Gold
Riding the bull market
I must have written this sentence many times in the last few years since gold began its rally, but here I type again: Gold prices broke a new record. The new all-time-high of US$3,500/oz was hit in April this year. A high gold price is, however, a double-edged sword, in the words of Ron Hochstein, president and CEO of mid-tier producer Lundin Gold: It is positive for the mining industry, but a bad omen for the outside world. If previous gold supercycles were triggered by events like Russia’s invasion of Afghanistan in the 1980s or the financial crisis in the late 2000s, today’s bull market is fuelled by geopolitical instability, tensions between major economies, aggressive Trumpian trade policies, a weakened dollar, and recession fears, which the IMF has recently warned about.
Shunning these risks, investors, especially Asian investors, have recently clutched to gold, buying physical gold (bullion), paper gold (like ETFs), or the somewhat in-between gold mining stocks. “For a long time, investors viewed gold as dead money. Today, investors have rediscovered gold’s fundamental value as a historic store of wealth and a hedge in times of uncertainty… Gold is, in my view, the mother of all money,” said Vincent Benoit, the CEO and managing partner of La Mancha Resource Capital, paying homage to the role of gold.
La Mancha holds interests in a portfolio of (primarily) gold mining companies in Africa and Latin America.
The mining industry cannot influence the forces of demand and where the price goes, but it is the main actor in delivering the physical gold that everyone from central banks to speculators want in whichever form. Unlike other forms of money, gold cannot be printed. As Benoit reminds, gold is finite. He goes as far as to say gold could be considered a “finished” resource. 208,874 tons of gold have been mined throughout history – about the size of a 22-meter-wide cube if it were all melted in that shape, according to the World Gold Council. The mining industry has not been great at replacing reserves, with a replacement rate of only about 15-20% of what is mined each year. Though not yet “finished,” gold could run out.
Of course, this is no fault of the mining industry. Mining companies deal at once with the physicality of gold–in grams, ounces, kilograms, and tons - and with the virtual value ascribed to gold by the markets - buyers, traders, investors, financiers, and their volatile sentiments. With sentiments currently upbeat, if not trepidant, can the mining industry accelerate future supply pipelines and curb the reserve depletion crisis, a crisis that could ultimately render gold finished, more than finite? And most importantly, can it do it fast enough? For as bullish as the markets look now, with Goldman Sachs forecasting spot prices up to US$4,000/oz by mid-2026, prices will eventually come down.
These are the questions driving our article, more specifically directed at this region bracketed by the US-Mexico border to the north and the Equator line to the South: Can this region rise up to the challenge? Since a higher gold price environment first benefits the larger producers before it trickles down to the higher-risk, smaller-cap explorers, we will start with the mining companies to assess how the sector is riding this bull market.
Most gold producers in the Latam North and Caribbean region are in Mexico, which, at over 140 t/y of gold production, is the 9th biggest producer globally, trailed by Colombia (65.8), Venezuela (30.6), Suriname (27.7), Ecuador (24.3), Dominican Republic (18.4), and Guyana (13.5). While Mexico benefits from a dozen or so key producers, the rest of the countries count on a few major operations, combined with smaller mines and artisanal production. Leading producers across the region are posting strong returns, which allow them to pay back debt, return money to shareholders through dividends, and start planning on how to utilize their strong cash flows. Acquisitions, as discussed in the previous article, are high on the agenda, and the conditions for M&A are well laid out: With anticipation of upside valuations, producers may want to snap those undervalued acquisition targets while they can. In recent years, the gold sector has been leading mining consolidation activity, according to S&P Global.
Higher earnings will also allow existing producers to splurge more on exploration, which they have neglected in recent years. But there are exceptions. NYSE-listed Coeur Mining is a gold and silver producer known for its keen dedication to exploration, balancing organic growth with inorganic growth. In the past five years, it has spent over US$300 million on exploration, and it plans to ramp up exploration budgets further in 2025. “Reinvesting in existing operations through exploration is the single best way to generate higher and higher returns,” said Mitchell Krebs, the company’s CEO.
Exploration in the Latam North and Caribbean region has been favored by low costs. Lundin Gold has been adding resources at approximately US$25/oz, managing to replace the 2.4 million oz mined to date at the 500,000 oz/y Fruta del Norte with 3.1 million oz, with resources and reserves inventories today higher than when the company released its DFS in 2016. While Lundin’s attention will stay on near-mine exploration, the company can finally also look properly at its large package of concessions.
