The prospects for profits in the Yukon

As gold pushes to new highs, one Canadian analyst is intrigued by a junior gold stock that is building a stake in the new Yukon gold rush.

Gold is hot again.

The price shot up by almost US$20 yesterday. Yet is this really anything new?

Through more than three years of crisis and recovery, gold has been pushing through new barriers. It has generally been prized as “a store of value,” a haven of security in an insecure world.

But can you get rich with gold mining stocks? Senior gold stocks can have some very big gains, as they did yesterday. As a rule, however, they haven’t matched the spectacular rise of the metal itself.

Perhaps it’s best to go back to the basics. The Yukon gold rush.

Not the one the late Pierre Berton wrote about so eloquently, but the one that is taking place right now.

The white gold district in the Yukon is on the verge of a major boom, writes Mr. Brian O’Hara in Investor's Digest of Canada.

Mr. O’Hara, a writer with a background in mining engineering and personal finance, has a particular stock he likes.

As is usually the case with junior resource stocks, his confidence in the company is largely based on the people that are running it.

While he assesses this company’s prospects, he gives us an insight into a rich mining region that may have three decades of discoveries and growth ahead of it.

The forest not the trees

We visited the Yukon and its blossoming gold rush last autumn in the company of an advisory that covers junior resource stocks (see Daily Buy-Sell Adviser, October 12).

Six months later, enthusiasm for the region’s prospects has not waned. Mr. O’Hara sees it exemplified by a man who is “looking at the forest while others are looking at the trees.”

Mr. William Sherriff is the chairman and CEO of Golden Predator Corp. (TSX/V-GPD). He is also “a geologist with a keen sense of observation which he applies to the big geological picture that others don’t look for,” says the writer.

Exploration companies run on two things. The first is the track record of the people in charge. The second is the financing they attract, which is directly related to the first.

Mr. Sherriff has a big win to his credit, points out this analyst. He was the co-founder of uranium mining firm Energy Metals Corp. In 2007, he sold it to Uranium One Inc. (TSX-UUU) for $1.8 billion.

He has staked his new company’s future “on becoming the leading gold explorer in Canada’s Yukon.”

Big discovery

The first firm to make a big discovery in the white gold district was Underworld Resources, which found a rich vein (one million ounces grading at 3.2 grams per tonne) 95 kilometres south of Dawson.

That find was snapped up last June by Kinross Gold (TSX-K), one of the seniors that has seen its share price jump in the past two days. It trades at $15.91 and yields 0.6 per cent on its $0.10 dividend.

“The willingness of a major gold company like Kinross to buy these resources at an early stage indicates the Tintina Gold Belt is a major camp in the discovery stage.”

Building upon this knowledge, Golden Predator plans to spend $11.5 million in the Yukon this year. Indeed, it began spending it early, since it is the only gold exploration company drilling in the Yukon in the winter.

Its biggest site is Brewery Creek near Dawson, a former open pit mine that produced 278,000 ounces of gold oxide ore between 1996 and 2002. The company will spend $2 million there this year.

If it spends as much as $6 million by 2015 it has an option to earn a 75 per cent stake in the site from Alexco Resource Corp. (TSX-AXR). Alexco is actually a silver miner. It received a favourable report in our October article on the Yukon and has gone from strength to strength. $6.42 a share then, it trades at $9.60 today.

Meanwhile, the Brewery Creek site has N1 43-101 indicated resources (the standard measure of disclosure in the industry) of 3.98 million tonnes, grading 1.1 grams a tonne of gold and inferred resources of 2.2 million tonnes grading 2.01 grams a tonne.

Very profitable returns

Golden Predator has three other Yukon sites in the exploratory stage. Crew Creek will get $3 million this year, Grew Creek $2.5 million and the Harlan zone $1 million.

It also has projects in Nevada. The company’s royalty division is expected to bring in over $1 million in revenue this year from 70,000 acres in that state. That original estimate was based on a price of US$975 an ounce — almost $500 below the actual price.

The company already has $25 million in cash on its books, says Mr. O’Hara. Much of that is from a recent equity underwriting of $22.7 million.

Golden Predator isn’t covered by any mining analysts yet, notes the writer, and hasn’t attracted a drove of individual investors.

On the other hand, it has a strong stable of institutional investors. Its major shareholders are Front Street Investment Management, U.S. Global Investors, Sprott Asset Management, Ned Goodman Investment Counsel and Mr. Sherriff himself.

These investors are undoubtedly looking favourably at the “very profitable returns” shareholders got from the Energy Metals deal, Mr. O’Hara tells the readers of Investor's Digest of Canada. What’s more, seven seasoned geologists sit on the board of directors.

The company is also making inroads in the community. Ms. Janet-Lee Sherriff, the CEO’s wife, “fell in love with the Yukon and has worked extensively with First Nations Communities.”

More individual investors appear to have signed on in the relatively short time since Mr. O’Hara wrote his article. The shares, trading at $0.84 then, are at $1.03 today.

The price of gold is up over $5 today, sitting at $1,457 an ounce. Not all investors will seek to profit by joining the Yukon gold rush. But some will tell you there’s no better way to strike it rich.

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