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Investment Thesis

We will see some price consolidation before the next bull market in gold starts again. Nevada could fuel the (junior) mining sector, with some interesting new discoveries going forward.

Background

Gold stocks are in bear market territory, but we think it's only temporary. The price of gold crossed the $1,900 mark per ounce in 2011, fueled by fears in the financial markets and the general belief that gold was a safe haven. Last October, gold was changing hands for $1,754 per ounce. Since then, however, the price of gold has fallen hard, weakening dramatically in recent weeks.

(click to enlarge)

The Gloom and Doom scenario would take us to the $700-$900 range for gold. Personally we don't think this will happen and we firmly believe trading will be above the $1100 level.

Gold Constraints

Gold is viewed as a hedge against rapid inflation and against the collapse of the banking system, an event that would be expected to have deflationary expectations. That gives gold bugs an each way bet and also makes it hard to interpret the signal being sent by a rise (or fall) in the gold price. It does not help that gold has no cash flows. This makes it very difficult to put a value on the metal in the way that one can suggest a stock with a price-earnings ratio of 50 looks overpriced. It also allows for a wide range of forecasts; Standard Chartered says the superbull case is for $4869 an ounce by 2020; Tim Lee of pi Economics, a monetarist, is going for $700 in 12 months' time.

One common criteria that value investors are looking for is cash flow and which companies have the ability to be self-sustainable. Keep a close eye on emerging gold and silver producers in mining friendly jurisdictions looking to increase production, resource growth and free cash flow.

With that said, the place investors can look for buying opportunities is the U.S. The state of Nevada is such an area, which could turn the coin and reap the fruits going forward.

Nevada

Gold mining in Nevada is a major industry, and one of the largest sources of gold in the world. Nevada currently produces 82% of all the gold mined in the United States, over six million ounces in 2007. Almost all the gold in Nevada comes from large open pit mining and cyanide heap leaching recovery.

The state is host to minerals including gold, silver, copper, precious opal and diatomite; with particular focus on precious metals. Nevada is also the leading producer of barite and gypsum in the country. Major gold mines in the area include the Goldstrike Mine owned by Barrick, the Coeur Rochester Mine owned by Coeur D'Alene Mines, and the Twin Creeks Mine owned by Newmont Mining. These mines contribute to state's overall gold production, which accounts for 87% of the country's gold production. Nevada's deep investments in gold mining means it is the third largest gold producer in the world after South America and Australia.

Nevada has a strong mining history, dating back to 1849 when gold was first discovered near Dayton. This initial discovery led prospectors to silver in the Comstock Lode, which made Virginia City, Nevada, one of the most famous boomtowns in the country's history. The Comstock Lode, for instance, produced 8.6 million troy ounces (267 tonnes) of gold through 1959, and the Eureka district produced 1.2 million troy ounces (37.3 tonnes).

Since these initial discoveries, mining has played an integral part in Nevada's economy, directly and indirectly employing thousands of people. In 2011, the natural resources and mining sector created 500 new jobs and, as of December 2011, there were 12,900 jobs in the sector. In February 2012 the Nevada Mining Association's informal survey found that the industry will create between 1,200 and 1,500 new jobs this year. Every year Nevada mining provided approximately US$100 million in state tax revenue.

The "Nevada" Candidates

Barrick Gold

Barrick Gold Corp. (NYSE:ABX) is the gold industry leader. The company operates mines and advanced exploration and development projects on four continents, and holds large land positions on some of the most prolific and prospective mineral trends.

Index - P/E - EPS -0.86 Insider Own - Shs Outstand 1.00B Perf Week -6.81%
Market Cap 15.76B Forward P/E 5.06 EPS next Y 3.11 Insider Trans - Shs Float 998.19M Perf Month -26.07%
Income -857.00M PEG - EPS next Q 0.65 Inst Own 73.90% Short Float 1.34% Perf Quarter -45.19%
Sales 14.34B P/S 1.10 EPS this Y -114.70% Inst Trans 3.15% Short Ratio 0.62 Perf Half Y -53.27%
Book/sh 22.52 P/B 0.70 EPS next Y 4.00% ROA 0.40% Target Price 27.00 Perf Year -56.16%
Cash/sh 2.34 P/C 6.73 EPS next 5Y 5.29% ROE 0.80% 52W Range 14.67 - 42.21 Perf YTD -54.27%
Dividend 0.80 P/FCF - EPS past 5Y -20.60% ROI -1.70% 52W High -63.58% Beta 0.56
Dividend % 5.08% Quick Ratio 1.10 Sales past 5Y 19.30% Gross Margin 46.00% 52W Low 4.81% ATR 0.92
Employees 28155 Current Ratio 2.00 Sales Q/Q -5.70% Oper. Margin 38.10% RSI (14) 31.38 Volatility 6.14% 4.26%
Optionable Yes Debt/Eq 0.66 EPS Q/Q -18.30% Profit Margin 1.30% Rel Volume 1.34 Prev Close 15.74
Shortable Yes LT Debt/Eq 0.63 Earnings Feb 17 BMO Payout 394.70% Avg Volume 21.44M Price 15.38
Recom 2.40 SMA20 -17.27% SMA50 -19.46% SMA200 -48.18% Volume 23,369,020 Change -2.32%

