Junior Gold Miners: A Canadian Stock Picker's Market
In 2016, traders bought all beaten-down gold miner stocks without distinction. Industry investors were giving almost every company a chance. Financing came from every which way.
2019 will be different: Knowledgeable gold mining industry investors have learned a lot about various junior gold miner companies since 2016.
In the next leg of the rally, industry investors will be more selective. Not all companies will have funding and financing thrown at them.
Many of the best investing opportunities will be Canadian companies listed on the TSX Venture Exchange and on U.S. Over The Counter (OTC) exchanges.
In 2017 and 2018 the Canadian market has already shown great interest, selectively, in certain junior gold exploration stocks that make significant new gold discoveries on their properties.
In October I wrote an article about "Why Individual Junior Gold Miner Stocks Are Better Bets Than JNUG". In this article I want to expand on that analysis, and go deeper into a significant trend that has emerged in the junior gold miners market in 2017 and 2018.
For the past few years, a lot of us have taken early 2016 as our reference point for engaging with and understanding the gold miners sector (GDX) (GDXJ) (JNUG). This is natural: The extraordinary rally in gold (GLD) (PHYS) and gold miners in early 2016 was the first example of a major turning point from bear market to bull market in this sector since the early 2000's. (The quick crash and rapid recovery in 2008-2009 was really just an interruption of a bull market.) For those of us who weren't active investors or traders in 2000-2001 or so, 2015-2016 is the first and only such turning point rally we have experienced.
But we need to understand that going forward, the next stage of the bull market in 2019 will not proceed in exactly the same way as 2016.
By late 2015, the bear market in gold had lasted so long, that practically everything in the sector had been left for dead. Good companies and bad companies, economic projects and worthless projects, management teams with strong track records and shady track records -- all of it, the whole lot of them, had been sold down to pennies on the dollar compared to their true value.
So when the tide finally turned in early 2016, the opposite happened: practically everything in the sector got bought again. Traders jumped back into gold miner names with as little thought and selection as they had jumped out of them before. So now, everything took off: good companies and bad companies, economic projects and worthless projects, strong management teams and shady management teams.
This dynamic has distorted our picture of what we think a gold miners bull market rally looks like. In early 2016 we saw every gold miner stock going up as much as 200% or more. That's why the gold miner index funds like GDX and GDXJ made such extraordinary gains then. That's why a leveraged index fund like JNUG could gain so much. Index funds do best when traders buy stocks in a sector without distinction. That was 2016.
2019 vs. 2016
As we all know now, the initial gold miners rally ended in the summer of 2016. Since then, we have had over two years of a meandering corrective downturn, that finally got more severe in August 2018. This deep selloff has finally created the basis for a new rally and the next leg up of the gold miners bull market, which we saw the initial signs of in October.
But knowledgeable gold mining industry investors have learned a lot about various junior gold miner companies since 2016. Before that, it was hard to judge them fairly: After all, the bear market from 2011 to 2015 was so bad that everybody in the industry suffered. So in a certain way, industry investors were giving almost every company a chance in 2016. Financing came from every which way.
By now, people in the industry have had almost 3 years to observe how all these companies handled the influx of financing they received in 2016. Now they can make much more knowledgeable and informed judgments about which companies have done good work to improve their properties and projects, and which have not.
So going forward, in the next rally in 2019, not all companies will have funding and financing thrown at them. Only the good ones will.
Many of these companies are Canadian, with their primary listings on the TSX Venture Exchange. U.S. investors can buy shares of these stocks on the Over The Counter (OTC) exchanges. Typically the ticker symbols are 5 letters and end in -F.
The Market for Gold Discovery Plays in 2017 and 2018
In fact, in 2017 and 2018 the Canadian market has already shown great interest, selectively, in certain junior gold exploration stocks that make significant new gold discoveries on their properties.
My research shows over 50 junior gold miner stocks on the TSX Venture Exchange that made gains of 90% per month or more over a few months' time at some point in 2017 or 2018. Many of these gains were based on the companies reporting a significant new gold discovery from a drill hole result showing a high grade of gold mineralization in the ore over a certain drill hole width. In some cases simply the expectation and anticipation of such a discovery result was enough to fuel such a surge in the stock price.
Some of these were extremely small stocks with market caps under $10 million, and some of the stock price gains were temporary and came undone after the rally ended. But not all of them!
There is a popular perception that penny stock investing in companies like Canadian junior miners is nothing more than a lottery. One often hears references to many thousands of such mining stocks, and claims that only a tiny handful of them ever have these kinds of huge gains that people dream of.
Of course you have to be selective and choose the best stocks of high-quality companies that you can find - that is the whole point of this article. But it is simply not true that these big gainers are as rare as "one in a thousand" or anything like that.
A very basic amount of simple research can narrow down the number of actual junior gold miner stocks on the TSX Venture Exchange to no more than a few hundred. Simply sorting and filtering a standard basic database of TSXV stocks for gold miners, removing those that are primarily copper or nickel or cobalt or lithium or some other mineral miners, and removing those that are too obscure for a standard stock reference site like stockcharts.com to even track, clears out hundreds of stocks that aren't serious legitimate junior gold miner stock listings. Once one has done that step, the total number of stocks is more like 300, not 3,000.
