TORONTO (miningweekly.com) – About halfway through the first quarter, analysts at Dundee Capital Markets noticed that exploration companies that had weeks earlier appeared to be dead in the water, as investors abandoned all but a handful of names, were steadily starting to leave the laggards behind as a combination of the gold price rally and improved investor sentiment blew wind in their sails.

On the back of a 17% rise in the price of gold during the first three months of 2016, the coverage universe of 47 resource stocks that Dundee tracked on an enterprise value per ounce (EV/oz) metric, based on a total mineral inventory (TMI) had risen steadily, helping analysts to differentiate those companies that had the benefit of wind in their sails from the idlers and providing a good measure of the potential upside that the market was willing to pay for quality gold opportunities.

In a research note published on Thursday, research analysts and co-authors Ron Stewart and Erik Bermel noted that the average EV/oz had so far this year improved from $13/oz to $32/oz, reflecting improved investor sentiment toward exploration-focused companies which, in turn, reflected the 15% year-to-date improvement in the gold price to about $1 220/oz.

The analysts noted that Dundee’s universe displayed a wide range in valuation from the lowest quartile that averaged about $5/oz, to the upper quartile group that averaged about $70/oz and peaked at more than $150/oz.

Similarly, the price to net asset value (P/NAV) of developers in Dundee’s universe had increased by about 75% from 0.3 times to 0.52 times. “This reflects an improvement in the economics of the project on the back of the increased commodity price,” the analysts argued.

Dundee noted that its universe was constantly changing as companies got “plucked-off” by acquirers interested in replenishing their development pipeline, as demonstrated by the most recent example when Goldcorp announced a C$520-million takeover offer to acquire Kaminak Gold at an EV/oz value of $73/oz, or 0.6 times the consensus NAV.

“We expect a sustained or rising gold price to prompt further sector consolidation as producers use their paper to acquire high quality projects with development potential and resource upside.”

The analysts advised that, owing to the stage of development and consequent technical and financial risks associated with explorers and developers, they remained consistently discounted to producers and, therefore, represented compelling targets.

Producers constantly scoured this space looking for the ideal project opportunity, Dundee advised, noting that, as a result of the value delta between the groups, they could offer healthy acquisition premiums and still demonstrate value accretive metrics on a deal.

The analysts offered top picks from their coverage universe, stating that they continued to view Belo Sun as a warrant on Agnico Eagle and, since its Volta Grande project, in Brazil, was a relatively low-grade project, it offered excellent leverage to improving gold prices.

Continental Gold had also seen positive momentum with the recent removal of illegal miners from its property, but the stock was still trading at a discount to explorer/developer peers, the analysts advised.

Both Dalradian and Lundin Gold were expected to soon release feasibility studies, which could remove risk and prompt construction decisions. Oban Mining was the least expensive on an EV/oz basis and could see a re-rating as it announced its Marban resource update shortly.

The analysts also pointed out that Sabina Gold & Silver was now cashed up after closing a $32-million financing to complete the permitting process and its six-million-ounce Back River project, in Canada’s Nunavut Territory, offering considerable upside from the initial case feasibility study released in September last year, including the potential processing of the two-million-ounce George deposit.