As you probably know, gold stocks have taken off this year.
The VanEck Vectors Gold Miners ETF (GDX), which tracks large gold stocks, is up 112%. That’s more than 16 times the S&P 500’s return this year.
You might see this and think you already missed out on gold stocks. After all, you don’t get many chances to double your money in eight months.
Gold stocks have also cooled off recently. GDX hasn’t set a new high since August 2. It’s down 10% over the last three weeks.
This doesn’t worry us. During the 2000–2003 bull market, the average gold stock gained 602%. The best ones soared more than 1,000%.
You also have to remember that bull markets never go straight up. It makes sense for gold stocks to take a “breather” after such an explosive start to the year.
That’s why we’ve encouraged readers to use down days as buying opportunities. But most investors can’t tell the difference between a world-class gold miner and a crummy one.
That’s where we can help…
Louis James, editor of International Speculator, has been analyzing gold stocks for more than a decade. He understands the geology. He’s visited 500 mines around the world. And he’s on a first-name basis with CEOs of some of the world’s biggest gold miners. He’s a true industry insider.
Gold mining is a tough business…
Louis wrote in this month’s issue of International Speculator:
Say you have a million-ounce gold deposit. You mine 100,000 ounces per year, making lots of money. Great. But if you don’t find more gold, you’ll run out in 10 years. You’ll be out of business.
Unfortunately, exploration is hard. Even the best explorers in the world fail at it repeatedly. They only succeed because they keep at it year after year. Even then, eventually, all winning streaks come to an end. Many geologists never make an economic discovery in their entire careers.
To hedge their bets, gold companies need to always be looking for more gold…
But there’s a problem. Gold exploration is expensive.
Many companies spend millions of dollars each year looking for rich gold deposits. Sometimes, it pays off. Other times, gold companies find nothing.
Because it’s risky, exploration is one of the first things miners cut when money gets tight. And that’s exactly what’s happened over the last few years.
As you probably know, gold was in a bear market for the better part of the last five years. Between August 2011 and last December, the price of gold plunged 45%.
Low prices forced gold miners to cut back on their exploration efforts. You can see in the chart below that gold exploration spending has plummeted since 2012.
“Takeovers” are another way for gold companies to find gold…
A takeover is when a bigger company buys a smaller company. All sorts of companies use them to grow, but they’re especially important to the gold industry.
There is never any guarantee that any company will be able to find enough new ore to replace what it mines out.
And no large company wants to become a small company – or cease to exist entirely. So, in addition to their own exploration efforts, all major miners have M&A [mergers and acquisition] teams. They keep track of successful exploration efforts and move in with takeover offers when one looks like a good fit.
Like exploration spending, M&A activity has plunged in recent years…
You can see in the chart below that M&A spending has been falling since 2010.
For the last five years, most gold companies have been mining gold they already had…
Meanwhile, folks are buying gold at the fastest rate in history. According to the World Gold Council, gold investment demand hit an all-time high during the first six months of this year.
This isn’t sustainable. Louis explains:
The big boys have cut exploration, and they haven’t been shopping. They have no choice but to start taking over successful exploration companies. It’s that or get taken out by the competition themselves.
Louis knows what the “big boys” want to buy…
According to Louis, a prime takeover target has a project with these attributes.
It’s BIG. As a rule of thumb, a project with five million ounces of gold is what big gold companies look for.
It’s rich. Large gold companies want projects that with high-grade deposits. They also consider proximity to infrastructure, local energy prices, elevation, snowfall, labor issues, and metallurgy… basically anything that affects how profitable a mine will be.
It’s got upside. The project should be scalable.
It’s safe. A relatively safe pro-mining jurisdiction is a big plus.
It fits. Takeover targets should fit with a company’s overall strategy.
Louis has nine companies in his portfolio that check these boxes…
And that means International Speculator subscribers stand to make massive gains.
You see, a company’s stock can skyrocket when it gets bought out. That’s because big miners often pay a “premium” to buy a smaller miner.
Let’s say a small gold stock is trading for $10 a share.
If a big gold company likes what the small company has to offer, it might offer to buy the company for $15 a share. That’s a 50% premium.
This would likely cause the small gold stock to jump from $10 to $15, the takeover price. If you already owned the stock, you could have made 50% in a day.
According to Louis, eight deals like this have already happened this year. The average premium for these transactions was 49%. One company was bought for a 56% premium. Another for a 58% premium. A few weeks ago, a large miner paid an 89% premium to buy a small Canadian gold company.
To have a shot at these huge gains, you have to act soon…
With gold prices up 27% in 2016, miners can afford to do takeovers for the first time in years.
Because of this, we could see many more deals in the coming months. And that could mean explosive gains for investors who own the right stocks.
Editor, Casey Daily Dispatch
P.S. Louis has nine stocks that he calls “excellent takeover candidates.” His latest pick, a small gold stock located in Canada, has everything a big miner could ever want in a takeover candidate. It’s as close to a sure thing as you’ll find in the resource space.
This short video explains how to access Louis’ top investing ideas. It also reveals the “unusual” method Louis uses to find gold stocks with massive upside. His secret strategy has already handed International Speculator readers a dozen gains of more than 100% this year. Watch this FREE presentation now.