Here Are Three Different Types of Exposure to the Gold Mining Space Heading into 2018

Mark Collins  |


During the final week of November, the price of gold was trading for just shy of $1,300 an ounce. Fast-forward to mid/lateDecember and this has fallen to $1,267 – a close to a 4% decline in a little over a month.

This action has, at the same time, translated to some parallel downside in many of the stocks that make up the gold industry, big and small, meaning that these companies are now available at a discount to their price this time last week.

With global market sentiment seemingly shifting towards a risk-off attitude, there is a good chance we will see the price of the yellow metal recover relatively near-term. As such, picking up an exposure to those companies that have taken a hit on the back of the decline in price of the underlying metal at the current depressed levels might be an opportunity to take advantage of some discounted shares and – in turn – a return to the overarching upside action we have seen throughout 2017 to date.

With this in mind, here are three different types of gold companies, each with a different risk profile, that could make for a nice long-term allocation at current rates.

First up, Franco-Nevada Corporation (FNV).

Franco-Nevada is currently trading at around $78 share, down from end of November highs at $86 a piece. That's a decline of just shy of 10% across the same timeframe as the above-discussed decline in the price of gold but to a much higher degree.

Unlike a traditional gold-mining or exploration entity, Franco-Nevada is what's called a royalty streaming company. Essentially, this sort of company operates as a type of finance vehicle for mining companies.

Searching for, mining and processing gold is an expensive business. Companies that operate in the space generally need large amounts of upfront capital in order to get to a point at which they can start generating revenues on any gold resources they uncover and, for many, traditional financing options (banks, equities markets etc.) are unfavorable or unavailable.

This is where Franco-Nevada comes in.

The company lends miners and producers the capital required to fund their respective operations in return for (generally) one of two things – the right to purchase any produced gold at a discounted rate to the future open market price or a predefined royalty on any gold that the producer mines and subsequently sells.

At the end of the third quarter, 2017, the company had little over $533 million cash on hand, up more than 90% on a year-over-year basis, and generated $171 million revenues during the quarter in question. Net income on these revenues hit $60 million, up 10% again year-over-year.

So, this is a relatively low-risk allocation to the space, with the company having a strong cash balance and a revenue stream that is inherently diverse, being spread across a variety of different financing deals in the sector.

Next up, McEwen Mining Inc. (MUX).

This one is a far more direct play in the sense that McEwen is actually mining and producing its own gold as well as actively exploring and developing a range of other projects spread (primarily) throughout the Americas.

The company's lead production asset is called the El Gallo mine and it's an open pit, heap leach mine located in Mexico. During 2016, the mine produced 55,000 ounces of gold. Secondary to El Gallo (but not by much) is the company's San Jose mine in Argentina, which produced 47,000 ounces of gold and 3 million ounces of silver during the same year, 2016.

This one is especially intriguing right now based on the fact that not only has it seen its share price decline in line with the overarching downside action we are seeing in the gold markets but said action has also been compounded by the company's announcing of a bought deal placement that will see it bring in $10 million before the end of 2017.

The placement is designed to underwrite an expanded discovery program at a relatively newly acquired project in Timmins, Ontario (so, outside of McEwan's primary Americas focus), called Black Fox.

Drilling at Black Fox should take place during early 2018 and, once those results hit press, there is a good chance that the decline we have seen on both of the above-mentioned inputs will reverse and that the gap will close as a result.

Another attractive feature of this company is that Rob McEwen, Chairman and Chief Owner, owns 24% of the outstanding share base. This aligns insider interest very much with that of shareholders and serves as a degree of risk mitigation for anybody looking to pick up an exposure to this industry.

Finally, U.S. Gold Corp. (USAU).

From a risk perspective, this company is the highest risk company on this list but, at the same time, as a direct exposure to a young exploration entity, it's also potentially very high reward.

US Gold has two primary resources: one in Nevada located along the famous Cortez trend and another in Wyoming. The former is called Keystone and is a gold-focus project, while the latter is called Copper King and – as its name suggests – is a Copper deposit (but also potentially holds some gold and some silver).

The guy in charge of exploration at US Gold is one of the major drivers behind it qualifying for a position on this list. The man in question is Dave Mathewson, who previously held top exploration positions at mining and exploration behemoth Newmont Mining Corporation (NEM) and was responsible for the discovery and successful subsequent exploration efforts of deposits in Nevada while at Gold Standard Ventures Corp (GSV).

Right now, US Gold is undertaking drill programs at both of its lead projects, with results expected during early 2018. If these results reinforce the already established historic drill results, it will pave the way for a deal with a bigger name that could see the company financed through to production at the sites in question.

Again, this one is a higher risk allocation given that it's going to need financing to fill the capital necessity over the coming 12 months. With that said, however, if a bigger name does come on board to help US Gold extract and process the reserves at its sites, the upside on offer could easily outweigh the risk side of the equation.

DISCLOSURE: The author has no position in any of the stocks mentioned in this piece.


The views and opinions expressed in this article are those of the authors, and do not represent the views of equities.com. Readers should not consider statements made by the author as formal recommendations and should consult their financial advisor before making any investment decisions. To read our full disclosure, please go to: http://www.equities.com/disclaimer.

Companies

Symbol Name Price Change % Volume
FNV Franco-Nevada Corporation 99.04 0.14 0.14 602,111 Trade
MUX McEwen Mining Inc. 1.54 -0.10 -6.10 3,503,592 Trade
usau U.S. Gold Corp.

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