Finding Nuggets Among Junior Gold Explorers

Financial Post, Jonathan Ratner - To separate the "haves" from the "have nots" in the junior gold exploration space, RBC Capital Markets looks at three factors: grade, size of deposit and geopolitical risk.

Analyst Michael D. Curran says companies that score higher using this model generally have higher market valuations, or adjusted market capitalization per total resource ounce (AMC/oz).

Of the 70 to 80 non-producing gold names he and his fellow analysts track on this metric, the group has usually averaged between $50 and $75 per ounce, before dipping lower in the middle of 2008. The current average of $66 is down slightly from $68 in January.

"Size of Resource does seem to command some attention for investors, as the general trend of increased valuations for larger deposit size can be seen," Mr. Curran told clients.

The analyst cites two primary reasons why this is the case. For one, there is no shortage of very large gold deposits that the market does not deem economically viable due to a number of reasons. As a result, several large deposits trade at very low AMC/oz. multiples, which serves to offset the impact of the Size of Resource factor alone.

The other reason is the presence of smaller deposits, which the market either believes will grow much bigger in size and/or have other favorable factors that will push up AMC/oz. multiples, again offsetting the Size of Resource factor.

It comes as little surprise that grade of gold deposit is one of the most important differentiators in terms of valuation among gold explorers. After all, higher-grade deposits generally have an easier time achieving economic viability.

Companies with low geopolitical risk also see high AMC/oz valuations relative to projects in higher risk regions.