From exploration to regulation, what makes gold stocks move...?
INVESTORS should know the catalysts that can move share prices and their potential effect—good and bad—on Gold Mining companies, says Jocelyn August, senior analyst at Sagient Research.
August knows her catalysts from pre-exploration to production. In this interview with The Gold Report, she describes the catalysts to look out for.
The Gold Report: Jocelyn, your expertise lies in crunching the numbers and quantifying the catalysts that affect equity values. Generally speaking, high commodity prices benefit the companies that mine them. Are commodity prices also important to the valuation of pure exploration companies?
Jocelyn August: The difficulty in valuing a pure exploration company is the lack of revenue from actual mining operations. You have to consider commodity prices in valuation because the higher the price a company will be able to get for its commodity, the better. However, if the company's projects are several years from production, the current and near-future commodity price is not that relevant.
For pure exploration companies, catalysts—or share-moving events—are likely to be events that demonstrate how well the company's projects are meeting important milestones. Being aware of these catalysts can make an investor a better judge of the amount of risk involved and of how much time remains before the company will be generating revenue from a project.
TGR: Is it fair to say the commodity price is useful for arriving at a net present value (NPV) to be used in a preliminary economic assessment (PEA), but that you need to be open to revision over time?
Jocelyn August: Yes. Companies often do a lot of sensitivity analysis in calculating the NPV for their PEAs. Lately, gold companies have been using a $1,200–1,250/ounce (oz) Gold Price, even though it is now trading at $1,700/oz. Companies tend to be conservative because they realize that price may not hold until they take a project to production.
TGR: Which catalysts in the life cycle of a precious metals company do you track?
Jocelyn August: There are catalysts, or predicted events, with a specific timeframe that we expect will affect the stock price of a company. At CatalystTracker, we researched which catalysts move stocks more than others do. For the most part, we found that the catalysts are generally the same across different types of companies, exploration and production versus pre-exploration, for example.
Most precious metals projects move from pre-exploration to exploration and then feasibility, followed by development or construction and finally into production.
The catalysts in pre-exploration typically involve testing the project area for the presence of minerals, usually without having to drill. Companies do a lot of airborne geophysics to determine good mineral targets. The catalysts here are successful results from the Z-Axis Tipper Electromagnetic (ZTEM) system or the Versatile Time Domain Electromagnetic (VTEM) system. Companies use them to identify where to begin exploratory drilling or to determine if the area has good prospects at all. Other catalysts at this stage include assaying or geochemical surveys to test for the presence of mineralization.
When these catalysts occur, we see varying effects on the stock price, depending on the characteristics of the company: size, market cap, exploration-and-production versus a pure exploration company, the number of other projects in its pipeline. For a small company, successful ZTEMs could be a very positive event for the stock price because they signify the value of further exploration and progress toward project milestones.
TGR: So the ZTEM and VTEM could affect share price?
Jocelyn August: Definitely, in particular if they show noticeably positive or negative results. For smaller exploration companies just getting started, ZTEM and VTEMs could be very important.
TGR: Which catalysts come into play during exploration?
Jocelyn August: The exploration phase involves evaluating the resources to quantify the grade and the tonnage of a mineral prospect. The ultimate aim is to generate enough drilling to satisfy the economic and statutory standards of an ore resource, in the form of an NI 43-101.
Typically, Indicated and Inferred resource carries the least geological confidence. Indicated resources are economic mineral occurrences that have been sampled to the point where an estimate can be made regarding the resource characteristics and the contained minerals. An Inferred resource is simply the amount of the mineral that can be estimated with a low level of confidence.
Generally, the Indicated and Inferred information comes out in the initial resource estimate. Our research shows that the initial resource estimate catalysts have a fairly large impact; moving the stock price up or down 7%, on average.
TGR: What is the effect of a company issuing a Measured resource?
Jocelyn August: With a Measured resource, the company has done further testing in the ground and can say with much higher geological confidence that there is an ore resource. Compared to the Inferred and Indicated catalyst, the Measured resource announcement tends to move the stock only 6%.
