May 08, 2024

This Hidden Group of Mining Stocks is Set to Outperform

Last month, gold price reached its new all-time high, nearly touching $2,400 per ounce.

That was a clear buy signal for most gold stocks. These often outperform the metal itself in the long run.

As a result, we saw gold equities surging across the board.

The VanEck Junior Gold Miners ETF (GDX), a basket of gold stocks, was up 15% since the beginning of the year, tracking the price of the yellow metal.

We believe more is yet to come.

The sector has clearly shown signs of life, putting investors in a tight spot. They now need to find the stocks with the most upside potential.

Thousands of companies work in the mining sector. Most are listed in Canada, a country with strong investor protection legislation and a long mining history.

However, a small subset of hidden stocks can potentially benefit more than others.

These have already got proper attention from major mining companies.

Burning Matches

Junior mining companies are burning matches.

Most don’t generate revenues, and their incoming cash flow is limited to private placements, which are not quite predictable.

It’s common to see one to five million dollars raised in these deals, which can usually last for a year or so. The company’s ambitions determine how long the money will last.

These funds keep the lights on until the company shows some progress.

That’s when strategic partners usually begin to knock on the door.

Strategic Partnerships

Major mining companies always look to expand their portfolios. One way of doing that is to conduct their own exploration. However, exploration often becomes a non-core activity when the main goal is to meet production targets.

That's where it’s more convenient to get help from the junior companies focusing on early-stage exploration.

But exploration is risky, and no one can guarantee success, even at the most promising projects. That’s why major miners do not buy every compelling asset but rather support the company working on it, creating a strategic partnership.

Major mining companies can invest directly in juniors. They often acquire a stake in a company via special funding and have the option to maintain ownership.

These investments often begin at five million dollars. Juniors use these funds to advance their core assets. Usually, the major provides consulting and places a director on the board to oversee the junior’s activities. This way, the major will be first in line to take over the junior company if it meets its exploration goals.

Here are some examples:

  • Newmont invested over $20 million in GT Gold. Following GT’s success in the field, Newmont acquired the remaining 85.1% of the company. It paid a 38% premium over its share price.

  • Eldorado Gold initially invested in QMX Gold in late 2019 and acquired the entire company in April 2021 at a 29.5% premium.

Another way major mining companies get involved is by creating a joint venture. After meeting certain milestones, the major earns ownership of the project.

This way, the major secures a stake in the project but not in a junior company. For example…

  • In 2008, Newmont and Fronteer Gold created a joint venture at the Sandman project in Nevada. After spending $14 million on exploration, Newmont could earn 51% of the project. In the end, Newmont acquired Fronteer for $2.3 billion, representing a 37% premium.

  • IAMGOLD secured a joint venture at the Nelligan project, which was owned by Vanstar Mining. The deal included over $5 million in cash payments, exploration commitments, and technical studies to earn up to 80% interest in the project. IAMGOLD acquired Vanstar at a 74% premium to its 20-day average share price.

There are more exotic options, such as royalty and streaming deals. But the idea remains the same… to secure the ownership of the project and position itself for a potential future takeover.

Since most of these investments provide significant funding, juniors can run more ambitious drilling programs and focus on delivering value on the ground. At least they don’t need to be stressed about raising funds every several months. That reduces ongoing dilution and increases the odds of a takeover.

The latter is the perfect exit point for most investors, as it often comes at a premium.

What Investors Can Do?

First, we believe that commodity prices are poised for further growth. Gold will likely outshine other metals, but it is worth keeping silver, copper, nickel, and others on the radar.

Finding the right company that tracks your favorite metal is not a simple task. However, using the information from above, you can find those supported by major mining companies, low potential dilution, and high odds of takeover.

However, at the Canadian Mining Report, we’re going the extra mile for you. Few juniors have major mining companies on board, which we see as a vote of confidence.

  • The famous Lundin Group recently invested C$35.2 million in Montage Gold.

  • AbraSilver received $10 million from Kinross Gold and another $10 million from a local Argentine power supplier.

  • Gold Fields and Osisko Mining created a 50/50 joint venture at the Windfall gold project in Quebec, Canada.

  • Newmont holds a 19.9% stake in Irving Resources, exploring for gold in Japan.

The list goes on…

One size doesn’t fit all. Please do your own research. Remember, the mining sector has a high risk and reward profile. Make sure you don’t invest more than you can afford to lose if your thesis doesn’t play out.

To stay tuned for new deals in the mining space, sign up for our alerts.

Disclaimer: This article is for informational use only and should not be used an alternative to the financial and legal advice of a qualified professional in business planning and investment. We do not represent that forecasts in this report will lead to a specific outcome or result, and are not liable in the event of any business action taken in whole or in part as a result of the contents of this report.

Subscribe &
Get Our Free Ebook

Learn how to successfully invest in junior mining stocksX

Share to Youtube Share to Facebook Facebook Share to Linkedin Share to Twitter Twitter Share to Tiktok