Klondex, Newmarket, Richmont...3 Underground Miners Flying Under The Radar

BMO Capital Markets have initiated coverage on three underground mining companies namely Klondex Mines Ltd.

, Newmarket Gold Inc

and Richmont Mines Inc. (USA)

, with the first two being rated Market Perform and Richmont Mines started with an Outperform rating. Analyst Brian Quast prefers Richmont over the other two miners because it has the most reasonable P/NPV (price to net present value), and Island Gold can deliver the best bang-for-buck to shareholders. Each of the three companies has one asset that dominates the corporate valuation. Klondex has Fire Creek, Newmarket has Fosterville, and Richmont has Island Gold. "This group has dramatically outperformed the gold price and most other gold equities over the past year, more on the back of operational and exploration success than simple currency tailwinds," Quast said in a note to clients. Exploration success has the biggest absolute impact at Island Gold, with Fosterville a close second. Foreign exchange has been a huge tailwind for both Newmarket and Richmont as the Australian and Canadian dollar denominated gold prices reach near all-time highs. However, it should not be assumed that all share price gains can be attributed to favorable currency movements, since both companies have improved operations over the past 12 months or so. Quast noted that when examining gold mines, underground gold mines have a history of outperforming open pit mines, and tend to garner a premium. This group of three underground producers tends to trade toward the upper end of valuation, particularly on an NPV basis. P/NPV of Klondex stands at 1.9 times, Newmarket at 1.5 times and Richmont at 0.9 times. Richmont trades at P/NPV levels below peers, and Island Gold has the biggest potential to move the needle for shareholders. "Given the opportunity for exploration success that exists at all three of these companies, it seems logical that the market would impute some level of success before the drill results are released so that P/NPV levels are likely to remain elevated," Quast added. Meanwhile, the analyst noted that acquisition is a less likely exit point for an investor. When looking at possibilities for M&A opportunities, these companies tend to garner a premium valuation, making any potential acquirer think twice before making a bid. However, the analyst is not ruling out the possibilities of consolidation within the group. Among the three miners, Newmarket has the most leverage to movements in the gold price. Quast noted that Newmarket increases NPV the fastest in a rising gold price environment, while Richmont has the least leverage to movements in the gold price.