Today in Fat Tail Daily we’re going to check in on the gold market.
After a hot run earlier in the year, both gold and gold stocks are consolidating.
However, we just got a clear example of where one mining team thinks the big opportunity still lies.
Discover Mt Gibson’s ($MGX) latest move…
This miner is an old recommendation of mine.
For years its main operation has been the high grade Mt Koolan iron ore mine up in Northern Western Australia.
(Believe it or not, the late Queen of England visited there once.)
It’s been a good money spinner for MGX.
At last accounts, they had $460 million in cash on the books, and that will be higher when the next set of numbers hit the market later this month.
However, like all miners, MGX have a perennial problem.
Eventually, the resource base is exhausted. The Mt Koolan operation has been in production for decades, and its days are numbered.
By 2028, it will be dusted, only a big hole and memories remaining.
MGX has a choice, and $500 million to spend.
Does it buy another iron ore project? Lithium? Copper?
We know the way management are thinking now.
They’ve just bought a 50% stake in a gold development project for $50 million.
Yep, MGX’s top brass think gold is the way to go.
It’s called the Central Tanami project, and it will be a joint venture (JV) with another company.
It’s located in WA on an existing mining lease, with infrastructure nearby. It could be in production within 2 years.
It’s this kind of behaviour that tells me that the precious metals bull run has a long way to go, with lots of opportunity to profit for investors like you and me.
Let’s reflect for a moment…
In the share market, you can make money in different ways.
One way is speculation. Occasionally a share will rise way beyond what fundamentals would seemingly dictate.
We chatted about $EOS yesterday.
It’s added about $600 million in market cap in the last 6 months, based off one definitive order (for the moment).
Clearly, there’s a speculative element to the price rise here, as the market positions around defence spending.
However, a different approach to buying and holding shares – more sure footed over the long term – is riding along with companies as they build out an operation…and create value.
In the case of MGX, it would be their gold mining operation. In this case, you’re not speculating on a higher gold price (though that’s always nice).
You’re participating in the process that turns a known deposit into a producing mine.
That’s a long journey. Approvals are needed. Infrastructure gets built or restored. Staff hired. Gold buyers arranged. Then there’s the business of running it all smoothly and safely.
You’re not trading a stock. You’re in the gold business, in other words.
That’s what MGX is going to do with its cash hoard.
It’s going to build a portfolio of shares across the mining space.
Think of it as a cash for equity swap.
MGX will become a mini-holding company for a range of businesses, based around precious metals.
As it happens, the last recommendation for my advisory Australian Small Cap Investigator is along a similar idea.
You see…
One thing about commodity producers is that, when prices are high, it can give them enormous free cash flow.
That gives them firepower to buy into other companies and projects if their existing operation doesn’t need or deserve more investment.
Clearly, the team at MGX think there is more potential in gold than iron ore over the longer term.
Here’s another thing about MGX.
Currently its market cap is around $350 million. That’s $100 million less than the cash in its accounts!
The market can see Mt Koolan is dying, and is unsure of where the business goes from here…hence the discount.
However, it’s possible over the next 1-2 years that MGX acquires a juicy portfolio of junior mining projects…and you might be able to buy them – via MGX – at less than their worth.
You can already buy $450 million in cash at a discount today.
However, this type of play requires two things:
1. Patience. It’s not all going to happen in the next week, month or even year.
2. Trust. We can’t be sure management at MGX will use their cash hoard effectively. It’s possible they buy a bunch of dud projects, or at the wrong price or time.
I don’t own MGX.
But I do plan to keep an eye on it.
If gold really does go toward $10,000 an ounce, they might be buying into the junior gold market at precisely the right time.
Those with cash always have a shot at the best assets at the bottom of the market. Gold juniors, unlike the producers, are still lifting off the floor.
I suggest you keep an eye on MGX with this in mind too.
Best wishes,
Callum Newman,
Editor, Small-Cap Systems and Australian Small-Cap Investigator
Murray’s Chart of the Day –
MP Materials
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Source: Tradingview |
Make no mistake, the moves Trump is making at the moment to shore up critical metal supply chains is big.
The chart above shows you the recent moves in rare earth miner MP Materials.
Trump has made an investment of $400m into the company and also underwritten demand for NdPr (Neodymium (Nd) and Praseodymium (Pr)) at a much higher price than current levels.
This is the moment when the US is fighting back against China’s tactics to maintain a stranglehold on supply chains.
I have said for a long time that I thought China had deliberately crashed many markets, such as graphite, nickel, and rare earths to scare off or send broke any western competition.
The 50% tariff on copper and the moves made in rare earths are a stake in the ground for the US that they will no longer allow those tactics to triumph.
Australia has one of only two ex-China rare earth producers in Lynas Rare Earths [ASX:LYC]. But we also have a few companies that are working towards project completion and have struggled to get the necessary funding.
That may be about to change as the US counteracts China’s tactics.
It could be time to run the ruler over the rare earth projects out there to figure out which ones will come online the soonest and have the best prospect of raising funding.
Arafura Rare Earths [ASX:ARU] looks interesting on the charts..
Regards,
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Murray Dawes,
Editor, Retirement Trader
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