For those with a stomach for risk and a head for research, investing in early stage companies in the gold-mining industry can reap big rewards.
With more upside potential than senior producers, gold exploration companies are an attractive investment proposition for early investors.
There’s ample evidence that the rate of new gold discoveries has declined over the past few decades, and yet investment gurus such as Eric Sprott have done well for themselves investing in early stage gold companies that eventually turn up new gold deposits.
“I keep reading that people are never making (gold) discoveries, the rate of discoveries is going down. The funny thing, well, I guess I’m the sucker then because I keep buying guys who say they’re making discoveries,” Sprott quipped in an interview with the Financial Post.
What makes for an early stage investment in the gold mining sector? Getting in on the ground floor in the exploration phase of the mining life cycle well before the drills hit pay dirt. If that sounds risky, that’s because it is.
However, “savvy investors can mitigate that risk through well-practiced due diligence,” Kimberly Ann, president and CEO of Lahontan Gold, told the Investing News Network (INN). “The key is to invest in the projects most likely to lead to the type of discovery that brings major gold producers to the table.”
In the past 12 years, the veteran mining executive has raised over C$210M in project financing and collaborated on three merger and acquisition (M&A) projects, including the corporate M&A leading to the C$340 million buyout of Prodigy Gold by Argonaut Gold (TSX:AR,OTC Pink:ARNGF).
The definition of early investing strategy success
Eric Sprott is well known for investing in small junior exploration companies mainly due to their potential for higher percentage gains compared to producers. Junior stocks are relatively cheap in the early stages of project exploration. But as a project progresses through drilling and discovery, and then on toward proving up resources and economic studies — each time removing another layer of risk — the reward may come in the form of a ballooning stock price.
“If you want to make money, you have got to buy small stocks,” Sprott told newbie investors at the 2020 Prospectors and Developers Association of Canada convention.
The success of Kirkland Lake Gold (TSX:KL,NYSE:KL,ASX:KLA) is a prime example of Sprott’s prowess and the power of early stage investment. An early stage investor in the company, he would later play an active role in Kirkland’s merger with Newmarket Gold prior to the discovery of two high-grade gold veins, which sent the company’s stock soaring as high as C$63 per share.
Lahontan CEO Kimberly Ann points to Great Bear Resources (TSXV:GBR,OTCQX:GTBAF) as another example of a small gold stock paying off big for its early investors. Great Bear’s major asset is the Dixie project in Ontario’s Red Lake mining district.
Prior to the series of key discoveries at Dixie in 2018-2019, for which the exploration team won the Bernie Schneiders Discovery of the Year award, shares in the company were trading in the C$0.45 to C$0.55 range. By the end of 2019, Great Bear shares had quadrupled to nearly C$2.50 and, as the company continued to prove up the resource, the stock had increased in value by about 700 percent to nearly C$17 per share at the close of 2020.
“Great Bear’s success in increasing both the value of its deposit and its company attracted the attention of Kinross Gold (TSX:K,NYSE:KGC),” Ann said. The global gold major made a C$1.8 billion bid for Great Bear in December 2021. Shares of Great Bear were trading at C$28.58 as of January 11, 2022.
“For those who invested at C$0.45 per share a few years ago, this represents a significant value creation from a relatively small capital investment,” she added.
Kimberly Ann is working to generate value for her Lahontan shareholders. In the heart of Nevada's Walker Lane, the company has a district-scale land package consisting of three properties with the potential to host multi-million ounce deposits. The projects, two of which were past producers, were formerly held by Victoria Gold (TSX:VGCX,OTC Pink:VITFF) and KA Gold.
Kimberly Ann believes her company has all the right characteristics to make the next multi-million ounce gold and silver discovery in Nevada’s Walker Lane trend. Lahontan is set to become a TSXV-listed company in 2022.
Evaluating gold exploration companies
Early investing in junior gold stocks carries a high risk, but as with the case of Great Bear it can also translate into high rewards. So how can early stage investors mitigate that risk and increase the potential for rewards with this investment strategy? Do your homework.
Adrian Day, another prominent investment sage, advocates for “focused investing,” which he defines as the “careful selection of potential big winners that we like to hold a long time.” Day says this strategy has “paid handsome dividends.” He holds up his early investment in Franco Nevada (TSX:FNV,NYSE:FNV), referred to as “one of the top-performing gold stocks of all time.”
There are a number of key metrics investors can employ when evaluating early stage investment opportunities in the resource exploration sector. The most important for investors to consider are the strength of the management team, the project and the balance sheet.
People power: Management matters
For many veteran investors, the most important factor in determining the success of an early stage company is talented management teams. “Success in junior exploration is more a function of people than property,” Rick Rule, former president and CEO of Sprott US Holdings and current proprietor of Rule Investment Media, said in an interview with INN. “Most of the value in a company is in the intellectual capital and talents of the people rather than its assets.”
Management teams with track records of success, including significant exploration and development experience, are generally considered the safest bets. If the company plans to bring the project through to production, those with expertise in feasibility studies, mine development and production would be a huge asset.
