As gold continues to prove itself as a strong commodity, investors should consider extending their portfolios to the precious metals space.
In particular, for market participants interested in high risk, high reward investing, they may want to turn their attention to small-cap gold stocks on the ASX.
Read on for a breakdown of the top small cap Australian stocks, as well as how and why to invest in these companies.
Small-cap gold stocks on the ASX: Why invest in small-cap stocks?
What is a gold stock?
Like all publicly listed stocks, gold companies issue shares that are available for investors to trade. When you purchase shares of a gold stock, you are essentially purchasing a stake in the company, making financial returns or losses from its profits.
There are two main ways that an investor can purchase stocks from gold miners. The first way is when market participants purchase through a major mining company. The other way of trading on the stock market is by investing in a gold mining stock through a junior miner.
Although no gold stock investing is 100 percent foolproof, backing a successful mining company in the precious metals space can alleviate some of the stress of a down stock market when you keep in mind that if a company’s share price goes down, it becomes more affordable to purchase and investors can more than likely anticipate that it will rise again and turn a profit.
While gold stocks are affected by some of the same factors that shape and shift the price of the precious metal, they keep some distance from a direct correlation because it is possible for a gold miner and its stocks to be doing well even in a down market.
Small-cap gold stocks
As previously mentioned, small-cap stocks are the second way to invest in a gold stock. A small-cap stock comes from a company with a small market capitalization, also known as a junior miner. Junior mining companies raise funds from investors in order to explore gold assets. Small-cap companies generally need their larger counterparts to either help them develop gold discoveries or to eventually purchase their assets in order to turn a profit.
It is important to understand that junior mining stocks are inherently risky. Companies frequently fail because of the risks involved in exploration and development. Discovering viable deposits is incredibly difficult, rare and capital intensive. As a result, stock values can shift drastically when juniors report disappointing drill results or poor returns.
Despite this, many investors are attracted to junior mining stocks because, as resource specialist Peter Krauth wrote, “(A)ll it takes is just one 10-bagger to make up for all the dogs in the pound.”
Of course, juniors will still have to remain disciplined when it comes to cash flow and capital allocation. Volatility in commodities prices is still going to be an issue, even with recent rallies — and the climate of global politics has to be taken into consideration with every exploration and investment decision.
While a large majority of small cap gold companies are coming from Canada, there are several burgeoning junior companies within Australia.
Brock Sailer, a partner at Sprott Global Partners, believes that there is an intriguing case to be made for looking at ASX-listed stocks.
“(There are) a bunch of (ASX-listed) mining companies doing exactly the same thing as what the Canadians are doing. So you’ve got to be careful when you’re investing in a Canadian stock — are you getting the best value?” he said to the Investing News Network (INN).
As his second point, Salier noted that the ASX and even the LSE are home to companies that focus on commodities and geographies that are less common on the TSX and TSXV. For example, he said, London-listed companies tend to be more comfortable with Africa, while companies on the ASX “have taken to (the Tesla (NASDAQ:TSLA) revolution) with more vigor than anyone on the TSX or in London.”
Small-cap gold stocks on the ASX: How to invest in the right one
To identify a successful small-cap gold stock on the ASX, investors should use as much information as possible to make their choices. Here are a few tips on how to spot winners:
- Be aware of political risk: Krauth notes that it’s worth taking the time to familiarize yourself with the countries in which junior miners operate. “It’s simple,” he says. “The last thing you want is for some kleptocrat to wait until tens of millions have been spent to discover a massive gold deposit, only to turn around and revoke a key permit or expropriate the land.” Metrics like the investment attractiveness index — on which Western Australia currently ranks second in the world — can provide an overview of which countries are more receptive to mining projects, but timely information is key, too. Wars, strikes and election cycles are particularly noteworthy and should always be looked at when considering juniors.
- Experienced management is crucial: Because there is little room for error, investors should look to juniors whose management has a solid track record, including significant exploration experience. Strong management tops the list for Brent Cook of Exploration Insights. “Of the roughly 3,000 junior exploration companies combing Earth chasing down anomalies,” he wrote, “maybe half can be thrown out because of incompetent or unfocused management: management is key in the junior sector — get to know them.” News about staff changes like resignations, new hires and company restructurings may seem small at first, but team updates are a crucial point to be aware of when choosing juniors.
- Keep up with the news: The value of a junior mining company is heavily affected by business activities like the development of new partnerships or acquisitions by mining majors. Keeping up with updates is important here — juniors are often high-risk investments that rely on strong partners to provide extra resources and expertise. Pay special attention to news about partnerships, management changes, license acquisitions and disputes.
- Read studies and reports: Understanding technical reports and studies is crucial to understanding the progress of junior mining companies. Many juniors rely on successful exploration to turn a profit or bring in major partners. Feasibility studies are especially helpful to look out for — they provide information that can help determine the likelihood of a project’s success, its potential challenges and what the payoff might be. Many of these reports are technical, so it’s important to appreciate the details and understand topics like mineral grading, licensing, reserve estimates and test types.
- Use purchasing criteria: Speculating on junior mining stocks is common, but can be heavily influenced by personal biases and impulse choices. It helps to bring a more rigid, objective approach to picking junior mining stocks. Rick Rule of Sprott US Holdings suggests buying a stock for a specific reason, and selling that stock if the reason disappears. Thinking like this allows decisions to be made more quickly and with more clarity.
