Sprott Global Investment Executive Steve Todoruk inspects drill core at Skeena Resources' Spectrum property in Northern BC - Sept 2015 (Tommy Douglas photo)

by Henry Bonner

Over the last 12 to 18 months, we’ve seen some gold miners reach higher share prices.

As we pointed out earlier this summer, there are winners and losers. Some companies, like Klondex Mines (KDX.CA), Detour Gold (DGC.TO), and Evolution Mining (EVN.AU) have moved higher over the last year. Others like Midway Gold (MDW.CA) and Argonaut Gold (AR.CA) have declined.

Steve Todoruk, a broker at Sprott Global Resource Investments Ltd., has been following the move higher in certain gold mining stocks. I asked Steve why some miners are recovering – but not others.

Hi Steve. You’ve been watching the companies that are outperforming. Why are some gold miners going higher when gold is still near a 5-year low?

Some miners are increasing their output while keeping costs low, which increases their return to shareholders even if gold is going nowhere. On the other hand, many other miners are disappointing investors because their production is inefficient – or their mines are proving to be low-quality.

Miners are also benefitting from the low price of oil, as fuel is one of their main costs. Services like contractors and equipment rentals have become cheaper as the mining sector slows down. Salaries are declining.

The weak Canadian and Australian dollars lower the costs of mining in those countries.

To take an example, Klondex Mines owns two mines in Nevada. Their share price has gone up thanks to rising production and high gold grades. The old saying is that “grade is king,” which certainly applies here.

I’ve also talked about Kirkland Lake Gold (KGI.TO), a small gold miner located in Ontario. The company was losing money back in 2012 and 2013 when gold prices were between $1,600 and $1,200 per ounce, but it has managed to improve its efficiency and is making money at the current gold price.

Sure enough, investors have rewarded the company for improving profits even as gold stays low. From around C$2.20 in December 2013, the share price has doubled to around C$5.60 as of late September, 2015.

Companies are certainly affected by the gold price. Kirkland Lake has fallen from a high of over C$21 per share back in 2011.2 But they’re not completely tethered to gold either. And as the gold price remains in the current range over $1,100-$1,200 per ounce, other factors besides the gold price are becoming more important, such as the quality of the mines and the efficiency of their operators.

These tend to be small or mid-sized mines that are doing well, not major miners. Does the market prefer smaller miners over big miners?

No, it’s just that big miners tend to have a large number of mines in different countries and with different profiles. Their best mines are balanced out by their lower-quality mines. They also get less of a boost from cheap currency in any particular location, because their mines are usually scattered around the world.

A small miner’s share price tends to reflect the value of a single mine. Depending on factors at those mines, some are heading higher while others are sinking. But with big miners, there tends to be a washout between the good and the bad. So they tend to move less dramatically.

Most of the major miners are still heading lower, which suggests that investors see more bad than good. Does having lots of mines tend to reduce efficiency overall?

That’s a very big part of why the majors have sunk lower. Investors have punished these companies for bad moves in the past. That has put an additional discount on their share prices.

Say a small company like Klondex is successful at operating its mines and starts to accumulate lots of cash. Their shareholders might start demanding more growth.

That’s where problems start. There aren’t many high-quality mines available out there. In order to grow larger, a miner might have to lower its standards.

As a result, majors tend to have a handful of very good mines -- maybe 2-3 out of a portfolio of 20 or more.

What should investors do in order to play this trend?

You used to buy small miners as takeover targets, but that way of thinking has changed. Takeover activity might remain tepid for a few years. In fact, many major miners are trying to sell mines.

As long as the gold price holds steady, some companies will be able to grow their revenues and profits.

So I’m looking at specific companies that are small enough to improve a single mine and get a higher share price.

A weak Australian dollar should also help Aussie miners. Canadian miners should get a boost too as their currency slides as well.

If the gold price tanks again, I doubt any gold stock will be unaffected. But recent price action shows that some gold stocks can recover without a broad bull market for gold.

P.S.: Steve Todoruk is a broker at Sprott Global Resource Investments Ltd. and worked as an exploration geologist prior to joining Sprott. You can contact Steve at stodoruk@sprottglobal.comor by dialing 800-477-7853. Steve offers a complimentary portfolio review of your resource stocks.

Related: Steve Todoruk: The only USA-based stockbroker who's also a geologist

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