Dear Reader,
At 211 °F, water is merely hot.
Steaming as it simmers quietly, on the cusp of transformation.
Yet, at 212 °F, a mere one-degree difference ushers in an intense transformation.
Water begins to boil, releasing powerful steam capable of powering a freight train.
It’s that one single degree that makes all the difference, a tiny shift that marks a powerful change.
There are many reasons we are at that one degree uptick transition moment in the gold market… we could be at the cusp of a historic and monumental rally.
Ignore this at your peril because right now…
Gold isn’t just climbing—it’s boiling over.
And it’s those who act, not those who hesitate, who reap the rewards.
Now if you’re ready to take the heat, read on.
There’s no Going Back, Gold is Hitting the Boiling Point
Gold just hit $2,400 per ounce, marking yet another record high for the metal this year. It is up nearly 15% year to date, and since January 2023, it is up 30%.
Yet contrary to gold, companies with leveraged exposure to gold have not fared nearly as well.
You’d think gold producers, developers, and explorers should all be up at least as much as gold.
But as you’ll see in the chart below, neither the NYSE Gold Bugs Index nor the Van Eck Gold Miners ETF have come close to gold bullion’s returns.
Companies operating in the gold development space have fared even tougher sledding.
- The median return for a gold developer since 2021 is -52% based on the data generated from 90 North American listed gold developers dating back to 2014.
It’s Time to Get Selective and “Picky”
It really is a bewildering time for gold investors.
You would think record highs in gold would lead to immediate records for share prices but that has not been the case so far.
- Investors (like me) avoid moose pasture assets worth nothing.
- AVOID management teams that deliver returns only to themselves.
Compounding the issue for the sector, over the past few years, capital-raising activities by gold companies have steadily declined.
Below is a chart that shows the equity raised through financings by gold companies since 2014.
Weak share prices and reduced access to capital creates an opportunity for the bold investor… or company.
Beneath the headlines of share price underperformance and capital raising, the market fundamentals are functioning well.
One way to look at this is through mergers and acquisitions activity in the sector.
In dark times, there’s no cash flow generated or ability to raise capital to do deals, we saw this in 2016 and 2017.
Today is much different.
Gold M&A is Heating Up…
Even though financings and share prices are down, players in the sector continue to gobble each other up.
Over the past few years, the gold market has seen big growth in the transaction value of mergers and acquisitions.
- In fact, 30 deals were completed in 2023 totaling $21 billion, a level not seen since 2010.
But even with the recent frenzy of M&A activity, valuations for companies are still low, especially for those in the development stage.
For now.
Especially if you don’t own any gold stocks backed by people who know M&A or how to make lucrative win-win deals…
And how to acquire valuable assets that nobody’s heard about (or with the know-how and access).
Lucrative “Takeover Engineering”
Gold developers are the companies with assets that have completed engineering studies on projects not yet in production.
I’ve always liked this sector because it provides valuable upside through development or acquisition…
But less downside than pure play exploration carriers where you are at the whims of a geologist and his maps.
The chart below shows the Enterprise Value per Ounce ratio for the gold developer space utilizing the data from 90 North American listed gold developers since 2014.
Enterprise Value is calculated as the Market Capitalization of the company plus debt minus cash, it reflects the true “take out” value of the company.
Dividing Enterprise Value by gold reserves and resources provides an apples-to-apples valuation comparison.
- A higher ratio indicates a premium valuation
- A lower ratio indicates a discounted valuation
Today the development stage group is still below its 10-year average, which is surprising given the recent record highs in the gold price.
- Gold prices above $2,000 per ounce unlock considerable value for projects that were deemed marginal at previous levels…
And supercharge the returns of ones that were already economic in the past cycle.
If gold hangs in above $2,200 per ounce, it could be a major inflection point for the sector and for valuations going forward.
Pin This to Your Fridge: My 4/64 Rule
You’ve probably heard of the 80/20 rule. For example, in mining, 20% of the management teams generate 80% of the shareholder wealth.
Let’s take that formula (Pareto’s Law) one step further: the 4/64 rule.
And when it comes to wealth creation:
- 4% of the teams generate 64% of the shareholder wealth.
In today’s high-stakes world of record gold prices, tensions in the Middle East and Ukraine, and inflationary measures, there is no room for error when it comes to investing.
It’s why in times like this, I go to the best of the best.
Focus on the BEST management teams with a track record of being in the selective best 4% of management teams who deliver 64% of the wealth to shareholders.
- I have identified a company that is trading at a discount to the gold explorer and developer peer group
- With multiple assets located in the Americas
This is a sign that there may be value here.
But most importantly, led by a management team in place who are large shareholders of the company themselves, that have a historical track record of generating strong shareholder returns in previous ventures.
What happens when a gold stock is one degree away from the boiling point…
When the market that previously sat on the fence starts jumping in…
Things can escalate from hot to boiling pretty quickly.
On Monday, June 3, you’re going to get the name of this stock.
Regards,
Marin Katusa and the KR Special Situations Team
Details and Disclosures
Investing can have large potential rewards, but it can also have large potential risks. You must be aware of the risks and be willing to accept them in order to invest in financial instruments, including stocks, options, and futures. Katusa Research makes every best effort in adhering to publishing exemptions and securities laws. By reading this, you agree to all of the following: You understand this to be an expression of opinions and NOT professional advice. You are solely responsible for the use of any content and hold Katusa Research, and all partners, members, and affiliates harmless in any event or claim. If you purchase anything through a link in this email, you should assume that we have an affiliate relationship with the company providing the product or service that you purchase, and that we will be paid in some way. We recommend that you do your own independent research before purchasing anything.
