Gold has moved higher in recent days, as a combination of geopolitical and economic risks rock markets and undermine confidence in the global economy. The yellow metal is trading at around its highest level in five years and appears poised to move higher, as investors move to hedge against the growing uncertainty filtering through financial markets. This now sees gold trading at over US$1,420 per ounce and attracting considerable attention, along with claims of a new bull market emerging.
While the senior gold miners garner the bulk of the attention from investors seeking exposure to gold, it is the smaller development stage miners that hold the most potential. One that is a particularly attractive investment is Lundin Gold (TSX:LUG), which is developing the Fruta del Norte ore body in Ecuador and has gained 32% since the start of 2019.
World-class project
Furta del Norte is classified as a world-class gold deposit with reserves of five million gold ounces at an average grade of 8.74 grams of gold per tonne of ore (g/t). That notable average ore grade combined with lower operating costs in Ecuador compared to developed jurisdictions means that the mine has low forecast all-in sustaining (AISCs) of US$583 per ounce. This underscores Lundin Gold’s profitability in an operating environment where gold is trading at above US$1,400 an ounce.
In fact, Lundin Gold modeled its projections, including reserves and AISCs on an estimated price of $1,250 per ounce. This indicates that should gold remain firm at around current levels, there is every likelihood that Fruta del Norte’s gold reserves will expand. That will lead to a longer mine life and give Lundin Gold’s net asset value a solid boost.
Impressively, for a project of this size and scale in an emerging market, it is on schedule and budget with overall construction 65% complete with underground construction ahead of schedule. The Fruta del Norte Project is fully funded and 84% of all capital has been committed.
The first gold pour is expected to occur during the fourth quarter 2019, and commercial production will commence during the first half of 2020. The mine has a projected 15-year life and will average over 310,000 ounces of annual gold production during the first 13 years.
There is a considerable amount of execution risk associated with a project of this size and scope, but Lundin Gold has the backing of Australian senior gold miner Newcrest Mining, which in early 2018 acquired a 27% stake $250 million. While Lundin Gold has done an exemplary job of managing the risks associated with the Fruta del Norte project, the backing of Newcrest mitigates many of the hazards associated with the project. Management has also done an excellent job to date of building a social licence with the local community, including hiring 50% of its employees from the province of Zamora Chinchipe where the mine is located, further mitigating a key risk.
Foolish takeaway
Lundin Gold is an exceptional opportunity for investors seeking to bolster their exposure to gold. Not only is it attractively valued, but management has done an exemplary job executing the project to date. It is easy to see its stock potentially doubling in value if it successfully commences commercial production as planned and golds remains firm at over US$1,400 an ounce.
