This is How I want my Exposure to Gold

By Zack Reitz - July 30, 2012 | Tickers: GG, IAG, PPP, SLW | 0 Comments

Zack is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

The prospect of owning a junior miner is simply intriguing for investors. These minors have small market caps, and the opportunities to experience exponential growth. If production for the gold mines is successful, investors will hit a jackpot. The problem with these exciting investments is the high risks associated with them. Mine reports are released periodically, indicating the gold reserves a miner might have. These can be very volatile periods with companies drastically moving to the upside or downside. Mining is also a very capital intensive business that can face many obstacles on the way to large returns. These obstacles can ensure more capital for operations, or lead to unexpected consequences while drilling. Despite the risks associated with these junior miners, I believe Primero Mining (NYSE: PPP) has a very bright future for the coming years ahead. Not only will they share in the exciting growth that a small cap can offer, but it also has a few factors contributing towards downside protection.

Association with Goldcorp

We are now entering into our first safety net and that is Primero Mining's association with Goldcorp (NYSE: GG). The San Dimas mine (the mine that Primero is currently operating) was sold by Goldcorp in 2010. This sale wasn't typical though as Goldcorp retained 36 percent of the company. Goldcorp would not have kept a considerable part of the company unless the gold giant saw a potential upside. And so far, the upside continues to look promising although it hasnt yet materialized. The San Dimas mine has 5.83 million tonnes of gold inferred within the mine, and production is only expected to increase. In the latest earnings call, Primero mined an ounce of gold at an average price of 630-660 dollars. This is a very nice margin as gold is currently selling at around 1600 dollars. Other positive facts about Primero Mining include its financials. Primero has 86 million dollars of cash on hand, which provides significant downside protection when considering Primero only has a market cap of $285 million. Primero is also only trading at 3 times earnings as well as sporting a book value at 0.51 times the current price. Despite the massive upside potential in Primero Mining, it is trading at a very conservative discount.

CEO Jeff Conway

Great leadership is one of the most undervalued assets a company can have. Not only will great leaders guide the company in times of distress, but they will also maximize shareholder wealth in times of prosperity. Jeff Conway is one of those great leaders that have made shareholders very happy in the past, and he is bound to make shareholders money again. During his time at IAMGold (NYSE: IAG) from 2004 - 2010, Conway turned IAG from a junior minor into a great success story while returning 250 percent to investors during his time as CEO. When Conway stepped down from CEO of IAmGold, it was a very questionable and unexpected move. But now it can be reasonably inferred that Conway wants to transform another junior miner into a multi billion dollar company. Conway has a vast amount of experience in the gold industry, and I feel confident he can replicate the success story from IAMGold to Primero Mining.

Possible Catalyst

When Goldcorp still owned the San Dimas mine, they had a deal worked out with Silver Wheaton (NYSE: SLW) which stated that the first 3.5 million ounces of silver would be sold to Silver Wheaton at 4 dollars an ounce, and half of all silver ounces past 3.5 million would be Primero mining's to sell at the spot price. The problem is that Primero's income taxes are currently assessed based on all silver sales at spot market prices. Management said that this extra tax liability adds around 40 million dollars in expenses. Primero filed a formal application to Mexican tax authorities in 2011 in hopes of restructuring this tax plan. The decision is expected to come late in 2012, but if the tax decision is favorable, it could provide a very nice pop to Primero's stock.

Conclusion

The best part about Primero though is the safety net contributed by a bunch of factors. Primero has 86 million dollars in cash, a very experienced CEO in Jeff Conway, and Goldcorp owns 36 percent of the company. A positive tax ruling could also give a huge boost to the stock price. Regardless of the tax ruling, Primero is primed to capitalize on the San Dimas mine.

zman4money has no positions in the stocks mentioned above. The Motley Fool owns shares of Primero Mining. 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.If you have questions about this post or the Fool’s blog network, click here for information.

This is How I want my Exposure to Gold

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