The U.S. is gripped in a wave of civil unrest, Europe is desperately trying to stimulate its economies, and all indicators point to a deep, savage, recession. For the moment the U.S. stock markets are continuing to hold steady but that may not last. As a result gold has seen a surge in interest with the Bank of America predicting that gold prices could rise to $3,000. This in turn has created an incredible opportunity for gold companies like Newmont Goldcorp (NYSE: NEM, TSX: NGT) and GFG Resources Inc. (TSX-V: GFG, OTCQB: GFGSF). One group in particular that will benefit are small-cap gold companies like Inca One Gold Corp. (TSXV: IO.V, OTC: INCAF, FRA: SU92.F).
Why are gold prices rising?
Gold is essentially a safe haven asset. When investors are concerned that stock markets or banks are entering a downturn they often turn to gold to shield their assets. This means that the worse a recession looks the better that gold will typically perform. For example during the “great recession” gold prices rose by 32.8%.
In this context the Bank of America’s record prediction makes perfect sense. Despite a strong recent performance by the stock market, and a wobbly week for gold, there are still deep problems. Many analysts are deeply concerned about the amount of money that The Fed is printing and there is the small matter of the corporate debt bubble. Taken together this means that in the long term gold is likely to continue to perform strongly and will probably hit its price targets.
What do rising gold prices mean for gold companies?
In short? Good news. The stock price of gold companies is closely tied to the price of gold. This hasn’t yet fully reflected on the marketplace and as a result many gold companies today remain deeply under-valued. This is because the value of their underlying asset, gold, hasn’t yet been priced into the overall value of the stock.
This effect is particularly pronounced for small-cap gold producers. Their prices are typically lower and with strong enough fundamentals even a slight increase in the price of gold can be hugely significant. To understand how this works let’s take a look at one of the gold industry’s most interesting stories: Inca One Gold Corp. (TSXV: IO.V, OTC: INCAF, FRA: SU92.F).
A case study in gold: Inca One Gold Corp
Inca One Gold is a small cap gold producer with all of its operations based in Peru. The company focuses on servicing small-scale and artisanal gold mining in Peru via two gold milling facilities. The company has a positive relationship with the local government authorities and is poised to break out thanks to a number of positive factors.
The Peruvian advantage
To start with the company’s choice of focus is Peru. The South American nation has some of the world’s most important unexploited gold reserves and a significant portion of its economy is supported by a growing gold mining industry. Inca One’s mills primarily service Peru’s artisanal mining sector. Since 2001 Peru’s small-scale gold mining industry has grown by 81% and this figure is expected to continue to grow rapidly over the next decade.
This means that Inca One will be able to grow alongside the Peruvian economy and have access to a steady stream of reasonably priced gold for the foreseeable future. The company is currently using just 35% of its total capacity pre-COVID, which leaves plenty of room for growth.
Riding the market
The value of gold in general is on the rise. As the industry continues to grow this will have a significant positive effect on the outlook for Inca One. According to a recent report by the Fundamental Research Corp. Inca One is likely to see gross margins of about 15 to 20% based on its production.
Even after discounting the average metrics of the industry by 75% the report demonstrates Inca One as significantly undervalued compared to other gold companies with an enterprise value of just $834 per annual production ounce, compared to an average of $5,557 per ounce. This means that the company is likely to see a significant growth in stock price over the coming months as investors realize their error.
Selling direct to consumers
The report by Fundamental Research Corp. notes that its figures “do not account for any upside potential”. This includes the company’s recent announcement that they are building out a gold bullion store with the intention to sell directly to consumers.
This is important because it will enable Inca One to take advantage of the gold coin premium. The most prominent example is the American Gold Eagle, which has a premium of around $71 over gold. This enables producers to get a better deal on their gold and it also enables companies to create scarcity and shield themselves from any sudden shifts in gold’s spot price.
Inca One intends to build its own selection of coins, based on Incan heritage, and offer these directly to consumers. This approach will add a significant premium to each Oz of gold the company produces, further increasing the value of Inca One as a company.
An undervalued company with huge potential
In the long term the market looks good for gold, and thus good for undervalued small-cap gold producers like Inca One Gold Corp. (TSXV: IO.V, OTC: INCAF, FRA: SU92.F). Economic uncertainty has sparked a renewed interest in gold from investors and there are few companies as well positioned to take advantage of that as Inca One.
DISCLAIMER: This article was written by a third party contributor and does not reflect the opinion of Born2Invest, its management, staff or its associates. Please review our disclaimer for more information.
This article may include forward-looking statements. These forward-looking statements generally are identified by the words “believe,” “project,” “estimate,” “become,” “plan,” “will,” and similar expressions. These forward-looking statements involve known and unknown risks as well as uncertainties, including those discussed in the following cautionary statements and elsewhere in this article and on this site. Although the Company may believe that its expectations are based on reasonable assumptions, the actual results that the Company may achieve may differ materially from any forward-looking statements, which reflect the opinions of the management of the Company only as of the date hereof. Additionally, please make sure to read these important disclosures.
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