Top tips for investing in the Pilbara gold nugget rush
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Stockmarket investing advice and tips from Mathew Walker, chairman of boutique corporate advisory Cicero Group and co-founder of technology fund Alchemy Venture Capital.
What are your thoughts on the current Pilbara gold nugget rush?
The fascination at the moment is in the gold sector and in particular the conglomerate gold sector – the market loves new discoveries and nothing more than visual gold.
It is hard not to play in the space at the moment because of the liquidity in many of these stocks.
In market trends like these there is usually a champion of the cause that goes up in multiples and brings interest to the sector before other players follow. In relation to conglomerate gold that has been DGO Gold (ASX:DGO) and Artemis Resources (ASX: ARV).
Those two were the first movers and now there are up to eight or ten who are playing in the space.
What are some of the challenges associated with conglomerate gold?
Conglomerate gold is essentially compacted alluvial gold and history shows we haven’t had a good relationship with alluvial gold on the ASX.
Primarily that is because it is impossible to verify or quantify the resource – some patches run well and some don’t.
When compared to a hard rock deposit, which can be readily quantified and verified, conglomerate gold is unquantifiable and with that comes obvious challenges in regard to valuation.
While alluvial and conglomerate gold mining has a lower capex requirement than traditional hard rock gold projects, it can be hard to debt-finance your project if you can’t prove its worth.
While there are methodologies such as trenching, pitting or wide diameter reverse-circulation drilling, none are likely to satisfy a debt financier.
There is a rush to get in on the gold market, but will there be enough capital to go around?
I see the rapid growth as a positive in the industry – economist John Maynard Keynes said the role of the capital market was to ensure the efficient allocation of capital and I think the number of new entrants into the sector is a reflection of this.
There is a strong appetite to invest capital and I think this shows the market is working efficiently.
How long will the rush last?
There’s two ways of looking at it, some might say that the Roman empire went for 400 years but the more sensible view is that when your uber driver is buying it’s time to be selling.
We have seen some stocks out there that appear to be fully valued despite the absence of a quantified resource but there’s no telling when it might be up.
Where is there still value?
Venturex Resources (ASX:VXR) has not yet run as hard as the rest and presents an opportunity with conglomerate found along the strike of the De Grey (ASX:DEG) zone. Both VXR and DEG still appear to have more to give.
Investors need to exercise caution at this stage in relation to valuation.
At times like this success can be their own worst enemy — the harder the stock runs the greater the down side risk if the resource disappoints.
One of the features of these conglomerate gold deposits is, in many instances you don’t know that it’s not there until it is too late.
Is there still value to buy in when they are running so hard?
Proceed with caution — I don’t see it as too late yet, but I would be looking for those that haven’t run as hard as others.
It’s like the real estate adage to buy the worst house in the best street — buy the best project with the worst promoter. It is easier to find a good promoter than it is to find a good project.
What should investors look out for?
Be cautious about projects promoting themselves on a nearology basis, those yet to establish the presence of conglomerate gold.
You should look for those with a more established proof of concept such as those who have found compacted gravels with the presence of gold nuggets.
The market still has some legs to it but do be very careful – we need to accept if we play in the space there is greater risk.
What stocks are on your radar this month?
Last month I gave you the tip of Yojee (ASX:YOJ) which is trading at 26c from 11c.
This month, I see some promise in Comet Resources (ASX:CRL) who appear to have established the presence of graphene and has a robust exploration program in the months ahead.
Mathew Walker is a businessman and entrepreneur with extensive experience in the management of public and private companies, corporate governance and the provision of corporate advice. In a management career spanning three decades, Mr. Walker has served as executive Chairman or Managing Director for public companies with operations in North America, South America, Africa, Eastern Europe, Australia and Asia.
He is Co-Founder and Chairman of the Cicero Group (Cicero) www.cicerogroup.com.au, Co-Founder and General Partner of technology incubator Alchemy Venture Capital and Founder and Director of beef cattle enterprise the Stone Axe Pastoral Company.