Small-cap gold stocks on the ASX: 5 best small-cap gold stocks on the ASX
Below we’ve outlined the five ASX-listed gold stocks that have seen the biggest gains year-to-date. Data for this article was gathered using TradingView’s stock screener on December 2, 2019, and companies with market caps under AU$50 million were considered.
1. Mandrake Resources (ASX:MAN)
Year-to-date gain: 433.33 percent; current share price: AU$0.02
Mandrake focuses on the resource exploration sector and through its subsidiary Focus Exploration owns the Berinka project, which is located within the Pine Creek Orogen of the Northern Territory.
To date, the best intercepts that the miner has encountered through drill programs is 4 meters at 6.6 grams per tonne gold from 32 meters, 6 meters at 3.8 grams per tonne gold from 18 meters and 5 meters at 2.6 grams per tonne gold from 30 meters.
Additionally, there are multiple further gold targets identified through surface geochemistry and rock chip sampling, all of which are in close proximity to the large Union Reef mill, which is owned and operated by Kirkland Lake Gold (ASX:KLA,TSX:KL,NASDAQ:KL) and is slated to re-start operations soon.
2. Kalamazoo Resources (ASX:KZR,OTC Pink:KAMRF)
Year-to-date gain: 218.18 percent; current share price: AU$0.28
Kalamazoo is a gold and base metals explorer, but its primary focus is on identifying commercial mineral deposits to explore at its Castlemaine gold project in Victoria. Additionally, the miner holds two gold-base metals projects in Western Australia.
The company is relatively new to the ASX, as it only began trading on the exchange at the beginning of 2017. Since then, the miner has been exploring and developing not only the Castlemaine gold project, but the Snake Well base metals project and the Cork Tree copper project.
In the last few months, Kalamazoo has raised AU$1.2 million in order to fund its Victorian gold projects and officially applied for an exploration licence to further increase its tenure at its newly acquired South Muckleford gold project.
The South Muckleford gold project is located in the Maldon Goldfield of Victoria and boasts historical gold production of 1,975,000 ounces of primary gold, as well as 317,000 ounces of alluvial yellow metal. The asset is also conveniently located approximately 10 kilometres from the miner’s Castlemaine gold project.
3. Great Southern Mining (ASX:GSN)
Year-to-date gain: 171.43 percent; current share price: AU$0.08
Great Southern is an exploration company that is working towards becoming a leader within the gold space in Australia. The miner has significant land holdings in the world-renowned gold districts of Laverton in Western Australia and the Mount Carlton region of North Queensland.
The miner’s main focus is on creating and capturing shareholder wealth through rich exploration programs that are low cost. Additionally, the company is working on strategic project acquisitions to complement and build its existing portfolio of quality assets.
Within the North Queensland region, Great South operates the Johnnycake project and the Edinburgh Park project, both of which are in the early exploration process. In Western Australian, the company operates the Mountt Lucky project and Cox’s Find gold project. Drilling at Mount Lucky revealed a resource of 1.1 million tonnes at 1.7 grams per tonne gold for 59,000 ounces. When the the resource estimate was released, it was estimated above a 1 gram per tonne gold cut-off.
4. E2 Metals (ASX:E2M)
Year-to-date gain: 150 percent; current share price: AU$0.20
E2 Metals is relatively new to the mining scene, as it only became listed on the ASX in 2017. However, the company has set its focus on making new discoveries in the world class Santa Cruz gold and silver province in Southern Argentina. The miner plans to use its innovative geoscience to lead them and investors to the next major discovery.
The mining friendly state of Santa Cruz is one of the most prolific gold provinces in South America, and E2 Metals owns and operates a unique mix of highly prospective but underexplored ground within the region.
The company’s current assets include Conserrat, where in excess of 11 million gold equivalent ounces have been mined in the past; Sierra Morena, which holds several kilometres of untested gold and silver veins; Corona, 30 kilometres south of the Cerro Negro vein district with in excess of 9 million gold equivalent ounces of total endowment; and Angostura, which has multiple coherent geophysical targets.
5. Black Cat Syndicate (ASX:BC8)
Year-to-date gain: 143.33 percent; current share price: AU$0.37
Black Cat also has its focus in the Western Australia region as it works to advance the exploration and development of the high grade Bulong gold field.
The company has often commented on its unique name with the gold space, stating, “Black Cat Syndicate is a play on good luck — for our investors and us. We have coupled this with a dose of respect for the early financiers that boldly made the Australian gold industry what it is today.”
Black Cat wholly owns the Bulong gold field, situated 25 kilometres east of Kalgoorlie by sealed road. Today, there are numerous high grade open cut and underground targets on mining leases with drill-ready targets, and Black Cat’s strategy to rapidly progress developments is by completing infill and extensional drilling at numerous mineralised corridors.
Assets at Bulong include the Queen Margaret corridor, Anomaly 38, Trump corridor and Myhree-boundary corridor.
Don’t forget to follow us @INN_Australia for real-time updates!
Securities Disclosure: I, Nicole Rashotte, currently hold no direct investment interest in any company mentioned in this article.
Editorial Disclosure: The Investing News Network does not guarantee the accuracy or thoroughness of the information reported in the interviews it conducts. The opinions expressed in these interviews do not reflect the opinions of the Investing News Network and do not constitute investment advice. All readers are encouraged to perform their own due diligence.