The whipsaw consolidation in the gold stocks has lasted for over one year now. Patience is running out for many investors as the HUI is down 2.1% and the S&P/TSX Gold Index is down 9.1%. Those who have shifted part of their assets to the precious metals sector during the 2005-2006 run may be disappointed as the Dow Jones and the S&P 500 are hitting new highs.
According to Barchart.com, the gold stock sector takes a miserable 185th place out of a total of 227 by performance. As we have written in a previous article, gold producers are suffering due to problems with production costs mainly attributable to rising energy prices.
However, taking a closer look, the picture is not so bad in the entire sector. In fact, there is a group of gold stocks that have been a bright spot even in the last 12 months. It consists of exploration companies that are moving into the development stage and planning future production - RSG Exploration II stocks .
The group consists of 19 companies with a total market capitalization of $6.4 billion. In aggregate, these companies own 145 million ounces of gold, 484 million ounces of silver, and 9.5 billion pounds of copper. The average enterprise value per ounce of gold is $39; in comparison, the mid-tier gold producers in the RSG Gold Benchmark have an enterprise value per ounce of $158.
Out of the 19 stocks, 13 are up and 6 are down over the last 12 months. There is a large diversity of stocks in terms of market capitalization, from a mid-cap Gabriel Resources (GBU.TO) to a micro-cap Gryphon Gold (GGN.TO). A giant in the group and a great success story, Novagold (NG), is not included in the calculation since the majority of its dollar weighted resources is copper, not gold.
Here is how the RSG Exploration II companies compare to the Amex Gold Bugs Index (HUI):
To be included in the RSG Exploration II group, a company needs to meet the following criteria:
- Own established reserves/resources underground
- Demonstrate economic viability of a mining project
- Have a potential to increase reserves/resources through an intensive drilling program
In other words, this is a group of companies with strong internal growth and future production plans. Evidently, they are often acquisition targets of major and mid-tier mining companies. Cumberland Resource Ltd. became the latest graduate from the Exploration II category after being acquired by Agnico-Eagle Mines (AEM) at a hefty premium.
Is there anything we can conclude from these observations other than to point to the strongest group of gold mining stocks?
Yes. One of the most important characteristics of a bull market in a sector is a leadership of higher risk growth companies. This is exactly what is happening with the gold mining sector right now. We believe that this is a good sign and that the gold bull market is intact. Patience is warranted.