Monday, August 22, 2011

Precious Metals Companies With Promising Growth Potential (undervalued gold, silver stocks)

   The gold rush is on and miners Yamana Gold (up 16% last month), Agnico-Eagle Mines (up 5% last month), Buenaventura (up 8% last 3 months), First Majestic Silver (up 20% last 3 months) are benefiting from the surge in price while others can't seem to catch a break as evidenced by their volatility, leaving investors frustrated angry and confused (those changes in stock are as of September). Here are some companies that have been through a rough patch (like Yamana gold last year) but could be in the money over the next couple weeks if gold and silver prices continue their climb but in a less volatile manner:

European Goldfields - Update for November: For 9 of the last 10 months (down about 29%) due to a longer than anticipated permit review process in which Greece decided whether or not to grant approval for the Olympias and Skouries gold-copper porphyry projects in northeastern Greece (permit initially applied for in 2006) (even after decided the stock continued to fall slightly, down 13% in the 3 months leading to mid November). Skouries alone has the potential to produce at a rate of 350,000 ounces of gold equivalent (about half of that coming from silver). Since the permits were granted, the company hasn't even made up the 9% stock decline experienced over the two months leading up to the decision (July 12, 2011). Base metals like copper continue their lacklustre showing ($4 August 22, 2011 compared to $4.45 on July 29th) making the copper assets less attractive.
The two new permits take away a lot of the risk that scared investors away from the company. Including projects in Turkey and Romania, European Goldfields appears to be well on its way to becoming Europe's largest gold producer by 2013-2014 (over 400,000 ounces of pure gold/yr doesn't include silver and copper). Construction of the mines also won't be a problem with Greece's largest construction company, Ellaktor as its largest shareholder (19.36%). More reason to optimistic about the company outlook: takeovers! Eldorado Gold and Centerra Gold both operate projects in some of the same areas and would probably overpay in a takeover. Also, European Goldfields is considering a move to the main London Stock Exchange index moving up from junior AIM.
Also of note, first production at Olympias will be in 2012, in the second quarter of 2011 gross profit increased five fold (up to $2.8M) lowering net income losses to $15.2M which is great considering cash flow currently only comes from a small mine in Stratoni. In Greece, Piavitsa is another possible project location.

Harmony Gold - Has suffered greatly over the last few months due to high costs, earnings disappointments, shaft closures, in litigation with former employees blaming it for their health problems. However, the company remains one of the world's largest gold producers and a major player in Africa. With spot gold closing in on $1900/oz (26.2% increase between June 30 and August 22, 2011) earnings shouldn't continue to be a problem for Harmony. The price won't fix the company's fundamental problems and the risk will still be there but a gold price nearing $2000 will mask many of them. In 2010 Harmony produced 1.566 million ounces of gold equivalent, that's more than Yamana and Eldorado combined though the market value of Harmony is only about half of either of them. Harmony's market valuation is about 2.5X European Goldfields but the size of its reserves is almost 5X greater.

Hecla Mining Company - The gold to silver ratio remains high (about 43 compared to 35 on May 3, 2011 (Silver 44, Gold 1540)) but is starting to come down; August 19-22 gold was up about 5.5% but silver was up more than 9%). Hecla Mining, like many other silver miners, has suffered from volatile prices since silver recorded a high of about $49/oz on April 29, 2011 however with gold about 20% higher than it was at that time and silver 10% lower, silver should eventually break through into the $50 level again. Hecla Mining has high growth potential relative to other silver miners because its fall over the last couple months has been more pronounced (as of Monday morning Aug 22; -33% last 6 months, -11.6% last 3 months, -13% last month compared to Coeur d'Alene (-6.7%, +.24%, -8% respectively), Silver Standard Resources (-3%, -9%, -12.6% respectively) and especially when compared to First Majestic Silver which is up 49% in the last six months (during that period First Majestic released reports confirming growth in production and earnings in 2010 and 2011 (71.8% rise in silver production in 2010 with cash costs among the lowest industry-wide (near $7/oz) compared to $12/oz for Pan American Silver (largest pure-play silver producer). Hecla also has low net cash costs realized (-$1/oz in 2010).

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