Which Metal Miners Will Outperform in 2010?

Anyone who pays attention to this industry has seen the ability for mining companies to get both debt and equity financing without any trouble at all. Why are they doing this? Yes, maybe it could be to fund future capital investment needs and/or ramp up production ahead of schedule, but I think the next 6-9 months will be a time of consolidation. So who's on the block? The following is a list of potential deals that may arise.

1. Yamana Gold's (AUY) sales of its 3 high cost mines lead me to believe it will either be aquired by Kinross to reduce geopolitical risk. But I also think Yamana could be eying Jaguar Mining (JAG). Nearly debt free and a 35% 5 year CAGR would fit nicely with its own ramped up production and add to its portfolio of South American Mines (Brazil). Due to the nearly complete lack of Cap-ex, its joint profits would allow Yamana to get ahead of schedule developing its deep portfolio of advanced and early stage mines.
2. Silver Wheaton (SLW) has made it clear it is on the hunt for a few more royalty streams. I think this will come from Techne Corporation's (TECH) mine along the silver belt of Alaska. Another possibility would be a partial royalty from one of Silver Standard's (SSRI) mines. They require a reasonable amount of capital investment, and this could be an alternative to an equity offering or tapping a credit facility.
3. I think Lihir Gold (LIHR) is another excellent candidate following the success of their turnaround story. Lihir has one of the best mines in the world in Lihir Island, which has high grade ore with minimal bi-products, an extremely long life based on current reserves which are sure to be replaced for years to come and have low and declining cash costs. China's desire to increase their reserves could lead them look at Lihir as a possible canindate. But there are few with the capital to finance such a deal - possibly Barrick (ABX), to ensure its place at the top of the industry due to Newmont's (NEM) 100% interest in Boddington.
4. My favorite junior candidate, previously mentioned, is my no.1 pick among the juniors to get bought but think Aurizon Mines (AZK), Alamos (AGIGF.PK), Centerra (CAGDF.PK), and El Dorado (EGO).

My Top Picks

1) Yamana Gold: This is one of the rare mid-tier producers that has an incredible advanced stage and mid stage development portfolio. It has Santa Luz, Pilar & Mercedes in late stage development. The current advanced stage portfolio is expected to produce 500-700k oz a year, but what I really like is its Agua Rica mine in their Mid stage development will produce a minimum off 600k oz a year for 20-25 years, not to mention La Pepe and Jeronimo. When combined, these three mines will more than replace any lost production. But getting back to the near term 2-3 years, Yamana's Production will increase from 800k in 2008 to 2m/oz in 2012 (down from 2.2).

Above is its production and cash costs out till 2013, but remember this excludes GEO (Gold equivalent Ounces) which underplays both its growth while displaying higher cash costs.

2) Jaguar Mining: Can be found in a previous article here.

3) Agnico-Eagle (AEM): Despite a mediocre quarter, Agnico-Eagle is about to experience a huge growth spurt, propelling it to the top of the mid-tier producers, along with Yamana Gold. Before getting into the production numbers, it is important to recognize a few other key metrics.

Production Per Share: In 2008, Agnico sported a minuscule 1.9oz per share. Don't be sad! This will increase over 350% by 2010 to 7.15oz/share! Now we’re talking... oh wait, I forgot declining cash costs hit bottom in 2010, under $300/oz! This even makes Yamana look bad with a measly 2oz/share (mostly due to the shares outstanding Yamana has and the fact 2011-2012 will be the high growth years), but nonetheless, sometime between 2011-2013, Agnico will sport the highest production per share as it reaches 2m/oz + per annum.

Cash Flow Per Share: Agnico's growth is so rampant, cash flow per share will grow 300% relative to 2009, and among the highest in the industry. This is not as telling as it seems as Agnico is trading at a premium, but attractive nonetheless.

