Doubts about the health of financial markets globally continue to linger after last week’s turmoil, and this has given gold a healthy boost in recent days. The growing economic and geopolitical uncertainty that has engulfed markets makes now the time for investors to bolster their exposure to the yellow metal. Typically, gold is negatively correlated to stocks and is viewed as a safe-haven asset. This means should market jitters set in once again and stocks plummet, then gold should firm. While it is the major gold miners that attract most of attention from investors, it is junior miners and explorers…
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Doubts about the health of financial markets globally continue to linger after last week’s turmoil, and this has given gold a healthy boost in recent days. The growing economic and geopolitical uncertainty that has engulfed markets makes now the time for investors to bolster their exposure to the yellow metal.
Typically, gold is negatively correlated to stocks and is viewed as a safe-haven asset. This means should market jitters set in once again and stocks plummet, then gold should firm. While it is the major gold miners that attract most of attention from investors, it is junior miners and explorers that offer the most potential upside. One junior gold miner that is attracting considerable attention is Continental Gold Inc. (TSX:CNL).
For some time, Continental Gold has failed to deliver for investors, despite the voluminous promises from management. The miner is focused on developing the Buritica deposit located in the Latin American nation of Colombia.
The ore body is rated as one of the highest grade undeveloped deposits globally. It has been assessed to hold gold reserves of 3.7 million ounces with a grade of 8.4 grams of gold per tonne of ore and 10.7 million ounces of silver graded at 24.3 grams per tonne.
The high ore grade is particularly important because the higher the grade, the more economically feasible it is to extract the precious metals, which means lower operating and development expenses. In the case of the Buritica project, which is expected to come online during 2020 and have a mine life of 14 years, it is estimated to have life-of-mine all-in sustaining costs (AISCs) of US$492 per ounce of gold produced.
These costs, in comparison to its peers, are extremely low and underscore the profitability of the project, especially in an operating environment where gold is trading at over US$1,300 per ounce. They are far lower than the US$609 per ounce projected for Lundin Gold Inc.’s (TSX:LUG) Fruta del Norte development in neighbouring Ecuador, or the US$700-900-per-ounce forecast for Pretium Resources Inc.’s (TSX:PVG)(NYSE:PVG) Canadian Brucejack mine.
While the degree of risk associated with such projects remains high, it is not nearly as significant as the market believes.
Colombia’s government has a long history of demonstrating that it is pro-business, while the security situation has improved considerably in recent years — notably, since the demobilization of the largest insurgent group, the FARC, in 2017. Bogota has also shown a determination to make the nation more mining friendly in a country with considerable precious metals resources and to attract more foreign investment as it battles to balance its finances in wake of oil’s protracted slump.
The Buritica project attracted a big vote of confidence when gold mining major Newmont Mining Corporation (NYSE:NEM) invested US$109 million in May 2017 to obtain an almost 20% stake in Continental Gold.
What many investors are failing to notice is the considerable exploration upside offered by not only Buritica but also Continental Gold’s other asset, the 48,000-hectare Berlin property. It was a functioning gold mine between 1930 and 1946 which is estimated to have produced up to 700,000 ounces of gold.
The mine was deemed to be too high risk because of the sharp decline in security within Colombia, but recent developments as well as an overall improvement in the domestic security situation means that the mine is a feasible project. During the first half of 2017, Continental Gold commenced reconnaissance exploration of the property.
Continental Gold is an attractive play on higher gold prices and could easily generate outsized returns for investors once mining operations commence and prove their profitability.
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Fool contributor Matt Smith has no position in any stocks mentioned.