So when I see 50 stocks out of 300 making a huge gain at some point in 2017 or 2018, that is a lot more significant than just a one in a thousand lottery ticket.
Over $3 Billion Worth of Gold Discovery Stock Gainers
Out of the 50 or so big gainers in 2017 and 2018, about 20 of them were achieved by stocks big and substantial enough to get their market caps over C$50 million Canadian dollars (almost $40 million U.S. dollars).
If you combine all the market caps of all of these stocks at their peaks, they represent a total of over C$4.4 billion Canadian dollars, or about $3.35 billion U.S. dollars. By comparison, the current total market cap of funds invested in the GDXJ junior gold miners index fund is around $4.1 billion.
I cannot describe and analyze all of these stocks in this article, and some of my analysis is reserved for subscribers to my Stock & Gold Market Report service. But I will show some significant examples of the trend that I am talking about, so that you can see the kinds of gains that have been made on these gold exploration stocks when they report a significant discovery in a drill result.
One of the first big junior gold discovery stories of 2017 was Golden Predator Mining (OTCQX:NTGSF), whose main property is the 3 Aces Project in southeastern Yukon. On January 19, 2017, they announced a drill result of 33 grams per tonne of gold over a width of 7.5 meters, and the stock price skyrocketed:
As the chart shows, this discovery led to a stock price gain of +233% in just 2 months. At its peak, Golden Predator's market cap was well over C$200 million.
Then in the spring of 2017, another big discovery story was Barkerville Gold Mines (OTCPK:BGMZF), who announced a whole series of high-grade gold drill results in March and April 2017 on their Cariboo Gold Project in British Columbia. Again, the market responded enthusiastically:
That's a gain of +180% in 2 months, and Barkerville reached a market cap of almost C$500 million at its peak.
The most famous gold discovery story of 2017 was certainly Novo Resources (OTCQX:NSRPF). In July 2017 they announced the discovery of large gold nuggets at their Purdy's Reward project in the Pilbara region of West Australia, and over the following months they promoted their discovery widely. The resulting stock price surge was truly extraordinary:
As you can see in the chart, the stock price soared from under C$1.00/share in July 2017 to as high as over $8.50/share in October 2017. It was almost a 1,000% gain in 3 months, and at its peak Novo's market cap was as high as C$1.4 billion.
Novo was the only gold discovery stock that was getting a substantial amount of attention from most investors - it may be the only one of these stock gain stories that you have heard of. But in fact it was not alone in the summer and fall of 2017.
At the same time a nickel discovery in British Columbia by Garibaldi Resources (OTC:GGIFF) sent its stock soaring as much as +3,000% in 3 months, and its market cap reached as high as over C$500 million. Garibaldi also got a lot of attention, and its success seemed to rub off on a number of junior gold explorer stocks in British Columbia as well, who also made huge gains at the time:
As 2017 turned to 2018, the biggest gold discovery success story was well-respected prospect generator Evrim Resources (OTC:EMRRF), who reported promising sampling results on their Cuale gold project in Mexico in January and even more so in April. Sometimes such sampling results, without more reliable drilling results, will not impress the market, but Evrim's strong reputation in the industry gave its preliminary results added validity in the eyes of the market. And so its stock price absolutely soared over these months:
That's a gain of +500% in 4 months, with a market cap that went from C$21 million to C$125 million (from $16 million to $95 million in U.S. dollars).
And the gold discovery success stories have continued over the summer and fall. In the most recent example, Westhaven Ventures (OTC:WTHVF) announced a high-grade gold discovery at its Shovelnose property in British Columbia with a series of drill results in October. In this case, today's current 3-month stock chart will suffice to show how enthusiastically the market responded:
Yes, that's a +620% gain in the past 2 months, a C$15 million stock that soared to over C$100 million.
Conclusion
These are just a selection of representative examples, of a trend that has taken hold in the junior gold miners market in 2017 and 2018. You can't catch even a piece of these gains with generic index funds like GDXJ or JNUG. You have to dig into all the stories of small Canadian stocks like these, and research the best and most promising investment opportunities in gold exploration discovery plays. Or you can subscribe to an investment service that does this. There are many such services out there on the market - mine is one of them.
My subscription service, the Stock & Gold Market Report, offers:
Complete model portfolioTop 10 junior gold miner stock picks2 top platinum miner stock picks#1 top silver miner stock pickMassive potential gains for 2018 and 2019Value beyond the initial stock picks - valuable guidance about:
When to take profits, when to sellWhen to let winners rideWhen to cut lossesWhen to hold through volatilityWeekly portfolio updates and commentary on global financial marketsFocus on the precious metals & miners marketCheck it out and subscribe today!
Disclosure: I am/we are long PHYS.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
Additional disclosure: I am long many junior gold miner stocks. Further details are available to subscribers of the Stock & Gold Market Report.
Editor's Note: This article covers one or more microcap stocks. Please be aware of the risks associated with these stocks.
Follow Geoffrey Caveney and get email alerts