Despite generating higher revenues, gold producers have only just started to see an appreciation in their share prices, the gap between spot prices and equity prices remaining wide. According to Hochstein, generalist investors only started to return to the market in the last six months, and are still “dipping their toes in the water” for now. A couple of quarters of good earnings may be needed before they fully jump in.
In the junior sector, investors are watching even further away from the sidelines. “We used to dream of commodity prices like those of today, and now that we have it, the market is still lackluster,” said Simon Ridgway, chairman of Gold Group Management and CEO of Volcanic Gold Mines, which is developing the Holly property in Guatemala.
Nevertheless, the mood in the junior sector is charged with hopeful energy. Many companies have gone to the markets for fundraising and are planning, running, or interpreting drilling programs. While the bulk of gold production in the region sits in Mexico, the exploration sector is more spread out. While explorers in Mexico are facing permitting issues (something that will be discussed in the article dedicated to Mexico), explorers in Colombia, Ecuador, Guyana, Nicaragua, the Dominican Republic, Suriname and Guatemala are not spared the worries of permitting and jurisictional risk, but they do capitalize on the opportunity of often untouched gold belts. For instance, Volcanic Gold has seen a positive response in its recent cash-raise for the Holly property, with its share price doubling.
High gold prices typically spur exploration in higher-risk jurisdictions. Beyond that, governments often respond more favorably to mining when the potential rewards are greater. South of Guatemala, El Salvador is going through a major rebrand. In December of last year, the smallest country in Central America lifted a seven-year-old ban on mining. President Nayib Bukele said the country sits on about US$3 trillion worth of gold (with 50 million oz in the ground), an unfathomable and by all means implausible number. Regardless, the change in position, though vastly opposed by different members of society, shows gold’s far-reaching allure.
Three of the top five best performing TSX gold stocks this year (by March 24th) were operating in the Latam North and Caribbean region: G2 Goldfields, a circa CAD712 million market-cap gold developer with projects in Guyana and Suriname; Mineros, a CAD657 million gold producer with alluvial and artisanal mining operations in Colombia and Nicaragua; and Orla Mining, a CAD3.9 billion producer with a diversified asset base in North and Central America. These very different top-three performers speak of the diversity of opportunity in this region, regardless of company size or location.
“Generalist investors are still dipping their toes in the water for now, still unsure whether this is the right time, but I do expect we will see more interest moving forward.”
Ron Hochstein, President and CEO, Lundin Gold
Different parenting styles for raising a gold project
“Who wants to buy or develop a 1 million oz deposit?” Dan Noone, the CEO of G2 Goldfields, an explorer in Guyana, asks at some point in our conversation. The answer to his rhetorical question is, impliedly, “no one.” Noone and his team, who was involved in the discovery of the 7 million oz Aurora deposit of Guyana Goldfields, acquired by Zijin Mining, has been growing the Oko-Ghanie project through extensive exploration (59,000 meters in the last campaign), bringing it to over 3.1 million oz at 3 g/t Au grade in the last resource upgrade. The company will continue to add resources, with the mineralization remaining open at depth and along strike.
Up in Mexico, that same question of resource size was posed to Kenneth MacLeod, the CEO of explorer Sonoro Gold: “Some have questioned why we would bring a half a million oz deposit into production,” he said. His answer is different from Noone’s, as Sonoro envisions building a small 33,000 oz/year operation, at a low CapEx. “We see this as just the beginning of a multi-phase program that will allow us to generate cash while expanding the project. In Canada, the conventional mindset is that companies must define a 2 million oz resource before seeking financing for production. But that approach takes years and up to US$50 million in exploration costs before de-risking. Most explorers in this situation hope to be acquired by a mid-tier producer. We take a different view. We do not want to be acquired by mid-tier mining companies—we want to become a mid-tier mining company.”
In truth, both models can be a segue into mid-tier status, and both have risks. But it is interesting to observe an alternative development model gaining popularity in the gold space, clearly emerging as a manifestation of the rush to production in order to capitalize on a high gold price environment.
In conventional mining project development, which adheres to a “the bigger, the better” logic, exploration companies will add ounces and rely on the markets for funding until the project reaches a scale that will render it attractive to be built and brought into production. Top-tier projects like Fruta del Norte, acquired by Lundin Gold in 2014 and now a half a million oz annual operation, are such an example. Such projects target mid-tiers and majors with a “build and buy” strategy, such as what Lundin has been in Ecuador, Aris Mining is in Colombia, or G Mining Ventures is doing now with the 4 million oz Oko-West deposit in Guyana. The main criterion for development is size, the kind of size that can justify US$1 billion in CapEx. Ideally, this model values projects over 5 million oz in size.
