Gold Price Disconnect
Why Junior Miners Are Next
This article is for general information only and is not personal financial advice.
Gold’s been strutting around like it owns the place. At a time when the tech-heavy Nasdaq is also rampaging higher. Hardly risk-off flows!
More like an everything bull market.
That smells like money expansion in play. And it makes sense after a long period of constrained bank lending, the shackles are off. The theme is ‘Buy everything’.
In the last few days a US-China trade standoff and a Bitcoin liquidation have caused some jitters. All the more reason to like gold. If risk-off flows really start, this rally might just be the prelude.
But while gold soars, miners aren't following in step. It's a funny old miner market. The established safe plays are tagging along, but the speculative end of town is lagging badly.
That's the opposite of how it's meant to work. Normally, junior miners lead gold rallies because their leverage to the metal’s price is so extreme.
There's a massive price disconnect. And it kicks in hardest at the emerging producers and earlier-stage explorers. They’re just not being priced like gold stocks.
Even when projects carry marginal risk, the market’s doubling down on doubt. The re-ratings are only happening once the cash starts to flow.
It’s clear the share market is wildly inefficient at pricing gold miners. And that’s great news for astute investors. The market’s stressing execution risk and overlooking cash-flow torque.
That anomaly is worth paying attention to.
The Great Gold Value Chain Disconnect
Start with the numbers. Gold’s up roughly 50% this year. The big producers, such as Newmont (ASX:NEM), Barrick Mining (NYSE:B) and Northern Star Resources (ASX:NST) have rallied too, albeit grudgingly.
Comex Gold Futures vs Newmont, Barrick Mining and Northern Star Resources (Source: TradingView)
But the juniors are more of a mixed bag.
Gold stocks are a leveraged play on the price of gold.
When gold’s at $3,000/oz, an AISC of $2,000/oz gives a nice fat profit margin of $1,000/oz. Pump gold prices up by 100% to $6,000/oz and margins jump $4,000/oz. That’s a chunky 4x profit increase.
Operating leverage in action!
Historically, explorers and developers have given investors two to three times the leverage of the gold price.
But the relationship isn’t consistent. Gold stocks are just as exposed to general stock movements as the price of gold. So, there are frequently periods of disconnect.
In the recent gold bull run, explorers aren’t even delivering half what you’d expect. This time around, the big moves started with the established players that have more or less just tracked the gold price.
In the last couple of months we’ve seen junior miners with cash coming in start to play catch up. The laggards now are the riskiest end of the mine lifecycle.
If the gold price were a nightclub, the explorers are the guys stuck out the front trying to convince the bouncer that they’re close friends with the DJ.
Part of this is macro. Rising costs, tighter capital markets, ESG paranoia, the whole laundry list.
But there’s a much bigger factor at play. Retail traders just don’t understand how to price explorers and developers.
On top of that, a lot of the big funds just don’t want to play in the explorer end of the market. So the big money comes from insiders and niche funds with specialist knowledge.
Thus we see big re-ratings occur after the cash starts rolling in.
Drilling Certainty From Speculation
The more a company drills, the more likely they are to hit gold. After all, you can’t find if you don’t look.
But hitting those precious ounces isn’t guaranteed. Exploration returns are notoriously low, and most projects quietly burn cash in the background.
That’s where experience counts.
The best teams know where to look and understand the terrain they’re working with. They don’t just drill holes and hope for the best. They test hypotheses.
Each metre drilled reduces uncertainty, and in markets like this, uncertainty is what’s holding the juniors back.
Here’s where the disconnect gets interesting.
The market is punishing early-stage explorers because it’s pricing in the low average success rate. Statistically, that makes sense.
Greenfield projects, those out in untouched ground, only deliver meaningful discoveries about 0.5% of the time.
Still, when a greenfield explorer hits, the payoff can be spectacular. The trick is identifying which ones are close enough to proven districts to enjoy a halo effect. Projects with the right geological address, even if they haven’t struck yet, hold more promise.
Brownfield plays, near known deposits or structural corridors, succeed roughly 5% of the time.
That’s still tough odds, but it’s ten times better than greenfield wildcatting.
