Best Gold Mining Stocks For 2013
Peter is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
How Does One Get Exposure to Gold in 2013?
For those interested in exposure to gold, there are a number of ways to get invested. One can buy physical gold outright such as gold coins, a gold Exchange Traded Fund, "ETF" such as SPDR Gold Shares, (NYSEMKT: GLD), gold futures, a gold stock ETF or a specialty junior gold mining company ETF, such as Market Vectors Junior Gold, (NYSEMKT: GDXJ). Many investors are not comfortable owning physical gold and there are storage and transportation costs involved. And retail investors typically do not trade gold futures. Simply throwing money into GLD or a gold company stock does not offer the best bang for the buck.
On average, the majors have under-performed GLD for the past 3 months, 6 months, 1 year, 2 years, 3 years, 5 years and 10 years. Other than that, they've been great investments! As gold prices increased, the majors spent way too much exploring around the world. Now the industry is stuck with bloated costs and is producing gold in dangerous places like Indonesia, Ghana, Russia and Uzbekistan, (all top 10 producing countries in 2011). See an article I wrote about gold supply risks here.
Do Mid-Tier Gold Producers Offer the Best Risk/Reward?
GDXJ has not kept pace with GLD either, but GDXJ has inherent biases that skew its performance. For example, ETFs frequently sell poor performing stocks, thereby eliminating the chance for those stocks to rebound. The best performing component companies frequently get acquired, thereby truncating further upside returns. I'm convinced that the best risk-adjusted returns can be found in individual small and mid-cap gold companies.
One mid-tier company that's especially attractive is Allied Nevada, (NYSEMKT: ANV) with a market cap of $2.7 billion. Allied is the poster boy of a small-cap producer making it big. The stock is up almost more than 500% from its 2009 low. Execution and 100% ownership of a world class gold/silver project in Nevada make this an excellent pick for 2013. With country risk high for the industry, operations in the U.S. are increasingly important and Nevada is considered the best state to operate in.
In 2009, Allied re-started its Hycroff mine. Due to a prior mining history, in just two years the company was in production of more than 100k ounces of gold. In 2011 the company embarked on a program to triple production by 2014. The key to Allied's future success is unbelievably low costs. Due to economies of scale, Allied expects its costs to fall to $200 per ounce. This remarkable cost figure is attributable to industry convention whereby the profits from silver mining are applied as offsets, or, "credits," to the costs of gold mining.
As industry-wide mining costs continue to climb and the risks of doing business in dangerous countries grow, Allied's steadily declining cost profile will attract the attention of larger gold companies. A major with $800-$900 per ounce costs could lower that average considerably with the addition of the low-risk, world class asset that Allied owns. Frankly, I'm surprised that Allied has not been acquired already. Analysts have mid- $50's price targets on Allied, which is trading at $29.75 today.
Junior Gold Stocks, Not as Foolish as One Might Think....
A junior gold miner that I especially like is Pershing Gold with an Enterprise Value, [market cap + gross debt - cash] of $120 million. Pershing is truly an up-and-comping star. I found this opportunity because it shares things in common with both Allied Nevada and Coeur d'Alene. Like Allied, Pershing is re-starting an existing mine, meaning that it could be in production within 18 months at a run-rate of 50k ounces of gold. Pershing has higher grade ore than Allied Nevada, but no silver production.
Pershing owns fully permitted, built and paid for processing facilities with a replacement value of $30-$40 million and an investment in another junior gold producer currently worth about $10 million. Once in production in 2014, Pershing could grow to 100k ounces of gold production within 2 years. At that point, new discoveries on the company's recently consolidated 25k acres on known mineralization zones will be in the process of growing well beyond 100k ounces per year. [Further articles on Pershing Gold can be fouund here and here]
Allied Nevada has proven that a company with a proven asset and a history of production can ramp up production rapidly. Pershing could be a mid-tier gold producer within 5 years and still have massive exploration upside like Allied Nevada has.
My bullishness on the stock is based on my strong belief in Chairman / CEO Stephen Alfers who has 30 years of industry experience, most of it in Nevada. In just a year at the helm, Alfers has consolidated 25k acres around his initial 1.1k acre asset, cleaned up the company's capital structure, raised funds to get into production by 2014 and signed an important deal with Newmont Gold (NYSE: NEM).
Let's not fool ourselves, Pershing is a risky investment. However, with the major gold companies unable to keep up with the performance of gold, an investment in a junior gold company is not as foolish at it might seem. Herein, I give investors two choices. A relatively low-risk, high-return play in Allied Nevada, or a high-risk, much higher-return play in Pershing Gold. Both of these companies could handily outperform gold and the overall stock market in 2013.
MockingJay2011 has a long positions in Newmont Mining. The Motley Fool has no positions in the stocks mentioned above. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!