An alternative “parenting” style that we are observing in recent years is bringing into early production a small portion of a larger project. This is an adaptation to the financing deprivation afflicting the junior markets, allowing juniors to start generating their own funds and lessen dependence on the financial markets by not having to chase millions of dollars in financing. This is precisely what Unigold is considering in the Dominican Republic at Candelones, the most advanced exploration project in the country (with an FS in 2022). Unigold will start with the first 200,000 oz oxide resource before moving to the ten-times larger sulfide resource.
Beyond enabling a profitable small operation, the other advantage of this model is that it simplifies permitting, as well as allowing communities to get used to mining. Candelones sits in a remote area without any history of mining, near the border with Haiti.
But there is another variant to phased scalability, which prioritizes scale not through a single, superstar mega-project, but through multiple, smaller, mineable deposits, with lower-entry barriers. Grade, in such a model, is primordial, and the tier level is determined by margins through a combination of grade and low operating costs. A perfect example is Mako Mining. In CEO Akiba Leisman’s own defition, Mako Mining is focused on building scalable mines in the Americas: “Within the Americas time zone (North, Central and South), we target assets with short timelines to production and of geological profiles that support small-scale, low-CapEx startup operations that can be scaled up organically and inorganically.”
Source: World Gold Council (2024)
Fitting that profile is the open-pit San Albino mine in Nicaragua. Something of a geological oddball, as Leisman called it, San Albino is an orogenic deposit, both high-grade and very complex, which is why large-scale mining companies tend to neglect this type of ore body. Though a tough nut to crack, San Albino is the highest-grade open-pit mine on the planet, at 17g/t Au in the main vein, which leads to average head grades of 7.5 g/t. Mako is producing about 40,000 oz/y, with generous EBITDA.
In production since 2021, San Albino became Mako’s core cash-generator, propelling the company’s diversification through two acquisitions in 2024, namely Goldsource Mines and its Eagle Mountain gold project in Guyana, and the Moss mine in Arizona. From these three assets, Mako will be producing 150,000 oz/y by 2027. “It seems to be almost lost on people what the objective of this industry is,” Leisman starts: “The sector is too much set up to doing something along the lines of speculation, but Mako Mining isn’t structured to sell out—we want to be the operator and generate substantive returns that reimburses us for the risks we take (...) Mako Mining has a distinctive operational framework where we do not subscribe to excesses and unhealthy tactics that have plagued the exploration sector, with over-incentivized management and speculative business models. We are in a position to stay away from that incentive system and focus on what we do best, which is to build scalable, low-CapEx, high-return operations.”
Mako Mining has a cornerstone investor in Wexford Capital, owning 48% of the company. This provides Mako with a lifeboat during market turbulence.
Last to include in our analysis is a sub-genre of explorers that are purely engaged in project generation, prospecting, buying, de-risking, and ultimately selling the project. We can call these foster parents. To their credit, these explorers will do the job of sorting through the myriad of licenses available and make the best picks, shaping land into projects. They are also the guys most sensitive to market trepidations, dealing more with the intangible investor sentiment than they will ever do with actual physical gold. And yet, they provide the seeds to the supply pipeline.
Greenheart Gold, a spin-out born out of the G Mining-Reunion merger in 2024, has built a portfolio of three projects in Guyana and Suriname, all close to large existing operations: Majorodam, located just 12 km from Saramacca, a satellite deposit for Zijin Mining’s Rosebel gold mine in Suriname; IGAB, located 30 km from Newmont’s Merian operation in Suriname; and the Abuya project in Guyana, which is situated 20 km from Zijin Mining’s 6 million oz Aurora gold mine. Greenheart is looking to add two to three more projects to this list: “Our strategy is to turn ground over rapidly. We typically invest about US$1 million over a 9 to 12-month period to do initial exploration work and determine whether a project has potential or not. If the results are good, the project advances to resource definition. If the results are not promising, we return the ground to the landowner and look to option other promising projects… In exploration, a higher rate of success will result from giving yourself as many opportunities for discovery as possible,” said Justin van der Toorn, Greenheart Gold’s CEO.
Article header image courtesy of Luca Mining