Spot gold dipped to $1,056 per ounce in November 2015. This price was the low point of a half-decade decline, which saw the yellow metal lose close to 45% of its value and at the same time resulted in a collapse in the value of many of the gold and precious metal industry's constituent companies.
This industry contraction had various implications for the sector – one of which was the dramatic decline in exploration spend. The chart below illustrates this decline:
Put simply, gold miners weren't able to justify spending on exploration efforts when they weren't making any money on the gold they were pulling out of the ground at their existing sites.
As the chart above highlights, spending at the end of 2016 was at an 11-year low. This is set to reverse. Gold currently trades at around $1,260 spot, and exploratory activity is reportedly on the rise. Long-term forecasts suggest gold should continue to appreciate in value; against a backdrop of geopolitical and economic uncertainty in Asia, the U.S. and Europe, these forecasts are tough to invalidate.
All this has resulted in a number of opportunities for traders and investors looking to gain an exposure to the space with the opportunities rooted in various consequences of a reduced exploration spend. Consider this: a company like Barrick Gold Corp. (ABX, Financial) or Newmont Mining Corp. (NEM, Financial) wants to expand its output in response to gold appreciating in value. It's already operating at capacity in most of its existing operations, and as such, it's got to rely on exploration and development real estate to drive said expansion. Over the last five to 10 years, it's pulled out of a large number of development projects.
What does this company do?
It looks to smaller, development-stage companies in the gold mining sector and either acquires their projects (or the company outright) or partners with said company to bring a development project to production and – in turn – revenue generation stage.
So this means development-stage gold companies could be worth a look, in anticipation of Big Mining looking to expand output. But this brings with it another dilemma. Junior gold is risky and unpredictable. It's similar in nature to junior biotech – many companies fail to reach revenue generation, and it's littered with failed names that once looked promising. How, then, can a trader or investor pick an exposure with the highest potential for success?
The answer: look for a company that has a sector guru attached.
This author did exactly that, and here's the outcome.
The company is Dataram Corp. (DRAM, Financial). Don't let the name put you off – Dataram is a technology company that just diversified into the gold mining space through the acquisition of a company called U.S. Gold Corp. U.S. Gold Corp. is a U.S.-based gold mining and exploration company, and it's got a couple of wholly owned projects that it's working to bring to the stage described above – a stage at which each would look attractive to a larger company looking to expand output.
Many companies fit this description; what makes this one different is David Mathewson.
Those familiar with the gold mining space might recognize the name. He's a geologist with more than 35 years' experience. His most notable role was head of Exploration for Newmont in Nevada.
Nevada is home to some of Newmont's most gold-rich projects, and Mathewson is credited with the discovery of a number of the gold mining giant's core assets – Tess, Northwest Rain, Saddle and South Emigrant in the Rain mining district.
At the end of last decade, Mathewson left Newmont to head up a company called Gold Standard Ventures Corp. (GSV, Financial). At the time, Gold Standard Ventures was a $15 million minnow with no producing mines. When questioned about his motives, Mathewson claimed that small explorers were the ideal entities from within which to discover and mature new resources. He spent the next few years applying his exploration methods to a project called Railroad-Pinion and proved the resource as a rich deposit. As mentioned, when he started at Gold Standard, the company was worth $15 million. This year, it topped out at a more than $600 million market capitalization.
Mathewson is no longer with Gold Standard Ventures. He's now the vice president, head of Exploration at the company I'm highlighting as one to watch in this discussion – U.S. Gold Corp.
U.S. Gold Corp. has two core projects. The first is called Copper King, and it's an advanced stage gold and copper exploration project. It's been subject to an extensive drilling campaign over the last 80 or more years – since 1938 there have been at least nine drilling campaigns carried out by seven companies with drilling by five different operators having confirmed mineralization since 1970. It's located in Wyoming, and it's the more advanced of the two projects in terms of timeline to production.
According to a 2012 Preliminary Economic Assessment (PEA) conducted by Mine Development Associates (MDA), the property has a total of 926,000 ounces of gold measured and indicated, and a further 174,000 ounces of gold inferred. Further, it has a total of 233 million pounds of copper measured and indicated, and a further 62.5 million pounds of copper inferred.
This translates to a 1.5 million gold equivalent resource and a net present value of just shy of $160 million at gold $1,100 per ounce and copper $3.00 per pound.
Management has set a 2017 target of updating these estimates with more current cost inputs, and this should serve to increase net present value before year end. Beyond that, the company is seeking a pre-feasibility study, and then, in line with the strategy outlined above, looking to partner up with a big name or offload the project completely ahead of the production phase.
This is all good stuff in and of itself, but it's not what's most exciting about U.S. Gold Corp. Sure, it's the most advanced of the two projects, but the one on which this company is likely going to base its growth in the coming years is the second project – a project called Keystone.
Keystone is a Nevada-based project (Mathewson's specialty region), and it's located on the world famous Corte Gold Trend. Its geology is similar to that of a number of the surrounding, producing projects, yet it (as yet) remains very underexplored. Mathewson said this about Keystone:
“The best exploration project I have seen in my career. Reminds me of the Railroad project on steroids.”
Remember, the Railroad project is what drove a close to 4,000% appreciation in the value of Gold Standard Ventures under Mathewson's guidance. As yet, the only drilling that has been completed is a sort of early stage exploratory drilling, which Mathewson himself refers to as scout drilling. This early stage drilling has turned out very promising results. The company is projecting an initial target of more than 1 million ounces of gold and a project potential in excess of 10 million ounces. The region in which the project is located is littered with what are known in the sector as Nevada Elephants, or deposits of more than 20 million ounces, which helps to put the 10 million-ounce forecast into perspective.
The most recent exploration efforts at the site are focused on a Gravity Survey, conducted by an entity called Wright Geophysics. The survey contributed to the definition of drill targets and concluded favorably as inferring Cortez-type geology at the project – geology that has proven to contain millions of ounces of gold at other locations in the nearby region.
With this one, then, the forward activity is all about drilling. U.S. Gold Corp. is focusing on expanding and defining resource estimates by way of a drilling and exploration program led by Mathewson. Knowing where to drill, and how deep, is hugely important in these sorts of programs; not just from a resource estimate but also from a cost perspective. That Mathewson is heading up this program bodes well for U.S. Gold Corp. on both fronts.
What are the risks?
The major risks associated with this company are rooted in the uncertain outcome of the various drilling programs. Drilling is expensive, and shareholders will generally have to bear the costs of any program on the back of the company issuing equity to raise capital. Having Mathewson on board, and leading the program, mitigates this risk to a considerable degree, but it still exists and needs to be considered ahead of taking any position.
From a more macro perspective, if the price of gold declines (which would go against generally accepted forecasts, but it's a possibility), the large gold miners might not be as willing to acquire development properties as they would be against a backdrop of an increase in gold prices. This might make it difficult for a company like U.S. Gold Corp. to score partnerships or to sell its properties, even if the planned drilling programs prove considerable resources.
These risks noted, however, this company is well worth a look. Macro tailwinds are supportive of its strategy right now; if these tailwinds continue, and assuming Dataram and U.S. Gold Corp. can execute on the planned exploration strategy, there's real upside potential.
Disclosure: The author doesn't own any of the stocks discussed in this article and doesn't intend to open a position in any stocks discussed within the next 30 days.
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