Strong History of Increasing Reserves (14 times to be exact, while equity holder’s leverage to gold is up nearly 5 fold over the last decade). I expect this to continue due to the quality of Agnico's mines i.e (La Ronde, Goldex, Lapa, Kittila, Pinos Altos, Meadowbank and several others with great potential). In my opinion, Agnico will have 5 mines, all with 5m oz of proven reserves, showing the diversification of its portfolio.

Capital Expenditures: They will gradually decrease over the next several years, thus increasing free cash flow (the real profit). 900 million was spent in 2008 and will decline year over year as follows: 2009- 550 million, 160 million, 90 million, 75 million, barring any acquisitions.

WHERE IS THE GROWTH COMING FROM?

• The Lapa mine is producing and increasing production by an additional 25% in the first half of 2010.
• Kittila Mine - Commercial Production expected later this fall.
• Meadowbank - Production set for Q1 2010, producing 350k of gold per annum for 9 years.
• Pinos Altos - Like Kittila, is expected to commence production later this fall, producing 175k of gold and over 2.5oz of silver for 12-14 years.
• But the Flagship (in my opinion) is LaRonde in Quebec located in the gold belt. This mine will have very high quality ore and far more reserves than has been declared thus far. It will produce 325k per annum, but wait it gets better. the LaRonde extension extends the life of the mine to 2024-2025 which has an even higher grade ore. This is expected to commence in 2011.

Geopolitical Risk: Among the best in the industry. Laronde, Lapa, Goldex, and Meadowbank are located in mining friendly Canada, Kittila is in Finland, and Pinos Altos is in Mexico.

Growth Profile: in GEO (55:1 G:S) - 2008 = 290k , 2009 = 540-575k , 2010 = 1.25-1.35m/oz, 2011 = 1.57 - 1.66m/oz, 2012 = 1.91- 1.98m/oz.

4) Lihir Gold: Lihir has been a frustrating story in the past, despite its gem mine, which the company is named after. Management has finally cleaned up their act just in time for coming bull rally in gold. They have been troubled from transportation to energy, delaying numerous projects and squandering capital. In order to avoid this turning into a recommendation, I wish to mention why I think it is currently mispriced by the market, as the company recently announced a 200-300k increase by 2011-2012.

This story is compelling to me for these reasons:

• Lihir island is expected to produce 775k-840k oz in 2009 and reach 1m/oz yr by 2011. The remaining mine life based on current reserves is 18-20 years. But the success with Lihir in terms of converting m&i to reserves leads me to the conclusion it should convert an additional 10m of the 36m oz of net resources to reserves.
• Bonikro mine - 125k 155k oz in 2009 in addition to other operating mines expected to produce 100-150 combined. The first year of production began in 2008, therefore production will accelerate over the next few years. There are some caveats: the upside could be substantial and it is highly likely the mines not in production in addition to Bonikro will lead to a mid to large increase in reserves over the coming years. The downside, however, lies in the fact these mines are located in West Africa go obviously political risk may pose a problem.
• A large portion of their assets both producing and exploration lie in a politically safe area of Australia or in favorable geopolitical areas. Including the infamous Ballarat mine, which had disappointed investor’s expectations, but 2008 showed significant improvement in production and the potential of the mine in general.

In short, Lihir is trading at a fairly big discount to its peers, yet production will ramp up dramatically up from 2008. The overall risk has declined in operations, both in continuous production of their mines and the transformation of their balance sheet. Cash costs will be between 400-425/oz for the next 4-5 years. It is also a pure play on gold when compared the number 1 miner in Australia (Newcrest) which gets more or less 80% of total revenue from gold. I mention this because of the hype going on with Teck Cominco (TCK), which is a great story as well.

Disclosure : Long Yamana Gold, Jaguar Mining, Agnico Eagle '11 Calls

Comments

[ducat:]

Hyper_ Either you use a way of judging ounces per share production or you are way off in your caluculations;

"Production Per Share: In 2008, Agnico sported a minuscule 1.9oz per share."

With 156 million shares, AEM would have needed to produce nearly 300 million ounces to have 1.9oz per share. We know the annual world production of gold is only about 80 million ounces. You might be closer in saying the they produce about 1/300th of an ounce per share. This compares with..for example, DROOY which will produce close to 1/100 of an ounce next year per share (at one fifth the current share price). Sorry if I don't understand your methodology.

