Columnist Mike Kachanovsky shares his insight and analysis on one of his current favourite junior gold stocks. It does not pay a dividend but it’s a junior mining stock that is a bargain. Its stock price has dwindled by over 50 per cent since its mid-2016 peak.
Certain facts stand out when considering the status of the resource sector. Collectively, explorers have never spent more, nor had better access to high-powered technology, at any other time except during the current century.
However, the magnitude of discoveries has declined sharply. It appears that most of the low-hanging fruit has already been thoroughly picked. There are just not very many large discoveries being reported anymore, despite the increase in activity.
Explorers looking deeper
Many explorers are now casting a wider net and focusing attention on remote areas of the world that were largely overlooked in prior cycles. This adds yet another layer of risk as some of these places are unfriendly to mining activity, regardless of any endowment of resources that may be awaiting discovery.
Also, frontier areas typically are more expensive to work in and have less established infrastructure in place to support development in the event that a company actually unearths a major deposit.
Nonetheless, there is a speculative appeal to the junior explorers. Even given the heightened risks, the potential rewards after a successful discovery are worth maintaining some leverage to the sector.
Choosing the gold-standard
As with most speculative ventures, the trick is to be extremely selective in order to consider only the highest-quality companies, and then to act when the market cycle affords optimum value. As of now, the following stock is a bargain commodity stock.
One company that I think has all the attributes for success is Auryn Resources Inc. (TSX—AUG; NYSE American—AUG). Theirs is a prototypical exploration story, with ownership of several highly prospective properties located in relatively safe jurisdictions as well as a war chest of cash in the treasury to enable aggressive work programs.
Let’s take a closer look under the hood
Often, when assessing the quality of a junior, the quality of management is a big topic of discussion. Auryn is led by people who have been there before and already proven they can deliver results.
For example, Ivan Bebek, the company’s executive chairman, and Shawn Wallace, president and CEO, have both served in leadership roles at other junior explorers that achieved discoveries and were eventually sold in lucrative deals to established mining companies.
This is exactly what the game plan is for most early-stage companies. Therefore, it makes sense to participate in juniors run by people who have demonstrated that they have what it takes.
On the exploration side of the coin, Auryn management stacks up very well, too.
The technical team is comprised of highly respected and experienced geologists that have served in senior exploration roles with larger mining companies. Talented geologists who aspire to make a difference with a significant discovery breakthrough will often choose to work with a focused junior explorer.
The market conditions have been very challenging for junior resource stocks in the last few years, which has made it more difficult to raise funding.
Financial backing from its peer
Auryn addressed that key issue early in 2017 by closing a major equity financing that generated more than $41 million, led by participation of senior gold producer Goldcorp Inc. (TSX—G; NYSE—GG).
This has furnished the funding for several attractive exploration programs that may continue with confidence for years into the future. The fact that Goldcorp, an established mining company, decided the Auryn financing warranted a strategic investment on its part, also serves as validation of the latter’s strength overall.
Excavating frontiers beyond the horizon
The next vital element for success is the property portfolio itself. A good explorer will have undivided ownership of large properties within high-profile mining districts, and the best places for an aspiring junior to have a shot at a big discovery are often found in frontier regions. Auryn has chosen to focus in mining-friendly jurisdictions of Canada and Peru.
It is hard to get further out on the frontier in Canada than the Nunavut territory, where the company controls the Committee Bay and Gibson MacQuoid projects.
Each of these properties features gold-bearing systems spanning more than 100 kilometres of strike length, with the potential for several multimillion-ounce gold deposits.
The challenge comes down to identifying the best targets over such a large area with so many showings and attractive indicators. It’s a good problem to have.
The company reported assay results from a widespread drilling program at Committee Bay in September, highlighted by a 12-metre interval of 4.7 grams of gold per tonne of ore.
Several other drill holes in the program encountered significant gold values, although overall, the results were somewhat thin in terms of resource definition. Still, the drilling confirmed the exploration model and indicates that a robust gold system is present across a major structural zone, thereby enhancing potential going forward.
The company has employed the same early-stage exploration techniques at Gibson MacQuoid.
In December, Auryn reported that significant surface sampling anomalies have outlined a prospective gold target. Again, this greenstone (that is, a rock formation made up of a mix of volcanic and sedimentary material coloured green from the minerals within) property represents an ideal candidate to host a gold deposit. The first round of drilling is planned in 2018.
Meanwhile, another ambitious drill program is underway at the Huilacollo property in Peru. In total, Auryn has scheduled 5,000 metres of drilling there, to test several targets developed from early fieldwork.
Huilacollo has been described as one of the best early-stage prospects in Peru, a country known for large base and precious metals deposits. Auryn controls four projects in Peru and all are set to see some drilling work within 12 months.
Exploration results are the lifeblood of a junior miner
Positive results can excite the market and generate a speculative mania among early shareholders. Ultimately, successful work programs can define deposits that build fundamental value as potential development candidates.
Auryn Resources has several high-quality properties in its arsenal, and the company is well-funded to allow a thorough, aggressive, ongoing exploration commitment at each of them. Even at this early stage, the company represents an appealing value prospect in the current price range. Several rounds of assay results pending could transform this bargain stock into a very hot stock, and the long-term potential, with so much followup activity in the pipeline, should give Auryn investors a measure of confidence to stay on board.
Mike Kachanovsky is a freelance writer who specializes in junior mining stocks and also covers technology companies.
This is an edited version of an article that was originally published for subscribers in the January 5, 2018, issue of Investor’s Digest of Canada. You can profit from the award-winning advice subscribers receive regularly in Investor’s Digest of Canada.
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