After a rather unfortunate 2013, it's been a good year for gold-mining stocks, both established and speculative. In the latter category, we place Tanzanian Royalty Exploration Corp., a TSX-listed concern that is up by more than 40 per cent from its low last December.
Tanzanian Royalty Exploration's performance can best be called "resilient," as some of the challenges it faced in the prior 12 months would seem to have precluded such a comeback. Or, perhaps, that is polite, as it's rather remarkable that the shares are worth as much as they are.
As the name implies, Tanzanian Royalty Exploration is exploring Tanzania for gold. It has no operating mines. It has no proven reserves, the category of gold that has economic viability. Instead, the company reports a couple million ounces of "measured" and "indicated" resources, a classification for ounces of gold that have, it says, "reasonable prospects for eventual economic extraction."
For this, investors have rewarded the company with a market value of roughly $270-million. A year ago, though, it was nearly $100-million more.
The downdraft is not solely due to the decline in enthusiasm for gold stocks in 2013. Instead, it seems to be in part from Tanzanian Royalty Exploration's removal from the NYSE Arca Gold Miners Index – and the popular gold-miners ETF that tracks it.
Just about a year ago, the NYSE Euronext said it would change the criteria for the index. One new rule: a minimum market capitalization of $750-million (U.S.). The goal, in part, was to reduce exposure to companies with lower levels of liquidity.
In September, when the additions and drops were finalized, Tanzanian Royalty Exploration was removed. The result was the disappearance of a very large shareholder. Van Eck Securities' Market Vectors Gold Miners ETF (GDX), which tracks the index, was forced to sell more than seven million shares of Tanzanian Royalty Exploration in the final months of 2013.
This event was key to a bearish analysis in Barron's, the U.S. investing newspaper. Barron's had previously questioned the company's valuation in 2009 in comparison to other small gold companies with operating mines or a healthy amount of reserves (versus resources). Last September, Barron's predicted that once the Gold Miners ETF sold its shares, pain would surely ensue for Tanzanian Royalty Exploration stockholders.
There was a problem with the Barron's thesis, however: Tanzanian Royalty Exploration is also a part of the Global Junior Gold Miners Index and a tracking ETF (GDXJ), both run by Van Eck's Market Vectors. And in 2014, as prospects for gold turned, investors poured nearly $900-million into the ETF through July, according to Lipper. That, coupled with market gains, has more than doubled the ETF's size since December.
What happens when such money flows in? The ETF has to buy more of every stock in the index. So the Junior Gold Miners ETF has bought more than six million shares of Tanzanian Royalty Exploration this year, providing key support for the shares and nearly making up for last year's sales.
None of these developments answers the question of whether Tanzanian Royalty Exploration is actually worth its Wednesday close of $2.57 (Canadian) per share, of course. Barron's felt a good comparison to Tanzanian Royalty Exploration was East Africa Metals Inc., a Vancouver-based, TSX Venture-traded company. Since the September article, East Africa Metals has added assets in Ethiopia to its existing Tanzania footprint. In June, the company said it had indicated gold resources of about 800,000 ounces. It has nearly $18-million in cash, no debt, and a market capitalization of $12.7-million – less than its cash on hand and roughly 5 per cent of Tanzanian Royalty Exploration's market value.
Barron's suggested that part of the charm of Tanzanian Royalty Exploration for investors is that its CEO, James Sinclair, is known in some quarters as "Mr. Gold" for predicting its rise in the 1980s and holding forth in various media on its prospects ever since.
Mr. Sinclair, contacted for his thoughts shortly after the Barron's article was published in September, dismissed it as inaccurate. He declined to provide a critique then and when asked again in late July. He also declined to comment on whether his public reputation aids Tanzanian Royalty Exploration's share price.
Fortunately for Mr. Sinclair and the company, the stock's recent gains suggest Tanzanian Royalty Exploration may continue to glitter, no matter its prospects.
David Milstead