You can see that an initial announcement would be more volatile for the stock versus a release that simply confirms continued exploration and progress.
We also see in the exploration phase a lot of different exploratory drilling being completed and results released. These announcements can move the stock price up or down 8% on average. We consider drilling results to be large-impact catalysts.
It makes intuitive sense that the smaller market-cap companies or the pure-play exploration companies would experience larger stock price movement upon the announcement of these drilling events compared to a larger company that already may have projects in production.
TGR: What are the catalysts in the feasibility phase?
Jocelyn August: This is when the company defines its reserve, quantifies the grade continuity and the mass of the ore and determines the economic feasibility of actually extracting the mineral.
The elevation to reserve status is very important because it allows the deposit to be called bankable and to be an asset upon which loans and equity can be drawn.
In this phase, we see a lot of bulk sampling, metallurgical test work, and engineering studies and assessments. So here are announcements of the results of these tests and of feasibility study completion results. Feasibility studies tell investors whether it is economically feasible to produce the precious metal from this location.
We break feasibility catalysts into three different types: 1) initiation, 2) completion and 3) a go/no-go—or a final round—decision. We find that all three have above-average impact, with 6.4%, 7.2% and 9.2% movements, respectively. Because companies at the feasibility stage are determining how economically viable the prospect is and deciding whether to proceed with the construction and infrastructure, it makes sense that these types of announcements, positive or negative, would have a large effect on their share price.
There are often regulatory catalysts as well: environmental impact assessments, government approvals or permits, Environmental Protection Agency decisions and aquifer exemptions throughout the exploration, feasibility and development phases.
These regulatory events can vary depending on the location of the project and the amount of regulation, the degree of concern over environmental issues or the presence of an indigenous population. Although it can be difficult to follow all of these regulatory events, we follow them in CatalystTracker. We have determined that on average, government approval or permit decisions are catalysts with an up or down 7.26% move.
TGR: These environmental licensing events are included in feasibility studies, correct? I would assume environmental licensing would be an important event.
Jocelyn August: It definitely is important. The economics of a project may work in getting the mineral from the ground, but permitting and governmental approvals may be too expensive.
When this catalyst happens depends on the project. Some companies may need permits to begin exploration or not until later on. They may be able to do the feasibility studies concurrently with environmental or approval permits.
TGR: And next comes construction.
Jocelyn August: After feasibility and permitting, we move into the mine development, or construction, phase. Depending on the type of mine, open pit or underground, as well as existing infrastructure, the timeframe for construction can vary.
We have identified the completion of construction as a large-impact catalyst, with an up or down 8% move. Interestingly, construction moves stock prices more than the start of production, which moves the stock just over 5%.
TGR: Does that mean that when construction is done, the start of production is already baked into the price?
Jocelyn August: At first, it seems a bit odd, but once construction is completed, the start of production soon follows, and, in effect, has already been priced into the share price.
TGR: Once construction is completed, what is the next catalyst?
Jocelyn August: Once companies are generating revenue from production, they often look to expand. This could be in the form of adding mill capacity or a new deposit. In some cases, a company starts production with an open-pit mine and adds underground mining infrastructure later on. These types of expansion add to a company's revenue stream, but usually do not result in very large stock movements, about 5–5.8% on average.
TGR: Next, let's look at how the catalysts you just described might affect the valuations of companies.
Jocelyn August: It is extremely important for investors to be aware of potentially market-moving, binary events. It can be hard to discern what will be a positive and what will be a negative, but you can use it multiple ways with multiple trading strategies.
For example, you may want to capitalize on catalysts before they are fully baked into the share price. If you think it will be a gray area, going up or down, you may not worry about trading that stock at that point. You can also hedge your bets up or down using stock options.
At CatalystTracker we track these future events to identify potentially large-impact events that will affect the share prices of the companies involved. Many of our clients use the CatalystTracker to minimize their risk or to better understand which events to capitalize on and which events to avoid trading on.
TGR: Jocelyn, thank you for your insights into catalysts and how they work.
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