Coeur Mining

Coeur Mining, Inc. (NYSE:CDE) is a large primary silver producer with growing gold production with assets in the United States, Mexico, Bolivia, Argentina and Australia. Coeur also owns strategic minority shareholdings in eight silver and gold development companies in North and South America. The Palmarejo mine in Mexico, San Bartolomé mine in Bolivia and Rochester mine in Nevada all produce silver and gold in doré form. Coeur's Kensington gold mine in Alaska produces gold concentrate and the Endeavor mine in Australia produces a concentrate that contains silver.

In 2013, Coeur expects to produce between 18.0 and 19.5 million ounces of silver and between 250,000 and 265,000 ounces of gold.

Index - P/E 20.78 EPS 0.64 Insider Own 0.50% Shs Outstand 89.95M Perf Week 3.99%
Market Cap 1.20B Forward P/E 10.92 EPS next Y 1.22 Insider Trans 37.64% Shs Float 101.05M Perf Month -9.34%
Income 57.00M PEG - EPS next Q 0.13 Inst Own 67.80% Short Float 3.51% Perf Quarter -28.15%
Sales 862.70M P/S 1.39 EPS this Y -48.10% Inst Trans 8.29% Short Ratio 1.94 Perf Half Y -44.33%
Book/sh 24.41 P/B 0.54 EPS next Y 103.00% ROA 1.70% Target Price 19.79 Perf Year -22.22%
Cash/sh 3.70 P/C 3.59 EPS next 5Y -8.02% ROE 2.60% 52W Range 11.48 - 31.97 Perf YTD -45.93%
Dividend - P/FCF 7.01 EPS past 5Y -11.80% ROI 3.70% 52W High -59.96% Beta 1.84
Dividend % - Quick Ratio 2.70 Sales past 5Y 43.60% Gross Margin 22.40% 52W Low 11.50% ATR 0.66
Employees 1898 Current Ratio 4.10 Sales Q/Q -16.00% Oper. Margin 14.60% RSI (14) 44.79 Volatility 5.45% 4.09%
Optionable Yes Debt/Eq 0.14 EPS Q/Q 250.00% Profit Margin 6.60% Rel Volume 1.27 Prev Close 13.30
Shortable Yes LT Debt/Eq 0.14 Earnings Aug 05 Payout 0.00% Avg Volume 1.83M Price 12.80
Recom 2.60 SMA20 -4.89% SMA50 -8.43% SMA200 -38.99% Volume 1,862,723 Change -3.76%

Newmont Mining

Newmont Mining Corporation (NYSE:NEM) is primarily a gold producer, with significant assets or operations in the United States, Australia, Peru, Indonesia, Ghana, New Zealand and Mexico. Founded in 1921 and publicly traded since 1925, Newmont is one of the world's largest gold producers and is the only gold company included in the S&P 500 Index and Fortune 500. Headquartered near Denver, Colorado, the company has around 40,000 employees and contractors worldwide.

