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Surging Investment in Junior Gold Miners Emphasizes Their Potential

Despite the recent pullback in gold, which is down by 11% over the last year and trading at its lowest level since early May 2017, investment in junior gold miners continues at a furious pace. After years of sitting on the sidelines, senior gold miners invested almost $300 million in junior miners and explorers over the first six months of 2017. They did this because of a growing need to expand growth opportunities and forestall potential production declines after slashing investments in exploration because of one of the most brutal gold bear markets of all time. 

Now what?

You see, mining projects can take up to a decade to get off the ground and reach commercial production. This explains the sense of urgency among major gold miners to expand their portfolio of projects under development.

There have already been several deals in the industry with signs of more deals to come.

Lundin Gold Inc. (TSX:LUG), which is developing the Fruta del Norte deposit in the South American nation of Ecuador, secured a US$400 million financing package to fund the project, despite it being viewed as high risk.

It is easy to see why it was able to do so; the project is considered to be one of the highest-grade gold projects in the world, possessing considerable exploration upside. The private equity funds that provided the capital were able to lock in favourable terms that become even better as that exploration upside is realized.

While Fruta del Norte is not scheduled to start production until 2019, it will be extremely profitable because of the high-grade ore which makes it a low-cost operation. It has been estimated that it will have all-in sustaining costs (AISCs) of US$609 per ounce, which are among some of the lowest in the industry.

For these reasons, it remains one of my top plays on gold.

Back in mid-May Eldorado Gold Corp. (TSX:ELD)(NYSE:EGO) announced the $590 million acquisition of Integra Gold Corp.. That deal is particularly beneficial for Eldorado because it gains Integra’s Lamaque gold project located near Quebec. Because it is located in the low-risk jurisdiction of Canada it helps to reduce the degree of risk associated with Eldorado’s operations, which are predominantly located in the higher-risk locations of Turkey and Greece.

This is a quality project holding estimated gold resources in excess of 1.4 million ounces with an average grade of 7.32 grams of gold to every tonne of ore. These elevated ore grades mean that it has relatively low AISCs of US$634 per ounce of gold produced, underscoring how profitable the mine will be once its commences commercial production.

Some of the industry’s largest players, such as Goldcorp Inc. (TSX:G)(NYSE:GG), are also seeking to acquire new projects. Goldcorp is in the process of completing its takeover of Exeter Resource Corporation, which will give it ownership of the Caspiche development located in Chile which holds an estimated 1.7 million ounces of gold.

This venture, on completion, is expected to have annual production of 122,000 ounces with AISCs of between US$676 and US$828 per ounce. That means in an operating environment where gold is above US$1,200 per ounce, it will generate healthy margins, while giving Goldcorp’s existing production a healthy bump.   

So what?

Even after gold’s latest pullback, gold miners remain an attractive investment. While senior miners such as Goldcorp offer the lowest-risk means of gaining exposure to the lustrous yellow metal, it is the junior miners that offer the most upside. This is especially the case in the predatory environment that now exists, where larger miners are focused on making deals to bulk up their future growth opportunities.

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Fool contributor Matt Smith has no position in any stocks mentioned.

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