Drilling metres in brownfield zones tend to deliver higher discovery rates because the underlying geology is already half-solved. They’re not guessing where gold might be hiding.
They’re extending known systems, chasing magnetic anomalies, or following geochemical breadcrumbs. If the magnetic highs light up and your geochem matches, they’re probably sniffing something juicy.
The average investor isn't a specialist gold exploration geologist. So it all just looks like risk and uncertainty. But these mispricings aren’t confined to the pre-discovery explorers.
Even companies sitting on substantial, well-defined resources are being marked down.
Projects with drilled-out deposits, clear economics, and visible development paths are still trading with extreme risk built in. The market’s pricing everything pre-revenue with scepticism.
The explorers will eventually catch up. They always do. That section of the market as a whole will start to attract more attention as the more obvious opportunities become fairly priced.
An acquisition or two by majors hungry for ounces, and suddenly speculation will be back in the risky end of town. Money moves predictably through value and risk chains.
How to Position for Gold Explorer Re-ratings
There are plenty of ASX-listed explorers sitting on solid ounces with decent grades. And yet investor interest is tempered.
The gold price is certainly not the problem.
The issue is the market’s inability to correctly gauge these projects, and excess caution when it comes to exploration, funding and development risk.
This leads to heavily discounting of all the pre-revenue groundwork. We see opportunities that fit into two categories.
Pure Exploration
The first is exploration tenements with known geologies and an experienced team capable of efficiently developing deposits. These are often valued the same as average management teams shooting in the dark in greenfield sites.
We like projects with proximity to producing mines, aligned structural corridors, and magnetic or gravity anomalies that tell a consistent story.
Funding is one of the most important factors at this stage to be aware of.
Resource Defining
The second obvious mispricings come from projects with established deposits with strong economics yet to be formalised with a Pre-Feasibility Study (PFS), Definitive Feasibility Study (DFS) and a Net Present Value (NPV).
Even with an abundance of evidence, investors often won’t do the math themselves. Even the back of the envelope, rough numbers.
When that NPV value is released, it gives investors something tangible to hand their hat on. Active drilling campaigns on these projects are often discounted by the market, despite the strong potential for good newsflow.
While these projects may get a strong re-rating on DFS, investors can still obsess on execution risk until they see six-months of positive cashflow.
The catalysts are obvious.
High-grade intercepts that expand resource envelopes
Feasibility studies proving economics
Consolidation within districts that pull smaller plays into bigger narratives
The trick is spotting the stories before the re-rate wave hits. When that happens, the laggards often move 5x or more. Investors finally believe the ounces are real.
We favour developers with deposits that are already economically viable and big drilling campaigns underway. Shallow and high-grade deposits are major pluses.
We also want to see experienced leadership and strong insider backing.
Developers with drill programs designed to convert resources or extend high-grade zones are where you’ll find better probabilities.
The edge
If you’re looking for the real leverage in this cycle, don’t just watch the gold price. Understand where the value sits in the risk chain, and the projects with the biggest re-rating potential.
Don’t buy hope and don’t shoot blindly. Exploration is still a very high-risk endeavour.
Buy probability.
The more strategic the drilling, the faster the re-rate once results land. And if you must punt on a greenfield dreamer, make sure it’s in a postcode that’s at least proven to host gold nearby.
Check out The Markets IQ’s latest Explosive Growth stock pick for an explorer that ticks all the boxes.
A strong management team and heavy insider backing
A million ounces in the ground at high grades
A massive drilling campaign underway to expand resources
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This publication has been prepared by The Markets IQ, a division of Vitti Capital Pty Ltd (ABN 13 670 030 145), which is a Corporate Authorised Representative (001306367) of Point Capital Group Pty Ltd (ABN 41 625 931 900), the holder of Australian Financial Services Licence 518031. This report is for general information only and does not take into account your objectives, financial situation, or needs. It is not personal financial advice or a recommendation to buy, hold, or sell any security. You should consider whether the information is appropriate in light of your circumstances and obtain professional advice before making any investment decision. This report is intended solely for wholesale, sophisticated, or professional investors within the meaning of the Corporations Act 2001 (Cth).
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