When Gold Goes, Investing Options Abound.

I think we’re at the start of a great new gold market. As I said last week, I don’t know whether tonight’s gains are it, whether this ascent will step back only to start again in six weeks when the Fed actually does cut rates, or whether a trade deal will slow progress and push real excitement closer to the end of the year. Whatever the case, the forces are truly aligning and gold is starting to make its move.

This outlook means I want to own more.

Let me be clear: we have been positioning for a gold bull market for years already. However, until the market appeared actually imminent I was acutely aware that only the very best stocks made sense. Explorers that couldn’t raise money in the still-weak market were No Go’s. Developers steadily advancing their assets were sadly not sufficiently exciting for the market. Assets that weren’t absolutely top tier, whether because of jurisdiction or grade or scale or something else, didn’t make the cut.

A strong gold market means much more opportunity. The best of the best will still outperform but far more stages, locations, and kinds of plays attract attention. And many of those plays deserve that attention. I’m not talking about throwing money at the sector because a rising tide lifts all boats; I’m talking about that fact that a real gold market creates much more opportunity – and I want to spread my bets around those options.

To that end, I’m introducing two companies today. Over the next few weeks I will provide in-depth write-ups for each. Today the goal is to get the names out there (so I can buy), with a short explanation of the opportunity.

Why More Options Arise

A rising gold price leaves a swath of opportunity in its path. Here are some of the kinds of opportunities that will evolve as the gold market gains momentum.

 Investors get interested in the space, which means explorers can finance. More money means more work gets done, which means more opportunity for discovery – and exciting new discoveries are fuel on a gold fire. Investors know that and start betting on explorers and the process continues.

 Producers that were unprofitable or just scraping by at $1,200 gold start making good money at $1,400 gold and are swimming in it at $1,600 gold. I don’t love that higher cost producers are seen as offering more leverage to gold gains than low cost producers – a rising gold price obviously means that low cost producers make even more money, which gives them the chance to make deals or build new assets, but going from profitable to more profitable is not as dramatic as going from not profitable to making money. And when gold is going up, the market forgets so quickly that costs matter! Between less focus on cost and the excitement of a miner becoming profitable, higher cost producers often outperform low-cost producers in a rising gold market.

 Optionality plays: the market usually swarms around large gold deposits in a rising market, in particular those that didn’t make sense as mines in a low gold price environment but that would turn a nice profit over a long mine life when gold strengthens.

 Mine builders: few projects today are ready to be built into new mines. Those that are, despite being rare and robust (if they’re still on track after all these tough years), still aren’t attracting much investor interest because the market is still stuck in the mindset that capital is hard to come by, that gold might turn down before the build is done, and that new mines are too risky in this tenuous gold environment. All those factors will change when gold gets going – capital to build mines will be readily available, there will be ample confidence that it makes sense to build now, and the risk of a new mine failing is worth the upside if it works. And new mines get the added excitement of takeout potential, as M&A activity always rises with the price of gold.

 Simple quick-to-production stories: I admit I’m the first skeptic when someone presents a quick to production story. I’ve seen them fail too many times, especially when the concept is to build a small operation to generate cash flow to fund exploration (production is complicated so exploration rarely happens). However, I am seeing stories emerge that might work and I think more will appear as the market rises. The difference: the long bear market plus these past two years of drawn-out new bull/bottom have given management teams good opportunity to identify assets that make sense. To me, quick-to-production can make sense if (1) permitting is quick, (2) the deposit is well understood, (3) metallurgy is straightforward and well tested, and (4) management has built simple mines before. I also want to see assets with reasonable scale – the market doesn’t care much for tiny producers but a good gold market can mean nice valuations for those producing 40,0000 to 100,000 oz.

 Value builders: these are probably my favorite stories. Here I’m talking about companies with defined deposits that they are advancing through drilling, met work, engineering, and social and permitting work. This kind of work creates real value because it moves a deposit towards potentially becoming a mine, but such efforts do not get rewarded in a weak gold market because new mines aren’t on the radar. In a good gold market, by contrast, demonstrating mineability, scale, economics, and social license creates real value.

At the end of the day, it doesn’t matter which kinds you buy. What matters is buying real companies with experienced, committed management and plans in place to create value. A rising tide will lift all ships but companies that are actively adding value will float higher faster.

I think it will also pay to pay attention to the kinds of plays the market decides to like. When gold made its move in 2016 I didn’t buy optionality plays because I preferred finding assets that made sense at close-to-current prices rather than buying companies with big deposits that required higher prices. But I was wrong: the market jumped all over the optionality idea and companies like First Mining Finance (now First Mining Gold) tripled and quadrupled.

I don’t know what kind of plays the market will decide to like this time around, but the lesson I learned was to pay attention. And so this time I will.

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