Gold Digger: As explorers eye a golden payday, here’s 3 ways to help separate the winners from the washouts

A weekly recap of the news driving ASX small cap gold stocks.

The long-term bullish outlook for gold has inspired a tsunami of ASX-listed explorers to pour into the space. How do investors sort the wheat from the chaff?

The main message for would-be gold bugs “is to do their own research and do it thoroughly”, analyst Stuart Roberts says in the latest Stocks Down Under report.

>>>Scroll down for the top small cap movers over the past week>>>

­­For producers/near-term producers, assess exposure to ‘hedging’ as well as production costs, he says.

Hedging involves a gold producer forward selling future production at a fixed price to lock in guaranteed revenue, rather than taking its chances with the spot price if it falls.

“Gold may be up, but future output of those miners may be sold forward at a level much lower than the price at which the metal has risen to,” Roberts says.

And keep an eye out for miners which have higher than average ‘all-in sustaining costs’ (AISC), a good way to evaluate the profitability of a company’s operations.

A good measure of advanced explorers is ‘enterprise value per resource ounce’, Roberts says.

For instance, a company with a market cap of $50m, no debt, $10m cash and a 2-million-ounce deposit would have an enterprise value per resource ounce of $20.

“Obviously, a host of factors come into play in the way the market prices a potential new miner but — other things being equal — the lower the enterprise value per resource ounce, the better,” he says.

“Anything under $20 is likely to be regarded by established resource sector investors as ‘inexpensive’.”

Then there’s jurisdictional risk. A lot of gold comes out of countries that aren’t as easy to operate in as the US, Canada or Australia, Roberts says.

“The West African country of Mali, for example, is currently emerging as major gold producer, and, while it is known as one of the more mining-friendly jurisdictions in the world, it can also be a dangerous place, as evidenced by active Islamic extremist groups in the mining zones,” he says.

READ: Guy on Rocks — Gold, gold and still more gold, but wait… what happened to aluminium?

Winners & Losers

Here’s how ASX gold stocks performed for the period April 25 – May 1 [intraday]:

Scroll or swipe to reveal table. Click headings to sort. Best viewed on a laptop:

Small cap highlights:

Barra Resources (ASX:BAR) could become a miner sooner rather than later after entering into a JV over the Burbanks project with privately owned miner and processor FMR Investments. Again.

In 2011, Barra entered an agreement with FMR to advance Burbanks to production, but this deal loitered in purgatory for a few years before it was terminated in 2013.

As part of the new deal, FMR will fund initial drilling and mining costs at the shallow ‘Mainlode’ gold deposit.

The first $8m in mining profits will go into a future fund for deep exploration drilling below historical workings; any additional profits will be distributed 80/20 to FMR and Barra respectively.

Explorer Dark Horse Resources (ASX:DHR) has gone on a run after announcing it will own 25 per cent of the Las Opeñas project in Argentina following a June 30 payment to the vendor.

A December 2020 payment, which would take Dark Horse to 51 per cent ownership, has been renegotiated so that 50 per cent will be deferred to the end of June 2021.

Former vanadium play Auteco (ASX:AUT) is ”well-funded” to start exploring its Pickle Crow gold project in Canada after receiving firm commitments for $5.1m in a share placement at slight premium to the 10-day volume weighted average price.

The Auteco share price is currently up +730 per cent over the past 12 months.

And new producer West African Resources (ASX:WAF) will pay ~$70m for a neighbouring 1.1-million-ounce gold deposit to increase production and mine life at its flagship Sanbrado project.

The deal with Canadian miner B2Gold comes just one month after West African poured first gold at Sanbrado, which the company says is on target for +300,000 ounces of unhedged production in first 12 months.