A Multi-Year Gold Market Breakout and a Fleeting Opportunity

With the gold market on the cusp of a multi-year breakout, it's time to assess and review the mineral companies on my watch list and narrow it down to the ones with the best assets, leadership, and value – not just price, but actual value for shareholders. Patience is more than a virtue in the gold space now – it's an absolute necessity and the best-prepared traders will reap the greatest benefit in this commodity supercycle.

Owning gold is a smart move in a risk-off market where large-cap stock indices could buckle at any moment from a number of catalysts: coronavirus fears, issues in the Middle East, and election uncertainty, just to name a few. And in this environment, gold equities are lagging behind the movement in the gold price, thus providing a rare opportunity for enhanced, risk-adjusted returns through selective stock picking.

The divergence between the gold price (black line) and the miners (blue line signifying GDXJ ETF) clearly favors the miners as being broadly undervalued and ready to play catch-up:

Courtesy: BarChart.com

What's causing this divergence? A primary factor is that developers have faced an unprecedented lack of capital availability over the last two years; investors haven't been supporting the developers and mining companies have been cutting costs instead of investing.

But that doesn't mean the capital isn't available; in fact, the free cash flow to gold producers has doubled as the gold price moved up from $1,250/oz to $1,500/oz and beyond in the past year, and that capital is going to come in search of projects. This means that now is an opportune time to start accumulating shares of development companies that offer exceptional value.

Perhaps 'value' isn't even adequate to describe what I look for in a resource company investment. At the end of the day, I want a 'value-plus' proposition: an undervalued gold company that's trading at a steep discount to the value of its peers, suggesting the possibility of enhanced gains as the gold price accelerates.

Yet another crucial benchmark here is that the management – the insiders of the company – should have some skin in the game. When the company's ownership and management have a vested interest in the company's success, you and I can take a stake with much more confidence. In this way, profiting becomes a team effort: when the insiders make money, the stockholders make money as well.

Not that confidence is the only criterion here – of course, a development company should be sitting on vast gold resources as well. And just like when buying a new house, the old saying applies: it's all about location, location, location. Companies at the top of my personal watch list are invariably situated in mining-friendly jurisdictions with a long history of successful mineral production.

A company that provides an excellent profile in this respect is First Mining Gold (TSX: FF, OTCQX: FFMGF), a premier developer I've been following for a long time. It's currently trading down 75% from when the company's portfolio was put together – but with the same exact assets that have been significantly advanced and de-risked:

This divergence is much more pronounced than what you saw in the previous chart, suggesting that the intrinsic value of First Mining Gold's assets has yet to be fully understood or priced in by the market. This company has all of the requisite attributes, including one of the largest undeveloped gold projects in North America, as well as a portfolio of past-producing and well-studied gold assets in prime jurisdictions with existing infrastructure.

While there are multiple properties, the two assets being focused on are the flagship Springpole Gold Project, which offers an advanced asset with size and scale, and the Goldlund Gold Project, a robust and updated resource with existing infrastructure, strong local community support, and promising district-scale potential.

The Springpole Gold Project is a world-class asset by itself.  Springpole remains one of the largest undeveloped gold projects in Canada, with 4.67 million ounces of gold in the Indicated category and 0.23 million ounces of gold in the Inferred category, and it's one of very few projects capable of producing in excess of 400,000 ounces per year:

A recent PEA demonstrated robust economics at a gold price of $1,300 per ounce and exceptional economics with gold at $1,500 per ounce and above. Even so, it's being ignored by investors like most projects are when they go through the permitting phase – but this is the opportunity.

At any gold price, the aggregate numbers are impressive: there is a resource base of 7.4 million ounces of gold in the Measured and Indicated categories and 3.8 million ounces in the Inferred category throughout First Mining Gold's assets in eastern Canada.

Again, the key here is location, and First Mining Gold's assets are in one of the absolute best jurisdictions for development activity: Ontario, Canada.

• Ontario has permitted three large, open-pit gold projects in the last three years.
• The Red Lake area is a focus of strategic activity, with Evolution (a $6.5 billion market cap gold producer) recently acquiring the Red Lake mine and looking to grow – and four of First Mining Gold's projects are within 300 kilometers of Red Lake.
• Kirkland Lake buying Detour for $5 billion shows that large-scale mines still have real strategic value.

In terms of leadership, First Mining Gold has a pedigree found in few other resource contenders, as the company was founded by none other than Mr. Keith Neumeyer, who has built two billion-dollar companies in the resource space already.

The company also has a powerhouse of a CEO and director, as Mr. Dan Wilton has 25 years of experience in M&A, corporate finance, and principal investing in the mining sector. Indeed, Mr. Wilton has executed as principal or advised in more than $10 billion of mergers, acquisitions, and divestitures and more than $1 billion of financings. Today, Dan Wilton and his team are advancing and de-risking the projects for First Mining Gold.

Leadership and vision are of paramount importance – my formula is to seek a 'value-plus' proposition among developers, and First Mining Gold clearly meets that criterion as it is now trading at less than one-fourth of the value of its peers:

Think about it: even if Springpole were First Mining's only project, First Mining Gold would still trade at a 50% discount to its peers and you would get the balance of this portfolio for free. Springpole isn't the company's only project, of course, as First Mining Gold owns a diversified portfolio of mineral-rich assets whose value is not (yet) well understood by most investors:

The highlights of First Mining Gold's vastly underappreciated resource portfolio include:

• Goldlund: A large resource featuring attractive grades and superior drill results with strong expansion potential (809,200 ounces of gold at 1.96 g/t Indicated; 876,954 ounces of gold at 1.49 g/t Inferred).
• Pickle Crow: First Mining recently announced a partnership with the same team that recently developed Bellevue Gold in Australia. They started with a project in a past-producing, high-grade gold camp, applied state-of-the-art exploration techniques, and delineated a 1.8-million-ounce resource at 11 g/t, taking their market cap to AUD$300m+ and raising $40m+ to advance the project.
• Hope Brook and Cameron: Past-producing, well-sampled assets that, as development projects, should each merit a valuation of $50m+ if they trade at the same multiples as peer development companies.

Earlier I alluded to the concept of having skin in the game. Management should have a vested interest in the success of the venture, and this is particularly important in the resource sector. First Mining Gold presents a strong participation profile including retail and institutional interest, along with management and directors:

Keith Neumeyer owns more than 12 million shares of First Mining, almost all purchased in financings or in the market. Dan Wilton has purchased about 2.5 million shares over the past year (a total share purchase greater than 2x of his annual salary). First Mining Gold also just announced that Keith Neumeyer and Dan Wilton are continuing to add to their share positions by participating in another equity financing.

To be honest, it's not very often that I come across a single gold company that hits all the right notes, but this one is as compelling as anything I've seen lately:

• One of the largest and best-positioned gold portfolios in Canada
• Assets located in Canada, a top mining jurisdiction
• The Springpole Gold Project is one of the largest undeveloped gold projects in North America with significant size and scale
• The Goldlund Gold Project hosts a very attractive open pit resource with district-scale exploration potential
• Experienced, disciplined management team to advance the company's projects and surface value
• Shares are trading at USD$9 per ounce of gold versus peer group at USD$44 per gold ounce, a significant discount

That's what I call a value-plus proposition and an unrecognized gem in the development space. Gold is breaking through resistance levels and we've identified the perfect setup in a company that is currently trading far below its peers. For investors seeking exceptional assets in great jurisdictions and with outstanding value, the time is now!