Monday, March 12, 2012

A hell of a lot of miners

As promised, an article on the miners.  I will try to cover as many as I can.  Brace yourself, this will be long.

But first a moment to remember why we care, (as we all know they haven't given us many reasons recently.)

A $3,000 investment in Homestake Mining in 1925 would have bought you about 60 whopping shares at $50 a piece.  That same $3,000 invested in the Dow at 150 in 1925 would be 20 shares.  10 years later the $3,000 investment in Homestake was worth $30,000 AND paying a 5% dividend that would be $1,500 a year, which was the average salary in 1935. (And gas was 19 cents!)  The $3,000 in the Dow, if you managed to hold on to it in the years that followed, after seeing your money more than triple only to then lose 2/3 of it 3 years later, would be worth still only $3,000.  I am unsure of what the yield was on the Dow in 1935 but being that it was a depression and being that your money is still only worth $3,000, whatever it was, was not enough to help much.

That is an example of a well run major miner.  In the 70's we saw what power some of the juniors can have. Some of the returns made on these are literally unfathomable, especially considering the short period of time in which they did it.  Here are a few.

Are you foaming at the mouth yet?  Alright, lets get on to some miners that may have there own shot at such killer returns.

Goldcorp is now the second biggest gold miner by market cap largely thanks to Mr. McEwen at the reigns when no one knew or cared who they were.  Mr. McEwen's leadership is a perfect example of how good management can be extremely beneficial.  Here is a story of two gold miners:  One miner was a rather large company, the other in comparison, not.  As the gold market continued to go no where fast the smaller miner's management, all believing in a coming massive bull market in gold, began stock piling a portion of their production in anticipation of higher prices in the future.  The larger miner took a much different approach, and hedged their forward production at a measly $400/oz.  The smaller miner was right and sold a large amount of gold at now higher prices while the larger miner sold shares to cover their asses. And today, that smaller miner is only smaller than 1 other gold miner.  

All in all,  I believe Goldcorp to be a good company and I think Mr. Jennings is doing a good job.  Their monthly dividend is the only monthly among the majors, although the yield is ...*yawn* around 1%.  I do believe it will be increased however, likely soon as it has been about a year and all the miners are in a keep up with the dividend frenzy.  Some of their recent acquisitions that were heavy in the silver department have allowed them to write off the silver and are now mining for relativity cheap gold costs.   But don't take my word for it, take a look at the company yourself, here is the website.

My call: HOLD
My 1yr Target: $60-62

And now for the other miner in our previous story...

Barrick Gold, or F***-S*** Gold as I like to call them (Peter Munk, the founder of Barrick who is Hungarian, when asked what they will call the company remarked  by cursing in Hungarian,"Call it Barrzak, call it szarick, call it barrick for all I care" ... Loosely translated then the company literally means F*** S***.  Just wanted to share that useless trivia with you.) has given us a perfect example over the years of what not to do.  I personally have never owned a share, although companies I work for have. Regardless, they're the biggest gold miner so they must be included, but if you want my advice, if you some how acquired stock in Barrick for free, sell it and buy Newmont.  Do your own due diligence though, here is the website link.

My Call: SELL
My 1yr Target: $45-55

Newmont is by FAR my favorite miner of the majors.  Management has been true believers in a gold bull market for over a decade and have proven it in with their actions time and time again.  (Like never strangling themselves to death with hedges at $400/oz) They have taken they Homestake Mining play book and are running with it being the first company to implement a dividend that increases as a direct result of higher gold prices.  They are the only gold miner in the S&P 500 as well, which means funds buying the S&P have to buy NEM.  With over 90 million ozs in reserves and 450 million shares outstanding, each share represents 2/10 of an oz of gold.  2/10 of an oz is currently worth $340.  When you account for the $500 oz cost, there is a profit for those 2/10 of an oz worth $240, or over 4x it's current share price.  It is selling for a forward PE of 10.7 with a yield of 2.5%, by far the best in the industry.  Management has spelled out their dividend policy, which will increase 30 cents for every $100 gold goes up from $1600-2000 and 40 cents for every $100 from $2000 and up.  At $2000 an oz gold, NEM will be paying a dividend of $2.70/share or 5% on what it is currently selling for... roll that up and smoke it.

My 1yr Target:  $75-80

Oh, Agnico Eagle, you use to soar like an eagle, now trying to find people bullish on AEM is becoming as endangered as eagles.  Agnico's whole claim to fame was the La Ronde mine in Canada.  The silver they had there was able to drastically reduce their costs so they could mine gold for about $100 an oz or so.  They never had a massive production, they never had massive reserves.  Their shares outstanding is relativity low.  The high flyingness of this stock was due to it's very low costs.  The following chart is what happens to a gold miner that has basically nothing else going for them other then very low costs, when those costs begin to rise.  I am not a fan of this one at all anymore.  Luckily I got out before the onslaught.  Some weren't so lucky.  You may try and play this for a bounce, but I wouldn't expect to see tests of the all time high near 80 anytime soon.  Again though, make your own assessment. 

