Gold's at $4,000: Could these junior gold miners be worth a look?

Gold prices surged past the $4,000/oz level this week, cementing a rally of epic proportions this year.

Ray Dalio, the founder of Bridgewater Associates, reckons you should have at least 15% in gold in this environment.

“It’s very much like the early ’70s ... where do you put your money in?”, he said at the Greenwich Economic Forum in Connecticut yesterday.

“Gold is a very excellent diversifier in the portfolio. If you look at it just from a strategic asset allocation perspective, you would probably have something like 15% of your portfolio in gold … because it is one asset that does very well when the typical parts of the portfolio go down.”

Flows into gold exchange-traded funds (ETFs) have hit $64bn so far this year, according to the World Gold Council, with a record $17.3bn in September.

Ways to invest in gold

It’s possible to invest directly in gold via products such as the Invesco Physical Gold ETC and the iShares Physical Gold ETC. Both are considered a Complex Product and require an appropriateness test to be completed.

A popular option for investors to  play the gold trade has been investing in gold miners instead of seeking direct exposure to the metal. This is not without its drawbacks, but it could be an option worth exploring.

Perhaps the best known ETF to enter the market is the VanEck Gold Miners UCITS ETF, which has doubled this year. It has risen by 164% in the last three years. The L&G Gold Mining UCITS ETF has also doubled in value this year and has a 3-year gain of 232%.

These invest in some of the largest gold miners such as Agnico Eagle, Newmont Mining Corp, Barrick Mining, Gold Fields, Kinross Gold, AngloGold Ashanti and Franco-Nevada, which all seen their cost-income metrics shift dramatically this year.

In London, some of the miners with the largest assets include Fresnillo, Hochschild Mining and Endeavour Mining, all of which have seen impressive rallies this year.

Junior miners: an alternative take

Record gold prices may be particularly relevant for small and mid-cap players.

It's a lot easier for smaller miners to generate free cash. But it’s very tough for a junior miner with a market cap of $50mn to raise the $200mn required to build out a mine. But exploration tends to follow the price – so despite exploration budgets declining last year from 2023 levels, the recent ramp in price is a positive for smaller players as capital flows into the sector. Meanwhile, larger operators need to secure growth so juniors with a viable project could be up for grabs.

While investing in individual mining stocks carries stock-specific risks, there are ways to diversify across the sector via funds; for instance, the VanEck Junior Gold Miners UCITS ETF. It owns about 90 different miners, and its main holdings are Pan American Silver, Coeur Mining, Alamos Gold, Equinox Gold and Royal Gold.

There are plenty more stocks in the sector to look at.

Thor Explorations Ltd (THX) is a West African focussed gold producer listed on both the TSX Venture Exchange and AIM Market of the London Stock Exchange. Its focus is a single mine in low-cost Nigeria and is developing a second, which could double its current output of around 85,000 oz a year and strong free cash flow margin of around 40%. Its all-in sustaining cost of $800–$1,000 per ounce looks all the more positive in light of the recent surge in spot gold prices.

Metals Exploration (MTL) is another with a single focus on a mine in the Philippines. It’s also close to opening a second mine having acquired Condor Gold. In its latest interim results it reported record positive free cash flow of $70.7 million, up from $46.4mn a year before, while production stood at 40,985 oz in the first six months and also has a free cash flow margin of around 40%

Caledonia Mining (CMCL) is similarly positioned – one mine in Zimbabwe with another coming, although its Bilboes project is further behind than he upcoming mines for THX and MTL. It does however have more confirmed ounces left at its existing mine than the other do.

Risks clearly lie in execution of the new projects, and costs are rising. CMCL’s all-in sustaining cost (AISC) per ounce of $1,805 in the quarter ended 30 June was up 21.5% year-on-year. The higher cost profile explains why CMCL has a lower free cash flow margin than either Thor or Metals Ex.

Summary

High gold prices lift all boats in the sector but may especially be a boon for junior and mid-cap miners as it

• makes it much easier to generate free cash flow

• makes previously uneconomical deposits viable

• attracts investment for exploration and development

• increases M&A activity as majors seek to expand their reserves and production profiles

However, higher prices - if they prove temporary - can lead to inefficient use of capital and stranded assets