The Benefits of Investing in Mid-Tier and Emerging Mid-Tier Gold Companies

Photo: The Benefits of Investing in Mid-Tier and Emerging Mid-Tier Gold Companies

Although the gold price has had a tough time this year, market watchers believe that 2019 could mark the beginning of the next bull market for gold. The current price makes this the perfect time to pick up gold stocks and emerging mid-tier gold producers are proving to be the most attractive investment for a few reasons.

Let’s take a look at where the gold price is headed and why investors should consider adding mid-tiers to their portfolio.

Gold price expected to make a comeback

Following a volatile year for gold, thanks to a consistently rallying US dollar, rate hikes from the US Federal Reserve and geopolitical tensions, analysts are optimistic about the yellow metal price in 2019 based on key US macroeconomic indicators.

While rising interest rates over the past 3 years have had an adverse impact on gold, many believe that the Fed will refrain from raising interest rates further next year, reducing some of the downward pressure.

The US dollar is also expected to decline, which would give gold a long-overdue boost and allow the precious metal to return to its premier position as a safe haven for investors. The greenback is very much impacted by the US trade deficit, which has been widening as part of an ongoing trend in 2018. According to the Bureau of Labor Statistics and the US Census, the imbalance increased by 6.4%, or $3.2 billion, in August to $53.2 billion. This gap is expected to continue to widen in 2019.

If you are looking to add gold stocks to your investor portfolio, there are a few things to take into consideration when deciding how to invest. While you can opt to buy physical gold in the form of coins, bars and jewelry, analysts in the space favor gold mining stocks over the physical metal.

Earlier this year in an interview with Kitco, gold analyst Adrian Day explained that gold stocks are undervalued relative to physical gold. Stated Day, “To me, the bigger question is less of timing and more of selection; I think one has to be extremely selective in the gold mining space.”

So, which gold mining stocks should you invest in?

Benefits to investing in juniors and mid-tiers

The stock market bull has been favoring larger companies, presumably because there are fewer risks although history hasn’t proven this to be entirely true. However, it is clear that junior and mid-tier gold producers offer significant benefits to investors. In fact, they are leading the way when it comes to strong balance sheets and cash-flow generating potential, thanks to asset purchases and organic growth. What’s more, junior and mid-tier gold producers typically provide significantly more leverage to an appreciating gold price than the majors.

If the gold price continues to rise, these juniors and mid-tier gold producers are poised to generate the substantial free cash flow relative to their current market cap.

When it comes to investing in juniors, they can provide the most leverage to an appreciating gold price. However, it’s important to know that juniors often have to raise capital to expand their production or to fund their exploration activities, so buying these stocks is like buying a lottery ticket - few will end up striking gold and turning a profit, so they offer a lot more risk than a more-established gold producer.

Opting to invest in companies approaching mid-tier levels will offer you more security, especially if they are already producing at a low cost and generating cash flow.

One gold company that is doing particularly well and has a clear path to mid-tier status is Teranga Gold Corporation (TSX:TGZ; OTCQX:TGCDF).

Teranga’s flagship Sabodala gold mine boasts an impressive measured and indicated resource of 4.4 million ounces and life of mine all-in sustaining costs below $900 per ounce. What’s more, the company has a fully funded, fully permitted open-pit gold development project, Wahgnion, that is on schedule for first gold pour in December 2019. This project’s proven and probable gold reserves recently increased by nearly 40% to 1.6 million ounces, extending the initial mine life to 13 years.

According to analyst Don Durrett, Teranga has an excellent risk/reward profile, a good management team and has major growth potential. And with one long-life, low-cost mine in production and another one soon to be complete, he believes Teranga is materially undervalued.

In 2018, Teranga is on track to achieve full-year production at Sabodala of between 235,000 and 240,000 ounces, an increase from the company’s original guidance range of between 210,000 and 225,000 ounces. The Sabodala mine is expected to produce over one million ounces of gold and generate $230 million in free cash flow over the next five years.

What’s more, the company expects to continue reinvesting its free cash flow into a pipeline of projects that over the next 5 years is expected to increase company-wide annual gold production to 500,000 ounces.

Durrett favors stocks that will perform at higher gold prices and looks at a company’s current market cap in comparison to its future market cap growth potential. According to his calculations, which are based on the best-case scenario, Teranga’s current market cap has the potential to increase 700%. This means it’s an ideal time to invest in Teranga while its stock price is still low as the market waits for Wahgnion, the company’s second mine, to come on line in 2019.

At present, Teranga Gold’s stock price is trading at C$3.52 on the Toronto Stock Exchange at a market cap of C$379 million. Durrett believes that the stock will double in value once Wahgnion is producing and if gold reaches $1,500.

If you are interested in learning more about Teranga Gold, the company will be at the Vancouver Resource Investment Conference 2019, January 20-­21, 2019 at booth 516.

If you want more information on investing in gold, the free investment guide “The Art of Investing in Silver and Gold” is a great resource and will give you the information you need to grow your portfolio. Click here to subscribe today!