibility study and could rapidly advance to construction and production following Board approval. The project also has exploration upside and could get even bigger. Sandspring’s mineral concession spans over 62,600 hectares and the company has commenced its 2016 exploration program, with the objective of adding additional high-grade gold resources to the mine plan.
10. In the end it’s all about the right people.
Experience, expertise and knowing the right place to be at the right time are the factors driving success in this new golden era. At Sandspring, all members of the senior management team, from the Chief Executive Officer to the Vice-President Investor Relations, have impressive experience in mining and natural resource development. Those at the helm, CEO Rich Munson and Chairman John Adams, have been with the company from the start – as far back as 1999. Both come from a background of success as operators and producers in uranium and coal in the U.S.
Gold is going to be the last metal standing, and juniors stand a good chance of making the most of this game right now. Sandspring is positioned in the heart of the gold zone as it makes a play that shows every sign of hitting the big time in this rallying atmosphere.
By James Burgess of Oilprice.com
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