The prices of goods and services continue to rise in the United States, causing many investors to hedge against inflation through gold. As a result, gold hit its highest level over the past five months on Nov. 11.
Also supporting the commodity is the fact that the U.S. Federal Reserve is hesitant to adopt monetary policies that will mitigate rampant inflation, even though inflation was at a three-decade high of 6.2% last month.
The positive effect on households from the recent increase in wages may vanish quickly due to higher consumer prices. Moreover, the sectors that are recording by far the highest inflation are food, housing and energy, which means inflation is much higher than 6.2% for lower-income households.
High inflation and low interest rates are causing investors to flock to gold and other safe haven assets, which appeal more than U.S. bonds and other fixed-income securities. As the demand for gold strengthens, the price per troy ounce should continue to move up, with analysts expecting it to be trading steadily above $1,900 within a year. The price of gold was $1,857.73 per troy ounce as of the writing of this article.
Shares of publicly traded gold mining companies are expected to rise as well, and in some cases, these companies can grow faster than the underlying commodity.
Investors in search of opportunities amid gold stocks could be interested in Orla Mining Ltd. (ORLA, Financial), a Canadian gold operator engaging in exploration activities and the development of mineral properties.
The wholly-owned Camino Rojo project located in the Mexican province of Zacatecas should allow the exploration company to begin producting gold soon. On this area of more than 160,000 hectares extending across several claims, Orla is going to dig up its possibility of success as operations are scheduled to pour the first gold sometime during this quarter.
Orla will become a gold producer and from this transition, the industry will soon welcome another operator holding highly profitable mining activities. From the open pit, the company has an annual production target of about 101,500 ounces of gold equivalent.
Currently, the company owns 1.5 million ounces of metal hosted in proven and probable reserves that should guarantee production activities for 10 to 15 years. Plus, Orla has the potential to significantly extend this lifetime by adding more reserves from 9.5 million ounces that are stored in mineral resources grading 0.83 grams per ton of ore.
The likelihood that explorations will be successful is high because Camino is a quality project based on analysis of the land. Besides being in a friendly mining jurisdiction, the ore body is compact, which means a low risk to incur errors during mining sequencing. This contributes to designing a high-profile asset, implying the payment of a modest all-in sustaining cost of $543 per ounce, which places it among the most profitable mines. Operations are adjacent to the main ways of communication and other infrastructure and are characterized by a low stripping ratio.
Usually, mining investors are in search of metallic projects yielding not less than a 25% to 30% internal rate of return (IRR). After the payment of taxes, the Camino Rojo promises to give back 62% IRR, and the business is expected to cover the initial investment of $134 million in no more than one and a half years.
Shares were changing hands at $4.37 apiece at close on Nov. 11 for a market cap of $1.08 billion.
Compared to the 50-day moving average value of $3.44 and the 200-day moving average value of $3.84, the current share price seems high, but considering the unbelievable upside potential lurking around the bend, I believe this stock could still be undervalued.
