Junior Miners just how undervalued? We have received a number of emails asking us to explain what a junior miner is and why they remain so undervalued with Gold at fresh all time highs?
There is no ‘official’ definition for a junior but it is generally accepted to be a mining company producing 50,000 to 150,000 ounces per annum (or less but with a clear plan to get to the 50k level soon).
So how big or small is 50,000 ounces per annum?
Well in 2006 total Gold production was 53 million ounces and 2007 should come in at around 57 million (courtesy Goldsheet). The top 10 miners produced 35 million ounces and the top 5 - 26 million ounces. For the record, the top 5 Gold producers are Barrick Gold, Newmont Mining, Anglogold Ashanti, Gold Fields and Goldcorp. These companies have seen the greatest price appreciation during the latest run-up.
Coming in behind the large caps are the mid-tier miners. These miners produce 150 to as much as 600,000 ounces per annum. Companies such as Yamana, Agnico Eagles and Lihir. The larger Mid tiers i.e. closer to the 600k mark have seen the same price appreciation as their larger cousins.
Here’s where it gets interesting!
Take Agnico Eagle (AEM) for example, a 250,000 ounce producer with a market capitalization of $8.5Bn. Based on its proven, probable and inferred resources, AEM sports a market cap value of $289/oz in the ground (source: Resource Stock Guide). 87% of AEM’s operations are in N.America – Canada and Mexico.
Contrast this with an assortment of juniors making up a similar production profile:
• Gammon Gold (Mexico) – mkt cap $848m; annual production 140k; $55.60/oz in the ground.
• Richmont (Canada) – mkt cap $80m; annual production 50k; $128/oz in the ground
• Claude Resources (Canada) – mkt cap $115m; annual production 50k; $132/oz in the ground.
In order to buy a 250,000 ounce producer you could consolidate Gammon, Richmont and Claude for around $1bn or buyout Agnico for $8bn - 8x as much!
Now we would be the first to admit our analysis is somewhat flawed and overly simplistic. We have ignored many crucial facts such as each companies cost structure, management and the quantum of reserves but still, an 8 times valuation gap demonstrates that there is a MASSIVE arbitrage opportunity waiting to happen.
Catalyst
We are reminded of Larry Livingston’s words in Reminiscence of a Stock Operator where he says that there is no better marketing tool than the tape itself.
At some point Gold is going to close over a magic number like $1,000 peaking the interest of many a speculator. Once they come looking, they will find to their amazement a huge swathe of precious metal stocks trading at absurdly low valuations – better to beat the herd now!
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