“When do I buy it?”
“When it’s ready.”
In one of my more unpopular opinions, I generally feel sorry for small gold companies.
Here you’ve got Ashanti Gold Corp., who I’ve written about before, as has Luke. Business-wise, they’re doing something that’s both bold and clever. They’ve ID’d an asset with a big-to-really-big upside, done a deal for it, and are in the process of diligently moving it forward. That’s a pattern right out of the stock playbook. Develop the gold property to become an integral and valuable piece of the larger operations in the region. That’s what venture-stage companies are all about – an opportunity for rapid growth. Pros who know better achieve it through the efficient allocation of resources to achieve the maximum amount of de-risking, all while in-view of the light at the end of the tunnel.
The trouble is, when a gold company does that, it’s really boring. They dropped news yesterday outlining the results of their summer drill program. The big reveal is that there’s no surprise here. These structures are behaving as they expected, they’re getting pay grade over mining widths, and that puts them well on the way to a proven, mineable deposit that is worth several multiples of what they earned into it for. The trick is to do it affordably, and they’re achieving that by having done the initial groundwork – examination of previous work that keeps them from having to ‘prospect with the drill,’ smart / strategic drill spacing, etc. This is great news and a strong step in the right direction…
… and Ashanti did next to no volume. Because venture-stage investors are action junkies. We want big-swings, big moves… action! Give us something everyone’s already on, and we’ll pile on for fear of missing out. Responsible, reasonable companies… those are nice and everything… but look at that over there! Moving!
We now interrupt this analysis to bring you a football metaphor
Since I don’t understand anything that isn’t stock or sports, I’m going to compare Ashanti to a dependable, effective running back. Backs that can get 4 – 10 yards a carry all game keep a team in it and grind the clock out, and that’s the stuff championships are made of. Hand it off on first down, big carry, we’re 2nd and 5. Sweep to the outside, first down. Screen pass to keep the defence honest, and back to the ground. Protect the football. It isn’t exciting. Highlight reels are for deep-ball circus catches, because that stuff is exciting! But teams that rely on run and gun football end up buried deep on third down more often than they care to admit, and that doesn’t make the highlight reel.
Add up enough rushing yards, then once the clock has done its job, the score reflects the stable, methodical elegance of a power running game, and the back with all the yards becomes the story. Occasionally, he breaks a tackle or two and takes it to the house, or forces the defence to commit to the middle and frees up a receiver who takes it deep. Those are the plays that make Sportscenter, and the equivalent in this long-tortured metaphor is a wide, high-grade intersect. Grade and width get the market’s attention. The bandwagon fills up and the action junkies come out of the woodwork with volume to spare. Much like the famous Beast Quake, you never know when one is going to strike.
But we do know what it takes to make one happen – disciplined football. Stick to the playbook and execute. The geologists have come up with a model, the drills will prove or disprove it. By nature, gold systems are unique pockets of randomness out of which explorers are trying to make order. The individual intersections will tell a story – the story – once they’re accumulated. But in the act of collecting them, a company gives itself an opportunity to break for huge yardage. The shareholders who bought the strong, methodical process end up in a position to sell it to the momentum-junkies who are playing the swing, and buy the correction if they continue to believe in the process.
Ashanti is running the ball between the tackles on three West African gold properties, and they’ve got the talent to make it pay off. AGZ trades for a $12 million market cap, and are exploring in a gold belt containing ~40M oz worth of operating or soon-to-be operating mines.
FULL DISCLOSURE: Ashanti Gold is an Equity Guru marketing client. Our principal, Chris Parry owns a lot of stock.