My 1yr Target: $50

I have owned Yamana in the past but sold it in 2009 for something that I believed was a better use of my money.  It was at the time, but that has now changed.  AUY has been shaping up and looks like it wants to challenge it's all time high in the near future.  With a 1.1 million oz a year production and cost expectations this year of around $250/oz, it's no wonder it's doing better.  The dividend is about 1.3%.  They have are actually a larger company then you might think as they have 745 million shares outstanding the third highest in the industry, giving them a market cap around 12 billion.  I don't keep too on top of this one anymore so be sure to check out the website.

My 1yr Target: $20

Iamgold was the "better use of my money" I was referring to.  It was at least at the time when both it and AUY were 6.  It certainly had the better things going for it, and share price quickly reflected that.  Recently though, IAG has been tanking while AUY has been going up.  I am dismayed at it's performance but I still think the company is doing very well.  The Westwood project opening next year in Canada boarders Agnico's La Ronde mine and I expect similar results that could put some downward pressure on costs.  Also adding 250k ozs a year in production would make it a solid new major property for them.  They also currently have the second best dividend in the industry at 1.7%.

My Call: HOLD
My 1yr Target: $20

Allied Nevada is another example of flying high with low costs.  Silver at their Hycroft mine has made them able to produce gold rather inexpensively.  The result is this stock soaring 9x higher than it was 3 years ago. Not one I watch all that actively, so I'd pay attention to the trend line to see if it holds.  Also keep a VERY close eye on their costs going forward and see if it can be maintained, or you could have an Agnico situation and see this $30 stock go right back down to $10.

My Call: HOLD
My 1yr Target: $45

New Gold has been a very good performing intermediate gold producer.  Costs remain relativity low to some other producers at around $400/oz.  They have a lot of interesting properties including a 30% stake in El Morro with Goldcorp.  They have almost 8 million in reserves and a production expected to be just above 400k oz for this year.  A solid company.  Look to see if support holds in the 9-10 region.

My 1yr Target: $14

Royal gold is the leader of the royalty companies hands down.  After getting beaten around a bit 10 years ago it has exploded due to the profitability of the royalty model.  If you have a gold mine these days, chances are you are paying Royal Gold to have it.  As an alternative to issuing stock to pay the bills, companies have used royalties to fund new projects.  RGLD being a very simple operation, has very little overhead costs and they are not affected by rising costs of the miners.

My Call: HOLD
My 1yr Target: $85

Franco Nevada has been around a bit but just recently moved to the NYSE.  Now, RGLD has competition from another royalty company on a NY exchange.  If you are a gold miner, and you some how made it without having a royalty with RGLD, you probably have one with Franco Nevada.  The royalty model is a great way to profit from a gold bull market as people are quickly finding out.  Mr. Oliphant who sits on the board of directors is also CEO of NGD.  It currently has a 1% yield and is the only gold stock other than GG to pay monthly. Find out more here 

My 1yr Target: $48-52

Silver Wheaton, everybody's favorite silver company was one hell of a good buy at $2.50.  At the 2008 low, one share of Silver Wheaton was worth less than 1/3 of an oz of silver.  Currently 1 share of SLW is worth $2 MORE than 1 oz of silver.  And it pays a dividend of about 1%.  With basically a similar business model to RGLD and FNV, SLW sees nice profits with no concern to them of higher prices.  SLW's cash costs per oz have been under $4 for 7 years straight.  For a list of all their streams and more details go to the website.

My 1yr Target: $48-50

McEwen Mining, formerly US Gold and Minera Andes is Rob McEwen's new company and he even had the balls to put his name on it.  One thing about Rob is, he will always go all the way on something he thinks is good for the shareholder and in this company puts his money where his mouth is by taking no salary as CEO and owning 25% of the entire company.  The merger provided this new McEwen Mining with Minera's silver production and US Gold's reserves.  2012 expected silver production is 2.8 million ozs and 50k ozs of gold.  2015's expected silver production is 7.8 million ozs and 150k ozs gold.  With a CEO that has proved he is one of us, you really should pay attention to this.

My Call: BUY
My 1yr target: $8-10

First Majestic you can't help but love if you bought it back at $3.  Not only does AG get the periodic symbol on the NYSE for the metal they produce, they can say they are the purest silver producer with a higher percent of there money coming from silver sales as opposed to by product.  (Gold, lead, copper, zinc...)  AG's earnings are expected to almost triple from last years and production of 8 million ozs in 2011 is expected to double to 16 million ozs by 2014.  Also, CEO Keith Neumeyer has said many times that as soon as their exploration costs are finished with, their #1 priority is a dividend.  He has said in interviews before the board will discuss it 1Q 2012.

