When investors think of investing in gold they think of bullion, large established gold miners and precious metals streamers. While many of these can be worthwhile means of bolstering exposure to the yellow metal, it is the smaller junior miners and explorers that offer the potential to obtain outsized returns. Since the start of 2019, junior miner Lundin Gold Inc. (TSX:LUG) has soared by 17%. Regardless of this significant increase in value, there are signs of further gains ahead.
Considerable progress with mine development
Lundin Gold in mid-January 2019 announced that underground mine development at its flagship Fruta del Norte project had reached the ore body — a significant development for any miner developing a large, high-quality gold project. Lundin Gold also stated that project construction was 45% complete and that overall engineering work had reached 85%. The project is currently on budget and schedule for the first gold pour toward the end of this year and for commercial production to commence in 2020 with an annual average gold output of over 300,000 ounces.
Notably, the mine development is fully financed and all major permits have been obtained. That means there are no major potential obstacles to completion and commissioning, removing much of the execution risk associated with a project of this scale.
The risks associated with the development of the asset are further mitigated by Australian senior gold miner Newcrest Mining Ltd. acquiring a 27.1% chunk of Lundin Gold for US$250 million. Newcrest brings with it considerable expertise, financial resources and extensive experience developing as well as bringing gold mines to commercial production. The involvement of the senior miner helps to backstop the Fruta del Norte project should Lundin Gold run into any issues.
Newcrest also acquired the right to receive a 50% interest in eight early stage exploration properties held by Lundin Gold in Ecuador if it spends US$20 million on developing those assets over the next five years. Those concessions hold considerable potential given that Fruta del Norte has been identified as sitting in a major mineralized trend.
The attraction of the Fruta del Norte project for a senior miner like Newcrest is easy to understand. It is rated as one of the largest high-grade gold projects under development globally, even eclipsing Continental Gold Inc.’s Buritica project in neighbouring strife-torn Colombia. The ore body has been assessed to hold reserves of 4.8 million gold ounces with an average grade of 8.7 grams of precious metal per ton of ore (g/t).
High ore grades are a key driver of profitability for any gold mine and typically dictate how economic and hence profitable it is to extract the gold. Because of that notable grade, Fruta del Norte is estimated to have all-in sustaining costs (AISCs) of US$583 per gold ounce produced. These are some of the lowest in the industry and underscore just how profitable Lundin Gold’s operations will be in an operating environment that sees gold is trading at over US$1,320 per ounce.
The appeal of the project was further highlighted by precious metals streamer Sandstorm Gold Ltd. buying a 0.9% net smelter royalty on precious metals produced from Fruta del Norte for US$32.75 million.
The degree of geopolitical risk associated with operating in Ecuador has subsided significantly in recent years. Since 2015, Quito has instituted a raft of measurers aimed at reducing the taxation and regulatory burden for miners operating in the country. This, along with other measures, has created an attractive mining framework that sees Ecuador on track to becoming a major precious and base metals mining jurisdiction like neighbouring Peru.
Unlike Colombia on Ecuador’s northern border, the security environment is far more stable. Lundin Gold has been able to secure a strong social licence from local communities, which means that it likely won’t face the challenges that afflicted Tahoe Resources Inc. in Guatemala, where protests and an eventual court decision shuttered that miner’s flagship Escobal silver mine.
Is it time to buy Lundin Gold?
Lundin Gold provides investors with the opportunity to access outsized returns by investing in a junior gold miner whose stock will soar once steady-state commercial production at Fruta del Norte is achieved. While such stocks are risky investments a combination of the mine’s advanced stage of development, solid balance sheet including considerable liquidity, high ore grades and the involvement of Newcrest mitigate those risks and underscore the upside available.
