Finding nuggets among junior gold explorers

To separate the “haves” from the “have nots” in the junior gold exploration space, RBC Capital Markets looks at three factors: grade, size of deposit and geopolitical risk.

Analyst Michael D. Curran says companies that score higher using this model generally have higher market valuations, or adjusted market capitalization per total resource ounce (AMC/oz).

Of the 70 to 80 non-producing gold names he and his fellow analysts track on this metric, the group has usually averaged between $50 and $75 per ounce, before dipping lower in the middle of 2008. The current average of $66 is down slightly from $68 in January.

“Size of Resource does seem to command some attention for investors, as the general trend of increased valuations for larger deposit size can be seen,” Mr. Curran told clients. “However, the improvement in valuations with size of deposit is not as beneficial as is seen with the other factors.”

The analyst cites two primary reasons why this is the case. For one, there is no shortage of very large gold deposits that the market does not deem economically viable due to a number of reasons. As a result, several large deposits trade at very low AMC/oz multiples, which serves to offset the impact of the Size of Resource factor alone.

The other reason is the presence of smaller deposits, which the market either believes will grow much bigger in size and/or have other favourable factors that will push up AMC/oz multiples, again offsetting the Size of Resource factor.

The analyst points to large resource deposits that have already got market attention such as Rainy River Resources Ltd. and Trelawney Mining and Exploration Inc.

For those investors looking for a possible turnaround, he highlights large deposits that trade at very low AMC/oz multiples, but could be re-rated higher if the market can be convinced of their economic viability. These include Medoro Resources Ltd. and Sabina Gold & Silver Corp.

It comes as little surprise that grade of gold deposit is one of the most important differentiators in terms of valuation among gold explorers. After all, higher-grade deposits generally have an easier time achieving economic viability.

Recent M&A activity has also provided a boost to this focus after recent deals such as Kinross Gold Corp.’s purchase of Aurelian Resources Inc., and Goldcorp Inc.’s acquisitions of Gold Eagle Mines Ltd. and Andean Resources Ltd.

The analyst noted that Rubicon Minerals Corp. has become the explorer with the highest grade deposit with Phoenix located in Red Lake, Ontario. Meanwhile, Extorre Gold Mines Ltd. is a high-grade gold-silver resource located in Patagonia, Argentina.

He also highlighted Premier Gold Ltd., which currently has a high AMC/oz of $294/oz, suggesting “the market appreciates the higher-grade tenor of the company’s exploration portfolio, and retains expectations for increased gold resources with further exploration spending.”

Companies with low geopolitical risk also see high AMC/oz valuations relative to projects in higher risk regions. Mr. Curran again points to Rainy River, which has a 6 million ounce-plus gold resource in northwestern Ontario that he considers a lower risk locale, and a deposit which has above average potential to grow larger with continued exploration.

Meanwhile, Romarco Minerals Inc. has a multi-million ounce gold deposit in South Carolina, which RBC anticipates will proceed through permitting and into construction later in 2011.

Among non-producing junior golds, the analysts favour Osisko Mining Corp. and Romarco, which have more advanced projects. Next in terms of project advancement, RBC likes Premier Gold and Rainy River. East Asia Minerals (Indonesia), Sabina Gold (Nunavut), Trelawney (Ontario) and Medoro (Colombia) are the preferred earlier-stage explorers.