When I look for a gold stock, I look for a company that can provide outstanding value in a space where we have a lot of different options. There are many small to medium-size gold companies that are working to develop their properties. And for the last several years, certainly since 2011 saw a new all time high in the gold price, financing for smaller companies had become fairly difficult.
As we can see in the graphic above from Oreninc, junior mining had suffered a steep decline in financings from 2011 through the first part of 2019. It was not until recently, during the gold bull that started at the end of Q4 of 2018, that dollars have started to flow back into the junior mining space. While the dollars have begun to flow back, much of it has gone to larger projects with higher expected rates of return. Therefore, it has become apparent that size matters in the gold mining space to investors because they want to reduce their risk on single project miners with smaller resource bases.
Enter Gold Project Consolidation
There are few basic ways to handle a gold bear market. One method is by consolidating producing companies through merger and acquisitions. While have seen some consolidation in the industry during the last bull market, experts expected more of this to occur than what actually happened. I interviewed Kai Hoffman recently, who owns Oreninc, about why we have not had more consolidation in the mining space. And he mentioned that finance gains since 2019 were focused on drilling and property development for some of the individual miners. But more investment would need to occur to bring all of these hundreds of potential gold projects online.
That left a lot of exploration gold companies putting their projects on hold looking for interested investors willing to put money into these projects. Some of these companies went completely dormant, which had left a trail of zombie gold companies with good, but uneconomic at $1100 gold prices, projects waiting to be picked up at a discount.
This is precisely what GoldMining Inc. has done since 2012. The company has been buying good gold deposits in 14 different fields across North and South America for about 10-20 cents on the dollar. And now that gold is trading in the $1900’s, many of these projects have suddenly become economic. And so the company is positioned as a very large value play in the middle of a very robust gold bull market.
GoldMining Inc’s main value proposition is having acquired gold very cheaply compared to the market average. And because of that, per an interview with Chairman and Founder Amir Adnani, the company trades at at a discount to most major miners by the dollar per ounce of gold in the ground. Here is the company resource from the corporate presentation.
Source: GoldMining Inc
The company is trading at a $394 million market cap as of Sept 13, 2020. That is $28 per ounce of gold in the ground. This is very cheap compared to most senior sized gold producers, the 2017 industry average cost of gold miners, and mid-tier producers. GoldMining Inc is trading right now like a junior exploration company with a single project. That is astounding from a value generation perspective.
Source: GoldMining Inc.
Back to financing, we know from the data above that not all companies are able to swing the money needed to develop their projects yet. This is where GoldMining Inc. has developed a very unique approach to generating cash flow for their projects. Many market analysts, including Frank Holmes of US Global Investors, believe that gold royalty and streaming companies have an advantage over the average gold mining outfit. The model has been perfected by companies like Franco Nevada, and is being copied by many new companies.
This is because while they enjoy a lot of the upside potential when gold prices are rising, royalty companies share very little of the downside potential with producers and explorers when the metal is in decline. Royalty companies are better insulated from bear markets because they have a diversity of high-quality active mines in their portfolio.
This is why GoldMining Inc has created their own gold royalty company subsidiary, Gold Royalty Corp, which provides financing for their gold projects.
Source: GoldMining Inc
The royalty company is being run by former GoldCorp CEO David Garofalo, and the rest of the management board speaks for itself. The genius of this move allows the company to control financing of its projects using its own terms while using a platform that favors investors gaining access to leverage on gold production with much less of the risk.
Source: US Global Investors
And once the royalty company starts producing profits, it can be spun off or IPO’d as a new revenue generating company. GoldMining Inc has effectively run an end around the recent problems in the finance space since 2011 while creating a unique secondary value proposition for their shareholders in the royalty space.
Source: GoldMining Inc
Sound too good to be true? Every investment proposition comes with its risks, and that is what we will evaluate next. While the projects collectively have a lot of gold ounce potential, building mines is not an easy or inexpensive proposition. GoldMining Inc will have to focus on efficiently exploiting their gold resources while building enough internal rates of return to finance additional mine expansion. The good news is that major gold companies do this every day, so it is certainly not unheard of in this space.
The company has 157 million shares outstanding, fully diluted, which is a fair amount at this stage. We should expect some more share dilution as revenue is raised to develop their projects. However, the share dilution is less worrisome when considering the amount of resources and number of projects the company has. It is not unheard of for a single project junior explorer to dilute to 100 million shares or more on a single project. Given the potential value of the revenue stream at $1900 gold, I believe that investors are not taking a lot of risk in acquiring GoldMining Inc at $2.66 per share.
The risk exists that a precipitous fall in the gold price would make some of these projects uneconomic again. But that risk is also true for all gold mining companies and not unique to GoldMining Inc. Given the debt problems that exist with $15 trillion in negative yielding bonds, and the economic problems caused by the recent economic shutdowns in the US, it is also unlikely that gold price enters a bear market in the short term while the company is developing their projects.
GoldMining Inc smartly acquired good gold projects at a nice discount during the recent lengthy bear market. Now that gold has eclipsed its previous 2011 all-time high, their portfolio looks much better positioned to return health profits to investors. Also, the gold royalty company has given them a leg up in attracting capital in a tight market, propelling GoldMining Inc ahead of some of their peers who are still looking for their financing.
Risks include costs of mine building in multiple districts and a lower gold price. However, given the powerful value created by the company, I think the potential upside return to investors is very healthy when compared with the company’s competition in the gold mining industry.
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