My call: BUY/HOLD
My 1 year Target: $25-30

Fortuna is one of my favorite silver miners.  With production set to increase to 6 million ozs this year vs 4 million in 2011, FSM is clawing their way up the silver miner food chain. 1 of their 2 operations mines silver at a negative cash cost while the other, the San Jose mine in Mexico adds a nice 2 million oz production for this year.  Fortuna recently said at the PDAC conference that they are eyeing acquisitions and want to reach a 14 million oz/year production within 5 years.  With a forward PE of about 10, this one you should watch if your into explosive earnings growth.

My Call: BUY
My 1yr Target: $9-12

Great Panther went screaming when silver took off last year which coincided nicely with them moving to the AMEX.  The result?  Rocketing from about $1 to $5 in a very short period of time.  It has been in a downtrend ever since though that should resolve higher in the near future.  GPL mines a silver equivalent production of 5 million ozs a year, that is broken down to 70% silver, 20% gold and 10% lead and zinc. This is a good one if you like silver but want a little bit of gold in the mix as well.  Robert Archer, CEO whom I have had the pleasure of meeting is a smart guy and I'd feel confident as a shareholder with him running the company.

My Call: BUY
My 1yr Target: $4-5

Aurcana corp is probably my favorite miner right now, and anyone who knows me, that doesn't come as much of a surprise.  AUN.V's shafter mine is going to produce 3.8 million ozs of silver this year sending their annual production sky rocketing from 1.7 million in 2011 to 5.5 million in 2012.  That would make their production larger than even EXK.  Their current market cap is around $400 million making them drastically undervalued based on their production vs some of their peers market caps.  (For example AG's 8 million ozs last year gives it a market cap of currently 2 billion.)  CEO Leo Rodriguez personally owns 3% and certainly understands how undervalued his company  is.  (Meeting him last year he was short a straw hat and a margarita but he seemed like he was already counting his money.) For a stock that is selling for a whopping $1 a share it is easy to pick up some for fairly cheap.  The pennies it was selling for only a short time ago will be eclipsed by it's earnings in the future.

My Call: BUY
My 1yr Target: $1.50

Sandstorm Gold is currently the only gold streaming company in existence.  After Franco Nevada took over Gold Wheaton, SSL.V has been in a class of it's own.  The CEO Nolan Watson is the former CFO of Silver Wheaton and their geologist is SLW's former director of IR so they know something about the streaming business.  SSL.V has 7 current streams including the Aurizona Mine stream on Luna Gold that  gets them 17% of the life of mine gold at $400/oz.   SSL.V has a monthly cash flow of $3 million, $25 million in cash and $50 million in available credit so they certainly have the money for moving forward.  This is an obvious take out target, likely for RGLD.

My Call: HOLD
My 1yr Target: $2-2.50

I was debating whether I should put up Tanzanian Royalty, but a lot of people follow them so I guess I have to.  But be sure to read the disclosures at the bottom. The short version is I work for TRX doing investor relations.

Jim Sinclair is certainly not remaining idle with this company now.  After acquiring the Buckreef project they now have a 43-101 proving 2.2 million ozs on that property alone with the hopes to expand that to 3-5 million in a couple of years.  Production is expected to be 100-150k ozs a year within 2-2 1/2 years.  Their Kigosi project is just "money in the bank" as Jim puts it as they expect the property to provide cash flow on it's easily produced surface rubble.  From a technical aspect it has bounced very well.  Today it sits above the 200 day MA.  If it is able to maintain these levels a shot at 5 would be obvious.

My Call: HOLD
My 1yr Target: $6-$7.50

Well, that about wraps it up.  I hope 18 miners was enough for you.  An important side note on the miners though, as all the bigger producing companies scramble to keep up with NEM on their dividends you are really doing yourself a disservice by not having any miner you own on dividend reinvest.  Most companies paying a dividend now have only a measly 1% yield but as we obviously believe both share price and dividends will increase in a few years you could have that stock go up 5x higher than you paid for it and have it still paying a 1% yield.  That would be the equivalent of a 5% yield on what you payed for it.  Might as well utilize that money to buy more of the stock at these low prices.  Take what I said at the top about Homestake Mining and factor in a dividend reinvested for 10 years on the way up.  Yup, much nicer return.

Ok people enjoy, and as always be careful out there.

-Jonathan M Mergott

[Disclosures as only Jonathan M Mergott can provide:  I personally or for a company I manage, own, have owned or could own again at any point in time all of the companies listed above.  In addition, members of my family own, have owned or could own again at anytime some of the companies listed above.  (As resident Financial Adviser for my family, I'd be a dick not to have their money in them.)  Also, I work for LH Roth Investor Relations, an IR Firm currently employed by TRX.  I am compensated for my work with them in cash and stock.  I am not being compensated by any company for writing this.  These are my own personal opinions based on my fundamental and technical analysis of the companies.  Do your own due diligence.  Jonathan M Mergott is not a registered financial adviser and is not responsible for any money lost.   Does that cover it all basically?]

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