Resource World Magazine

70 www.resourceworld.com A U G U S T / S E P T E M B E R 2 0 1 8 Epilogue by David Duval E ven diehard investors are lament- ing the performance of gold stocks which is not surprising considering the fact that gold prices have consistently failed to breach the technically important US $1,400/oz resistance level after numer- ous attempts. Nonetheless, despite recent price weak- ness in the metal generated by US dollar strength, most senior and intermediate gold producers have proved to be fairly resilient as have many well-financed juniors in what historically is a highly volatile market segment. Unlike junior explorers, gold producers have the advantage of production leverage, a quantifiable profit indicator for investors whereby higher gold prices are reflected immediately on a producer's bottom lines. Also impacted positively are key market metrics including their P/E ratios which in past bull markets have reached lofty levels exceeding 50:1. Mind you that's nothing compared to the mind boggling P/E ratios seen today for companies like Amazon (more than 200:1) which, in fact, has been seven times that in the past. Numbers like this – which are largely confined to the tech sector on the NASDAQ Exchange – strike me as more of a mania than the result of any rational investment decision. (However, I'd be a buyer of Amazon at something approach- ing 50:1 as I do most of my shopping on Amazon as do many of my friends and family). The odds of seeing a repeat of this high tech market mania for gold stocks are pretty slim in my opinion, barring any ballistic increase in the gold price which would likely be short lived. Gold producers have come a long way in recent years reducing debt loads and production costs which in most cases has improved their balance sheets and profit- ability. Even so, their market reputations remain tarnished by bad investment decisions made in the past including Barrick's hedging programs and invest- ment in Pascua Lama and Kinross Gold's disastrous $7 billion plus open market purchase of Red Back Mining's Tasiast Mine in Mauritania. There are many others too, including Eldorado's investments in Greece and China. In any event, their broad-based efforts to reduce debt and improve profitability have helped create a floor for their stocks and set the stage for a major rally when there's a serious upturn in gold prices which I expect to happen over the next two to three years. As the sentiment for gold price appre- ciation improves, merger activity is bound to pick up and that's one reason why I like intermediate-sized gold producers and junior explorers with resources in the ground and exploration upside within or near established mining camps. So far this year, Hecla Mining has announced plans to acquire all the outstand- ing shares of Klondex Mines, a high-grade Nevada underground gold producer with its Fire Creek, Midas and Hollister mines. The low risk merger will happen by way of a plan of arrangement whereby Klondex's Canadian assets will be spun out to its exist- ing shareholders. Alio Gold, a Canadian gold mining company engaged in production, development and exploration in Mexico and the US, recently completed the takeover of Rye Patch Gold and its 100%-owned Florida Canyon Mine in addition to its resource and exploration projects along the Oreana and Cortez gold trends. Last year Barrick Gold, the world's largest gold producer, signed an almost billion dollar deal to sell China's Shandong Gold a 50% stake in its Veladero Mine in Argentina. The alliance could see them cooperate in other acquisitions as well, including Pascua Lama. Some mining executives are arguing that the world has reached "peak gold" because all the major deposits have been discovered which might at least partly explain the willing- ness of producers to enter into strategic alliances. Shandong is currently completing an independent evaluation focused on the potential to develop a mining project at Lama in Argentina, including a high-level evaluation of potential synergies between Lama and the nearby Veladero operation which would enhance the project's value for both partners. This is a perfect example of companies seeking to leverage assets near existing operations. Junior explorers fall within a different investment spectrum and are predictably more speculative given the inherent risks associated with exploration. In addition to an expensive and generally stifling regulatory climate, they face time-sensitive permitting issues for work programs and resistance from First Nations groups who in many cases are leveraging their land claims issues with federal and provincial governments by blocking all forms of resource development. The timeframe to achieve commercial production has also increased dramatically. Drilling began at Hemlo in January 1981 and just over four years later the David Bell Mine achieved commercial produc- tion. Fast forward to 2018 when it takes 15-20 years to achieve the same result and you can understand why investors are wary about committing capital over such a long period. n Performance of gold stocks undermined by lackluster prices and historical mismanagement

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