There is a constant threat of investors getting trader-vision. News sources give play-by-play action on how the markets will open along overnight trading in foreign markets. The temptation is to be short-sighted and trade the market blips while missing out on the big picture and trend. Let's take a step back and look at the long-range chart for gold plus one stock that could be a good play going forward.
Gold Analysts Using the Shotgun Approach
The price forecasts for gold are as wide as the grand canyon. Brian Dennehy of independent financial advisers sees a correction toward $1,000 per ounce with a range that goes as low as $700. It should be noted that this estimate was based on technical analysis, which is biased toward the practitioner.
Others look at the current economic environment and the "solution" of inflationary money printing (aka quantitative easing) as pushing gold to new highs. Peter Schiff uses this and other fundamental reasons to forecast gold prices being at parity with the Dow Jones Industrial Average at some future date. In an interview on CNBC's Fast Money Peter Schiff suggested a couple possibilities, which included $5,000 and $10,000 per ounce gold prices.
Historical Trending Pattern of Gold
The price of gold, as tracked by a gold-based ETF (GLD), appears to trade in a fairly stable multi-year trend. Look at the past five years on the quarterly candlestick chart below.
(Click charts to expand)
From 2005 to the end of 2007 we saw a healthy upward trend in a fairly tight range. 2008 was a volatile year followed by another three years of a tight upward trend. Note that our foreword trend projection is based on opening and closing prices for the quarters and not the full range of trading prices. If the trend continues - and current prices are well within the bullish trend channel - then we can expect a range of $1,900 to $2,200 by the end of 2012. If you include the full gamut of prices (candle wicks or shadows), our forecast price range would also increase to a potential high of $2,600.
As someone with experience day-trading I have learned the costly lesson of following the bigger trend and playing the pullbacks. Gold might correct at some future date but as we sit today, it is behaving normally within its uptrend on a quarterly chart. Given the current upside in gold, what is one small gold stock that could have significant potential in 2012 and beyond?
The Canadian Gold Nugget Named Loncor (LON)
Loncor Resources is a gold junior in the Democratic Republic of the Congo. One of the largest gold producers, Newmont (NEM), has a 17.8% stake in Loncor. Newmont is no stranger to African gold with about 20 percent of its core assets in two African projects. This is a vote of confidence from a large and experienced player. But what prospects does Loncor have?
The Ngayu project covers 2,200 square kilometers, where Loncor has optioned iron ore rights to Rio Tinto DRC Orientale (RIO) and retained all the gold rights. The other project is the North Kivu with an area of 17,760 square kilometers, which is located along a strike between two major gold belts - one dominated by Banro Corporation (BAA) and the other by Randgold (GOLD) and Anglogold (AU). Our focus will be on a recent development in the Ngayu project in the Makapela prospect.
Makapela Prospect
On February 17, Loncor reported positively on drilling results in the Makapela prospect. Coming up with a share price valuation on the other hand is much more difficult at this early stage.
- Vein 1 has over 350 thousand ounces by my estimates based on drillings.
- Vein 2 has another potential for 470 thousand ounces in the most significant grade zone with another section slightly smaller with less potential.
In addition to this there are lower grade veins and extensions that could significantly boost that number. One significant intersection that needs further drilling to assess the potential has a strike of 1.5 kilometers with rock chips of up to 18.8 g/t of gold. Based on early drilling results there could be another half a million (based on some personal bias and estimates). Another possible extension to vein 2 could yield up to another million ounces.
In the Makapela prospect I estimate a minimum of 3 million ounces but it could be much higher than that too. (I believe the maiden resource, expected in the latter half of 2012 will be less than 2 million oz but will grow with further explorations) Additional testing needs to be carried out for a more accurate estimate. How might we value Loncor shares based on these results?
In addition to this narrow vein high grade deposit at Makapela, Loncor has started exploration drilling at its Itali area, in the broader region of what it calls the Imva Fold (a feature that could concentrate contained gold) that is demonstrating 38 meter widths and consistent lower but still decent grades of just under 3 g/t from surface to depth. The Itali region requires much more work but is showing encouraging signs.
Loncor Share Price Estimate
We will estimate using 3 million ounces (quite conservative in my opinion) in the Makapela project. We will assume a gold price of $1,500. We will include cash costs per ounce of $500 leaving $1000 per ounce margin. If it takes it 12 years to mine the 3 million ounces and we apply a 20% discount rate of return, I get a present value of $5.78 per share.
Keep in mind that there is a lot of guesswork involved in this estimate. However, we have not considered the other projects that also have high potential and the upside for current gold prices. If gold were to stay above $2,000 per ounce we might imagine prices three times that high (assuming constant cash costs). There will be a wide variance on resource estimates, price of gold and desired discount for risk. For my profile I find that Loncor is worth at least $3 per share in the short term from this one project, but it could be as high as $8 - $9 once you factor in the other projects and a higher gold price.
These estimates will need to be adjusted going forward based on numerous factors relating to mining in the DRC, drill results, the price of gold and much more - but I see at least a double-bagger with Loncor over the year - possibly more. If you take the long-term view of gold and Loncor I say it is a good buy.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
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