Similarly, if management’s strategy is to be acquired by a major, the team’s roster should have members with a history of successfully negotiating favorable M&A. Of course, key criteria for successful leadership also include management’s experience with raising capital and attracting funding from larger partners.
“With Lahontan Gold, we’ve put together an all-star team of mining industry professionals,” Ann explained. “Their experience spans decades and covers every stage of the exploration and mining process. Our Director of Exploration, Brian Maher, is an economic geologist with over 40 years of experience in international mining and exploration. Director John McConnell is currently at the helm of Victoria Gold, where he guided the construction of the more than 200,000 ounces per year Eagle gold mine in the Yukon.”
Project potential: Geology and jurisdiction
While a strong management team is an essential asset, Eric Sprott believes the best indicator of a company’s future value is what’s in the ground.
“What do I look for when I’m trying to seek out an opportunity? I’m trying to look for some value that’s not appreciated by the market. Quite often it might be grade, it might be prospectivity, it might be margins,” Sprott said in an interview with Meb Faber Research. “There’s a number of things that you’re looking at that you’re saying, ‘Well, the market is not quite appreciating what could happen.’”
Evaluating the value of a property in the early stages, especially a greenfield project, can be a bit tricky. However, investors should stick with the basics and take a close look at the geology of the project, especially the grade, potential deposit size as well as the potential for district-wide mineralization.
Size is definitely a factor. Is the project big enough to host a profitable million ounce deposit that will entice a major mining company? Although grade is often touted as king, in certain circumstances lower grades can be more lucrative depending on the deposit size and amenability to low-cost production methods.
Investors should also consider the project’s proximity to past and/or producing mines. The old adage “to find a mine look near a mine” is based on scientific principles that have led to significant discoveries. No other mines in sight? Greenfields projects can still host potential new discoveries if they are located along a known trend with a favorable structural setup and have geological similarities to a known deposit.
Lahontan Gold’s flagship asset is the high-grade gold and silver Santa Fe project with past production of 345,000 ounces of gold and 710,000 ounces of silver. Contiguous with the Isabella Pearl mine operated by Fortitude Gold (OTCQB:FTCO), the Santa Fe project is 15 kilometers southwest of Paradise Peak, which has produced more than 1.5 million ounces of gold. Additionally, the company believes its high-grade gold-silver Moho project, 35 kilometers southwest of the Santa Fe, has the potential to reach more than 1 million ounces at high grades.
Just as important as the property’s geology is whether it is located in a favorable mining jurisdiction. Essentially, is the project in a mining-friendly region? Are there any regulatory, political or environmental issues that might prove challenging to moving the project forward? Proving up valuable resources with excellent drill results may not matter much if the company cannot unlock that value. Projects in jurisdictions with a low risk of appropriation and transparent permitting processes are the preferred pick.
With the three high-quality projects in the prolific Walker Lane trend, Lahontan benefits from Nevada’s billing as the most attractive mining jurisdiction for investment in the world and its status as the world’s fifth largest gold producing region.
Financial position: Drilling dollars
For some seasoned investors, it's the people that make for profit; for others, it's the project fundamentals. But for Adrian Day of Adrian Day Asset Management, it's the company’s financials that warrant the most attention.
“I always look at the balance sheet, the burn rate, the discipline of the company in the past both in raising equity and dilution, and on the other side, spending and cutting spending when necessary,” Day told INN. “And frankly, when I am looking at an exploration company, I look at the balance sheet before I look at the properties.”
Essentially, investors should be looking for companies with a strong enough financial position to execute on the management’s strategy and withstand an economic downturn without diluting shareholder value or going under.
According to Lahontan’s Kimberly Ann, her company “is well-funded with a strong financial position.” Lahontan Gold has raised C$8.5 million in recent financings and is completely debt-free.
An early investment strategy in junior gold stocks can be highly rewarding for those who do their homework. As Adrian Day advises, investors must be willing to commit the time to properly research companies, especially in the junior exploration sector.
Experienced early investors know to look for companies with seasoned leadership, quality projects in favorable jurisdictions and healthy financial positions. Early stage companies with these characteristics are better equipped to weather the ups and downs of economic cycles while making discoveries and building shareholder value.
This INNSpired article is sponsored by Lahontan Gold. This INNSpired article provides information which was sourced by the Investing News Network (INN) and approved by Lahontan Gold in order to help investors learn more about the company. Lahontan Gold is a client of INN. The company’s campaign fees pay for INN to create and update this INNSpired article.
This INNSpired article was written according to INN editorial standards to educate investors.
INN does not provide investment advice and the information on this profile should not be considered a recommendation to buy or sell any security. INN does not endorse or recommend the business, products, services or securities of any company profiled.
The information contained here is for information purposes only and is not to be construed as an offer or solicitation for the sale or purchase of securities. Readers should conduct their own research for all information publicly available concerning the company. Prior to making any investment decision, it is recommended that readers consult directly with Lahontan Gold and seek advice from a qualified investment advisor.