When gold began to rally in late 2015, investors breathed a sigh of relief. The longest resource bear market was finally over, and capital slowly began finding its way back into the mining sector.
During the beginning of gold’s rally, gold stocks actually declined as investors could not get a true pulse on the market. However, when the recovery was apparent, gold stocks soared, eventually yielding over 150% returns in less than a year.
Unfortunately, with such rapid gains a pull-back was inevitable and healthy. From its peak, gold decreased -17% while gold stocks gave back up to -38% in aggregate.
It appears the pull-back is now over, and gold is once again on the mends.
Since late 2016 gold has recovered 16%, but the Junior Gold Miners ETF (GDXJ) and the Arca Gold BUGS Index (HUI) are only up 21% and 29%, respectively. Just like when gold was first recovering, investors are reluctant to begin deploying capital. However, once this recovery is apparent, we expect gold stocks to once again continue its precipitous ascent.
The platinum group metals are composed of six noble, precious metallic elements: iridium, osmium, palladium, platinum, ruthenium, and rhodium. In mining, the most valuable PGMs are platinum and palladium, and rhodium to a lesser degree. Intuitively, the metals are correlated in terms of price movement, and often time track other precious metals, especially gold.
While platinum and gold are correlated (0.85), platinum has historically traded higher than gold, averaging 50% more since 2000. The platinum to gold ratio is currently 0.75, with gold consistently trading higher since the beginning of 2015.
If we shorten the timeframe from 2000 to 2009, the average decreases. However, it still implies that current platinum prices are undervalued relative to gold:
Using the current gold price of $1,300/oz. and the average ratio since 2000, platinum should rebound from its current price of $990/oz. to $1,950. Using the 2009 average of 1.03 still means a significant rebound to $1,360/oz., or a gain of 40% from current levels.
The PGM industry is dominated by the major South African platinum producers, and the largest palladium producer in the world, the Russian-based Norilsk Nickel. Just these two regions account for almost 90% of the World’s platinum and palladium production.
What makes PGM investing even more precarious is that in addition to operating in risky jurisdictions, there are only a handful of public companies. If you filter this to junior companies with a resource, you are down to less than ten.
New Age Metals (CVE:NAM, OTCMKTS:PAWEF) Current Price: C$0.07 Shares Outstanding: 68.4 million Market Capitalization: C$4.8 million Cash: ~C$2.6 million
New Age Metals is one of the few PGM companies that operates in a safe jurisdiction, but is also the cheapest on a per platinum ounce basis. According to our analysis and current market prices, New Age Metal’s River Valley PGM Project hosts a total resource of 3.4 million ounces platinum equivalent. This gives New Age Metals a valuation of C$0.74/oz. Compare this to the average of its comp group, C$40.00/oz.
With platinum poised to return to its median, and New Age Metals trading at a substantial discount to its peers, the optionality in this play is enormous.
New Age Metals is an out of favor companies that has fallen through the cracks because of the decline of platinum. However, the company has raised C$2.6 million and is now more than halfway done its 2017 drilling campaign, focusing on the Dana North (T3) and Pine zone.
In addition, an induced polarization (IP) geophysical survey and borehole geophysics has been completed. The first portion of the drill program was concentrated on follow-up drill testing of the 2015/2016 PGM mineralization at the Pine zone. Drilling will now focus on the geophysical interpretation from the recently completed IP survey.
Six holes were completed at the Pine zone, which is open along strike and at depth. The first batch of assays has been sent to the lab. Results are expected any day now.
The current exploration program will be used to establish the resource base for a preliminary economic assessment (PEA), which the company plans to complete before the end of 2018.
Prior to the current program, the River Valley PGM Project has seen 671 holes drill holes for 152,394 metres and $40 million in total spending. Shares from its last financing became free-trading on August 28, and the stock has sold off in anticipation. In fact, share prices are down more than 50% from its recent high. This bargain price is a nice entry for new investors, especially with an imminent fall commodity rally, and the strong and catalytic news flow on the horizon.
No other PGM company has the torque NAM has, and that is why the company is one of largest holdings in our portfolio.
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