Jul 08 04:31 PM

[Hyperinflation:]

I apologize as you must not be familiar with Agnico's ramp up in growth. Yeh looking back at 2008 and even 2009, production per share are pathetic, but this ratio becomes extremely attractive thereafter: 2009 will still increase to 3.85 ounces per thousand shares and jump to nearly 8 oz per thousand shares. This will then ramp up to 15-16 oz per thousand shares by 2012. www.agnico-eagle.com/E...


On Jul 08 04:31 PM ducat wrote:

> Hyper_ Either you use a way of judging ounces per share production
> or you are way off in your caluculations;
>
> "Production Per Share: In 2008, Agnico sported a minuscule 1.9oz
> per share."
>
> With 156 million shares, AEM would have needed to produce nearly
> 300 million ounces to have 1.9oz per share. We know the annual world
> production of gold is only about 80 million ounces. You might be
> closer in saying the they produce about 1/300th of an ounce per share.
> This compares with..for example, DROOY which will produce close to
> 1/100 of an ounce next year per share (at one fifth the current share
> price). Sorry if I don't understand your methodology.

Jul 08 10:31 PM

[ducat:]

Hyper_ Yes I am familiar with the growth pattern for Agnico. What I am not familiar with is substituting "production per 1,000 shares" for "production per share". Did you read my post?

Jul 08 11:51 PM

[Hyperinflation:]

Yes I did, .128 oz per share ( or 7.81/100) will achieved by 2012. They high quality of their mines will likely lead further annual production growth thereafter. They have been adding proven reserves at a very fast pacing over the past few years. i wasn't using oz per share in the article, I was referring to total production. I meant was that when they reach 2m oz of production per year, that will then give them one of the highest production per share ratio in the complex. Does that help?

Jul 09 01:30 AM

[ducat:]

Hyper_ If you were not using ounce per share, why did you say this: " Production Per Share: In 2008, Agnico sported a minuscule 1.9oz per share. Don't be sad! This will increase over 350% by 2010 to 7.15oz/share!"???

By the way, with 145 million shares out and your projected 2 million ounce annual "production", that equates to 0.014 ounces per share. Does that help?

On Jul 09 01:30 AM Hyperinflation wrote:

> Yes I did, .128 oz per share ( or 7.81/100) will achieved by 2012.
> They high quality of their mines will likely lead further annual
> production growth thereafter. They have been adding proven reserves
> at a very fast pacing over the past few years. i wasn't using oz
> per share in the article, I was referring to total production. I
> meant was that when they reach 2m oz of production per year, that
> will then give them one of the highest production per share ratio
> in the complex. Does that help?

Jul 10 01:33 PM

[ducat:]

Hyper_ I might add to this discussion in case anyone is still looking at it. The annual production per share is not a stand alone figure. It only has meaning when viewed in relation to share price. In that case AEM is very expensive right now and pending the share price when 2 million ounce production is reached it may still be very expensive. Note; I like AEM very much but it is just too costly for me to own right now. One has to give it a huge premium for "safe" mine locations and great management to justify the price.

Jul 10 01:45 PM

[Hyperinflation:]

AEM, in my opinion trades at a premium due to their ability to convert resources to reserves and the quality ore of their flagship mines. Everything in the investment world if forward looking so yes it could be outrageously expensive but it could also be very cheap. I was extremely lucky to initiate a few call positions in Nov when it traded in the high 20's but will continue to hold onto them until exp.

Jul 14 07:14 PM

[Joe Bruin:]

Great article Hyper. You should look at Eldorado Gold (EGO) a little more. They have a very nice, low cost mine in Turkey. The mine is part of an old volcano. What is nice is that there is another sister volcano that they have started to explore. The CEO briefly talked about it at the Denver Gold conference last week (9/15/09)

Disclosure: I am long EGO.

Sep 23 01:19 AM