If it looks like a bull market (technical breakout in gold), smells like a bull market (significant negative yielding debt) and feels like a bull market (funds flowing into gold), it must be a bull market. Our analysis shows that equities in smaller sized companies outperform during a bull market. However, not all junior miners are created equal, and we believe there are three keys to picking them.
De Grey Mining Ltd.
Impact: Mildly Positive De Grey has defined multiple new targets within its Pilbara Gold project and developed a new geological interpretation drawing similarities to Western Australia’s Kalgoorlie Region, which has produced over 80Moz Au. As De Grey continues to de-risk and demonstrate the exploration upside of the Pilbara Gold Project it should re-rate to our fair value estimate of A$0.35/sh.
Introducing our inaugural Exploration Preview, which focuses on names within our coverage universe with drill bit torque. We review the exploration potential and try and quantify the potential impact on the share price should the company be successful in delivering results. We believe that exceptional drill results can create value regardless of where we are in the commodity cycle. Our top ideas are highlighted in Figure 1 below and will be presented in a similar alphabetical order within this document, bifurcated for precious and base metals focus.
Impact: Mildly Positive De Grey has announced strong recoveries from metallurgical testing at Toweranna, indicating the deposit is free milling and conventional CIL processing can be used. As De Grey continues to de-risk and demonstrate the exploration upside of the Pilbara Gold Project it should re-rate to our fair value estimate of A$0.35/sh.
Impact: Mildly Positive De Grey has announced the final batch of drill results from its RC drill program at Toweranna and has announced its transition into scout drilling to test the deposit at greater depths. The update continues to support the company’s target of 2Moz for its entire Pilbara project which would provide upside beyond our current 1.58Moz estimate. We reiterate our fair value estimate of A$0.35/sh (unchanged) which we expect could be realised with coming positive milestones for the company.
Gold is on the move, looking for the companies we expect to be the big winners. Recent events have been very constructive for the gold price and point to it having the potential to move higher in the near-term. Taking this into account we have evaluated the leverage our current coverage universe has to the gold price (Figure 1). The companies with the highest leverage to gold in our coverage universe are: Gran Colombia Gold (TSX:GCM, FV est. C$6.00), De Grey (ASX:DEG, FV est. A$0.35) and Lion One (TSX:LIO, FV est. C$1.35). We note that while Seabridge (TSX:SEA, FV est. C$29.00) does not have the highest financial leverage to the gold price, it could be a go-to name because of its higher market cap and better liquidity. As well, while we do not have a NAVPS estimate on, Minera Alamos (TSXV:MAI) and RNC Minerals (TSX:RNX, FV est. C$1.00) both should also react favourably to a rising gold price.
Impact: Mildly Positive De Grey has announced additional positive drill results from Toweranna, which we believe supports management’s 2Moz target for 2019 (entire Pilbara project). We maintain a fair value estimate of A$0.35/sh (unchanged) and believe that the coming resource update could positively surprise the market.
Impact: Mildly Positive De Grey has announced successful initial ore sorting results at its Toweranna deposit which demonstrate the technology’s amenability to sort ore, lower operating costs and increase production. This news reinforces our fair value estimate of A$0.35/sh (unchanged) and we believe a re-rating is likely in the near to medium term.
Impact: Positive De Grey’s drilling at Toweranna has delivered strong results and based on this success, we have increased our estimates. We have increased our fair value estimate to A$0.35/sh (was A$0.30) and believe that the company is poised to re-rate as it continues to deliver exploration success.
Impact: Mildly Positive Results from De Grey’s larger Withnell deposit suggest high grade lodes are coming down the pipeline as the company pursues an aggressive exploration target across its entire project. These and other recent drill results support our fair value estimate for De Grey of A$0.30/sh and we believe the stock should re-rate as the company demonstrates the scale potential and exploration upside of the Pilbara Gold project.