WHAT ARE WE LOOKING FOR?
We continue this week's series on gold stocks, courtesy of data compiled by precious metals analyst David Haughton and his team at BMO Nesbitt Burns. Having already looked at senior producers and intermediate-sized companies, today we turn our attention to the juniors - or what Mr. Haughton prefers to call the "emerging producers."
LITTLE GUYS, LITTLE PRICES
The accompanying list represents junior gold plays that are covered by BMO's research team. Many are still rated as "speculative" - a sign that they are higher-risk investments than the bigger, more established names in the gold sector.
In general, these junior gold stocks are carrying lower valuations than the intermediate and senior segments. This, too, is a nod to their risk levels.
Investors typically expect lower prices to compensate them for the additional risk involved in buying shares in companies that, in many cases, don't have any producing properties yet. Almost half the companies on BMO's emerging-producer coverage list have no current earnings or cash flow. It's also worth noting that none of the junior gold companies in BMO's coverage universe pay dividends.
However, Mr. Haughton said, the prices in this group have been moving higher this year because of rising merger-and-acquisition activity, which is feeding speculation that other juniors could soon receive takeover offers from larger producers looking to secure future gold reserves.
Part of the challenge in looking at valuations of mining exploration companies - those that don't yet have any producing operations, and hence no revenues, cash flows or earnings - is that the financial data necessary for most key valuation metrics simply don't exist. The valuations of these companies amount to a bet on the potential of their exploration prospects - some of which are much closer to being realized than others.
For that reason, Mr. Haughton said, the market typically pays more for juniors that are either in production or are close to it, and less for names that are still in relatively early stages of development. There's less risk in the former group, so they are afforded higher valuations.
The same is true when bigger gold producers go looking for acquisitions, he said - they're more attracted to junior explorers that are further down the development road and have better established the potential of their projects.
"They're just as risk-averse as investors," he said.