The Argonaut Algorithm: How fund manager David Franklyn picks standout junior gold stocks

Argonaut Funds Management’s David Franklyn talks the key metrics the resources investor uses to identify undervalued junior gold stocks.

This is how Argonaut's David Franklyn picks the gold from the dirt. Pic: Getty Images

Argonaut Funds Management's David Franklyn joins Stockhead to share investing secrets from the high-conviction resource sector investing fund, including his junior stock pick of the month.

There's a lot to be excited about when it comes to gold, says Argonaut Funds Management's David Franklyn.

"With interest rates trending lower, ongoing geopolitical risks, and the potential for a Trump presidency to add further global volatility, gold is attracting increasing attention," he said.

But that doesn't mean every post is going to be a winner, especially when you look down the list at the smaller gold explorers who have the potential to significantly rerate.

Franklyn says Argonaut takes a "methodical and systematic approach" to evaluating small gold explorers and developers.

"One of the key tools we’ve developed to assist with this process is the 'Argonaut Algorithm'."

What is the Argonaut Algorithm? Franklyn says it combines essential inputs and assumptions to rank stocks based on expected returns, helping the fund manager assess their potential between now and when they are likely to enter production.

Four key questions guide their assessment.

1) How would the market rate a company relative to current producers if it delivers on its promises and was in production today?

"To answer this, we look at factors such as management quality, scale, orebody grade and quality, access to infrastructure, approvals, mine life, and annual production. Location also plays a critical role – projects in regions like West Africa often face steep discounts compared to projects in more stable areas such as Western Australia.

"For example, the average "Enterprise Value to Production" (EV/Production) for ASX-listed gold producers is around $9000 per ounce of production. However, there are outliers — Genesis, a crowd favourite, trades at $17,400 per ounce of production, while Vault is at $5200/oz and Resolute, a West African producer, sits at just $1700/oz.

"This metric offers a valuable guide for emerging explorers and developers, such as WIA Gold (ASX:WIA), Magnetic Resources (ASX:MAU), Santana Minerals (ASX:SMI) and others that progress through the development lifecycle. Importantly, this is a live, dynamic metric that changes daily based on fluctuations in gold prices and sector sentiment."

2) What is the funding requirement for the project?

"Equity dilution is a key consideration here. We assess how much capital a company will need to fund exploration, studies, and development. Early-stage capital expenditure is typically funded by equity, which can lead to rapid expansion of the equity base, ultimately affecting the ability to generate strong returns on a per-share basis.

"Further, a highly regarded management team can raise capital at a higher price than an unproven team, which significantly impacts shareholder returns. Capricorn Metals (ASX:CMM) and Genesis Minerals (ASX:GMD) are prime examples of companies where strong management teams have helped secure better funding terms."

3) Time to Market

"The timeline to production is another crucial factor we examine. We look at where the project stands – is it at the grassroots exploration stage or does it have a defined resource or reserve. We also consider whether feasibility studies have been completed, and the status of environmental studies, First Nations agreements, and mining approvals. The closer a project is to delivering positive cash flow, the more attractive it becomes."

4) Project Risk Rating

"Finally, we apply a project risk rating between 0% and 100%, reflecting the level of risk involved. For example, a project in Western Australia with an approved mining lease, completed studies and access to infrastructure will carry a low-risk rating. In contrast, a project in Mali, which may face political instability and other challenges, will have a much higher risk rating.

"By utilising this comprehensive approach, Argonaut Funds Management is able to make informed investment decisions and navigate the complex world of small gold explorers and developers."

Argonaut's gold pick this month

New Murchison Gold (ASX:NMG)

"NMG ticks the boxes. It has an established high grade reserve, near term production, low capex, capable management and is located in an established gold region," Franklyn said.

"NMG has recently announced a maiden ore reserve of 140oz at an attractive grade of 4.8g/t at its Crown Prince project in the Murchison region of WA and has signed a toll treating agreement with Westgold’s Bluebird mine that will see 130koz treated over a 2.5 year period.

"Production is due to commence in June 2025. NMG will realise approximately 70% of the prevailing months spot gold price and will incur costs related to all onsite mining activities and ore crushing along with pre-production and mining contractor costs of approximately $20m."

Argonaut Funds Management is a high conviction resource sector investor managing the Argonaut Natural Resources Fund and the Argonaut Global Gold Fund. David Franklyn is the Fund Manager for the Argonaut Natural Resources Fund.

Argonaut Funds Management is not providing investment or financial product advice (nor tax, accounting or legal advice) in this commentary and it should not be used solely for the basis of making an  investment decision. Recipients should obtain their own advice before making any investment decision.

Argonaut Global Gold Fund is a shareholder in the NMG.

Argonaut Securities produces research on NMG.

The views, information, or opinions expressed in  this article are solely those of the columnist and do not represent the views of Stockhead. Stockhead does not provide, endorse or otherwise assume responsibility for any financial product advice contained in this article.

Originally published as The Argonaut Algorithm: How fund manager David Franklyn picks standout junior gold stocks