Tips for new investors: What to look for when investing in gold stocks
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Gold bulls believe that the ASX precious metals sector is currently a value investor’s dream.
Famous resources investor Rick Rule calls it “universally too cheap” and Tony Locantro, investment manager at investment and advisory firm Alto Capital, agrees.
In a presentation at Gold Events’ last Australian Gold Conference for 2021, Locantro says the stupid money is too busy chasing exotic sectors – like crypto and hydrogen — “that will not produce anything apart from broken dreams and brokerage”.
“Meanwhile I think gold stocks have done bugger-all [share price wise] and there is a lot of value there,” he says.
“You can buy some of these stocks for around $10m market cap, and not only are you getting ounces in the ground, but you are getting exploration potential as well.
“There are many stocks I believe have multiple upside potential, because the flood of stupid money is nowhere near the sector right now.
“What I’ve been saying to my clients is ‘look, let’s buy these stocks that are on the back foot, and eventually value will be realised’.”
Long term, Locantro is trying to find the next Northern Star (ASX:NST), a micro-cap explorer turned gold mining behemoth.
“I want the next rockstar of the gold sector,” he says. “There are a few stocks under 3c that I would be buying at the moment.”
How do you make good money investing in the Aussie gold sector? Here are some of Locantro’s tips for beginner investors.
Take note of those small caps with 500,000 ounces to ~1 million ounces (Moz) of quality gold in the ground.
Major and mid-tier gold stocks are on the hunt for acquisitions, and those under the microscope will be junior stocks with established resources.
“I think the majors are saying ‘we aren’t replenishing our ounces [through exploration]. Let’s look toward the juniors’,” Locantro says.
“We are going to see a lot more corporate activity, and companies that can get a million ounces of quality gold are going to be valued at $100m plus.
“With the takeover of Apollo, we are seeing more than $200m ascribed to just over 1 million ounces.”
The M&A trend is going to continue, Locantro says.
“If [a small cap stock] can come up with 1 million ounces, and sell out for $150-$200m – why the hell not? Then go out and do it all again.”
Exploring new areas untouched by exploration (greenfields) and around or under old mines (brownfields) both have benefits.
Both companies have done very well for themselves, and their shareholders:
But brownfields is considered less risky.
“I think companies that drill ‘step out’ holes [in brownfields areas] and have success should be rewarded,” Locantro says.
Companies that drill ‘directors’ holes’ – straight into the guts of the known system – not so much.
“When everyone is looking for a bandwagon why wouldn’t you drill near a mine? That’s where you are going to get your multiples,” Locrantro says.
“But I think courage in moving away from a mine area is ultimately going to be rewarded. I think that is what is happening with one of my companies now, Pacgold (ASX:PGO).”
A few weeks back the recently listed explorer pulled up thick, high-grade gold in maiden drilling at the brownfields ‘Alice River’ project in north QLD.
The highlight intercept was 26m at 3.6g/t gold from 104m, including 3m at 21g/t from 126m.
This was an exceptional outcome from the first holes into a new, large-scale target, PGO managing director Tony Schreck says.
“High-resolution IP geophysics data highlights the new target zone extending over 800m south from beneath the open pit and these initial two drill holes confirm our interpretation that the system significantly widens only 50m to 100m below surface and is open in all directions,” he says.
This new target represents just one of numerous new large-scale targets being tested in the current drill program.
The red-hot $18m market cap stock is up 146% on its IPO price of 25c per share.
“To me, some of the best operators in the precious metals space are people you consider as boffins,” Locantro says.
“They wear the khaki pants with the shirts, and they all look the same, they all talk the same – but these are the passionate people in the sector that can make you a lot of money through putting it into the ground [drilling].
That’s what Locantro likes about the true explorers.
“Those that have been in companies that have been taken over, that want to go and do it again,” he says.
“You only have to look at people like Chris Cairns.”
Geologist Chris Cairns joined Integra Mining in March 2004. As managing director, he oversaw the discovery of three gold deposits and the subsequent journey from explorer to gold producer. In January 2013, Integra was taken over by Silver Lake Resources (ASX:SLR) for $426 million.
He then joined Stavely Minerals (ASX:SVY), where he oversaw a big discovery at ‘Thursdays Gossan’ in Victoria in 2019. He is now also on the board of recently listed explorer E79 Gold Mines (ASX:E79).
“Hopefully he makes it three from three,” Locantro says.
1. Don’t worry about the share price, Locantro says. “Don’t refresh your phone every 5 to 10 minutes. Invest in quality – truly invest.”
2. Have a squiz at the top 20 shareholders. “It takes experience, but you can work out who are flippers, who’s for real, who’s likely to buy more, and who’s just there for a one-night stand.”
3. Look at quarterly reports, Locantro says. “How they are set out, are they professional, do they cover all the projects in the portfolio? Are these top tier quarterly reports? I implore people to go read a quarterly from the likes of Red Metal (ASX:RDM), which is a lead silver company with a lot of exploration projects. To me, that is the perfect quarterly report.”
4. Where is the money going? “Read the quarterly cashflow as well; specifically, the amount of money put into the ground as opposed to administrative expenses,” Locantro says. “You don’t want to see people on these massive salaries that aren’t putting a lot of money into the ground.”
5. Look at the jurisdiction. Is it risky? Is this deposit a chance of being mined?
6. Don’t forget to take money off the table. In 2007, Ramelius came out with a 48m at 154g/t gold hit and it was on for young and old, Locantro says.
“That was amazing. I think I had my biggest month of brokerage ever. Mums and Dads who put $20,000-$25,000 into that stock became millionaires.”
Once a stock goes 5-10 times Locantro suggests that his clients take a bit of profit and look for the next one.
“But in my 23 years of advising I find that my clients have an allergy to taking 10 times their money,” he says. “They always want to hang out for more. Then that stock halves and they are unhappy with the five-bagger.”
People say things like ‘I could’ve held Northern Star from 1c to $17’ but that’s nonsense, Locantro says.
“The Australian gold index lost two-thirds of value along the way. The only way you would’ve held onto that stock all the way through was if you were in a coma, in jail, or lost your holder’s statement. Investment success in hindsight is always 20-20.”