Index S&P 500 P/E 9.24 EPS 3.24 Insider Own 0.20% Shs Outstand 497.00M Perf Week -0.33%
Market Cap 14.89B Forward P/E 10.04 EPS next Y 2.98 Insider Trans 28.26% Shs Float 491.49M Perf Month -11.89%
Income 1.64B PEG - EPS next Q 0.49 Inst Own 81.30% Short Float 3.24% Perf Quarter -26.90%
Sales 9.36B P/S 1.59 EPS this Y 278.00% Inst Trans -0.86% Short Ratio 1.73 Perf Half Y -32.73%
Book/sh 27.96 P/B 1.07 EPS next Y 19.14% ROA 5.60% Target Price 39.83 Perf Year -35.24%
Cash/sh 2.92 P/C 10.24 EPS next 5Y - ROE 12.10% 52W Range 27.07 - 56.28 Perf YTD -34.13%
Dividend 1.40 P/FCF - EPS past 5Y 30.10% ROI 10.80% 52W High -46.53% Beta 0.39
Dividend % 4.67% Quick Ratio 1.50 Sales past 5Y 12.50% Gross Margin 54.40% 52W Low 11.17% ATR 1.35
Employees 16400 Current Ratio 2.10 Sales Q/Q -18.90% Oper. Margin 30.20% RSI (14) 43.98 Volatility 5.14% 3.59%
Optionable Yes Debt/Eq 0.46 EPS Q/Q 887.50% Profit Margin 17.50% Rel Volume 1.15 Prev Close 29.95
Shortable Yes LT Debt/Eq 0.46 Earnings Jul 25 AMC Payout 45.00% Avg Volume 9.17M Price 30.09
Recom 2.60 SMA20 -5.76% SMA50 -6.70% SMA200 -28.10% Volume 8,298,431 Change 0.48%

Allied Nevada Gold Corp.

Allied Nevada (NYSEMKT:ANV) is a US-based gold mining and exploration company, which operates its wholly owned Hycroft gold mine located near Winnemucca, Nevada. The company also owns more than 100 advanced and early stage exploration properties located throughout the State of Nevada. The company's focus is on internal growth strategies, including the development of the Hycroft mine from a run-of-mine heap leach operation to a world-class, large-scale heap leach milling operation. This will be accomplished through a logically staged growth plan involving the acceleration of the current mining rate for the heap leach operation, which is currently underway, construction of a gyratory crushing system expected to be completed mid-2013 and construction of a milling facility to treat sulfide material.

Index - P/E 13.22 EPS 0.49 Insider Own 7.40% Shs Outstand 90.12M Perf Week -2.11%
Market Cap 584.00M Forward P/E 4.10 EPS next Y 1.58 Insider Trans 17.62% Shs Float 109.96M Perf Month -20.30%
Income 44.50M PEG - EPS next Q 0.13 Inst Own 70.40% Short Float 3.97% Perf Quarter -60.17%
Sales 224.50M P/S 2.60 EPS this Y 30.00% Inst Trans -2.18% Short Ratio 1.35 Perf Half Y -77.96%
Book/sh 7.01 P/B 0.92 EPS next Y 118.09% ROA 3.70% Target Price 17.28 Perf Year -76.48%
Cash/sh 2.72 P/C 2.38 EPS next 5Y - ROE 7.30% 52W Range 5.40 - 41.02 Perf YTD -78.49%
Dividend - P/FCF - EPS past 5Y 26.50% ROI 5.60% 52W High -84.42% Beta 1.28
Dividend % - Quick Ratio 2.50 Sales past 5Y - Gross Margin 47.40% 52W Low 18.33% ATR 0.53
Employees 469 Current Ratio 4.20 Sales Q/Q 25.50% Oper. Margin 36.40% RSI (14) 38.92 Volatility 9.71% 7.05%
Optionable Yes Debt/Eq 0.92 EPS Q/Q -23.10% Profit Margin 19.80% Rel Volume 1.05 Prev Close 6.48
Shortable Yes LT Debt/Eq 0.86 Earnings Aug 05 Payout 0.00% Avg Volume 3.22M Price 6.39
Recom 2.50 SMA20 -11.74% SMA50 -24.04% SMA200 -72.16% Volume 2,792,474 Change -1.39%

Final Note

There's a compelling reason for investors to hold gold in their portfolios. Prices should start to stabilize once there's a significant reduction in supply as miners cut back.

Some miners may hold - depending on their cash flow situation - some production and inventory for a while just to see what happens. Other miners will start to close down some of the more costly mines, spend less on exploration and invest less in general.

We think Nevada will be the place to be in the coming years.

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Main Risk: Profitability Problems

Gold falling below $1,200 an ounce is certainly at the level where miners, especially the smaller ones, will face profitability issues.

According to industry experts, the total cost of production varies between $1,000 and $1,200 an ounce depending on the scale of a miner's operations.

Source: 4 Nevada Gold Miners Side By Side

Additional disclosure: Data used from finviz.com and company investor presentations.