With the price of gold (NYSEARCA:GLD) currently in a recovery stage, up to $1,375 from the June lows of $1,180, I believe there will be even greater gains ahead as the Fed has announced a non-tapering and as we stare another debt-ceiling crisis right in the face.
In my opinion, gold has big upside in the short-term for these two main reasons. First, a large number of traders went short gold at $1,700-$1,800 on the false belief that there would be a tapering from the Fed. However, now that we know the Fed was full of it and continued their $85 billion a month QE, they will be covering their shorts. The US is also set to hit the debt ceiling yet again, this time in either mid-October or early-November. Another debt-ceiling crisis like the one we saw in 2011 could send gold through its 200-day moving average of $1,484.
I have been searching for the best short-term investments to play a recovery in the price of gold. There are a few ideas I've come up with, but I think there is one in particular that stands out. That company is New Gold (NYSEMKT:NGD) and their 2017's warrants, which trade under the symbol (NDGAF).
First, I will discuss why I like New Gold as a miner going forward, and then I will touch upon the warrants.
New Gold: Profitable, Low-Cost Production
New Gold is a gold mining company that has a portfolio of four producing assets and three significant development projects. The company owns and operates the New Afton Mine in Canada, the Cerro San Pedro Mine in Mexico, the Mesquite Mine in the United States and the Peak Mines in Australia.
New Gold sticks out to me because they are one of the lowest cost gold producers out there and all of their projects are located in politically stable regions. New Gold has 29.2 million ounces of gold in the measured and indicated categories - 62 percent of those reserves come from Canada, among the best places to mine in the entire world.
New Gold's four current operating mines produce roughly 440 - 480k gold ounces a year, but the company estimates that they have the potential to increase this to over 800k ounces a year from their current projects alone! It is important that gold miners not only grow their production but grow meaningful production that is profitable; New Gold believes that these projects will be very profitable, like their current projects, with below industry cash costs.
New Gold's 2013 guidance for all-in sustaining costs is just $875. This is compared to the senior mining average of $1,100, according to the company's presentation. It is comforting to know that the company was still profitable at depressed gold prices.
Recent Quarterly Results
For the quarter ended June 30, 2013, New Gold produced 102,435 ounces of gold, 424,734 ounces of silver and 21,668 thousand pounds of copper.
The average realized price of each metal obviously effected the company's earnings - the company recorded an average gold price of $1,276 silver price of $22.08 and copper price of $3.06. However, all-in sustaining costs came in at just $931, so the company was still able to pull in a profit despite the biggest drop in gold in years.
Net earnings: The company reported net earnings of $15 million and adjusted net cash from operations of $43.2 million. The company reported EPS of .03.
Balance Sheet: At the end of the quarter, the company had a significant cash balance of $562.5 million, with long-term debt of $855.5 million. As you'll see from the chart below, all corporate debt is now due in 2020 and beyond, so the company should have more than enough capital to complete their exploration and development projects.
Here are some other operational highlights from the Q2 report:
- Gold production was up 8% year-over-year because of the start of commercial production at New Afton.
- Copper production was 21.7 million pounds, up 440% year-over-year because of New Afton.
- All-in sustaining costs per ounce were up to $931 from $736 a year ago.
- On May 31, New Gold acquired Rainy River resources for $310 million. This adds a significant resource base of 6.2 million ounces of gold to New Gold's portfolio. This deposit is expected to become a mine that produces 225K ounces of gold a year on average at below industry costs.
Blackwater - The Big Potential
The company's big future growth will come from production at Blackwater, which hosts a 8.6 million ounce gold resource. The company is targeting 500K ounces a year production from Blackwater.
The total project development costs to get Blackwater into production are $1.8 billion, so the company will either need to rely on future cash flow, more debt or perhaps a gold stream to get it into production.
However, once in production this project could push New Gold into a 1 million-plus ounce a year gold producer, significantly enhancing shareholder value. To put it simply, it will be worth the money.
Stock Price and Technical Analysis
New Gold should generally move higher with the price of gold, like most other mining stocks. However, because of New Gold's industry leading cash costs, I believe that New Gold and their warrants could outperform other gold equities going forward.
First, here's the chart of New Gold. You'll see that New Gold has been hammered down from $12 a share last year (along with basically every other gold stock). However, New Gold shot up to over the 50-day moving average on Wednesday as the gold price shot higher.
Compared to the (NYSEARCA:GDX) Gold Miners Index, however, New Gold has outperformed, as you'll see in the chart below:
New Gold Warrants - What Are They?
I believe there is an even better way to play the upside in gold and in New Gold - the 2017 warrants, which trade on the US exchange under NGDAF.
I believe warrants are a very misunderstood, but powerful trading tool that investors should consider. This is essentially a long-term call option on the price of gold, but with better risk.
The terms for the New Gold warrants are as follows:
1 warrant + $15.00 = 1 common share
Expires June 28, 2017
If you own these warrants, you have until June 28, 2017 to sell these warrants, giving you plenty of time and upside to an increase in the price of gold. If gold hits my long-term target of $2,500 an ounce, there will be tremendous gains made here. Even just a slight increase in gold back to $1,500 could result in a share price of New Gold of $9-10 and a price of $3 or so on the warrants, which would be more than a double at current prices.
As a US investor, you can trade these warrants on a US exchange. However, if you are a US investor, you need to understand a few things.
- You cannot exercise them on a US exchange, just trade them, just like you would a common stock. But there is no need to, in my opinion. We are simply using them as a trading vehicle to gain leverage to the price of the common stock. Simply sell the position when the time is right.
You will see from this chart that the warrants are highly leveraged to the price of the common stock and they tend to outperform on the way up and underperform on the way down:
*Some More Important Notes About Warrants!*
- They are generally less liquid than common stock. You should definitely use limit orders and not market orders.
- If you are wrong, you can lose up to 100 percent of your money. I believe there is a great risk/reward scenario here, however, because you are getting 3+ years to expiry. This is why I like them so much more than options, which have a shorter time period, in general.
- You don't actually own shares so you will not get any future dividends or voting right. But New Gold doesn't pay a dividend and isn't likely to pay a huge dividend between now and 2017, in my opinion.
- Even if the stock doesn't reach the $15 exercise price, you can still make a lot of money. For example, when NGD was $11 a share in November of 2012, the warrants were about $3.30, or nearly 200 percent higher than the current prices.
Conclusion: New Gold Offers Compelling Risk/Reward
New Gold seems like a very solid investment here as gold recovers from the June lows of $1,180. If you like gold, and if you are willing to take a little more risk, I think the New Gold warrants are also very attractive and should be considered. If you are someone not in a position to take risk, then you should definitely stay away from these warrants and look elsewhere. With great leverage comes risk, and that should be understood before any action is taken.
There are a couple of other gold warrants out there which I really like, that also trade on the US exchange. If you are interested in my top picks, please comment below and follow me here on Seeking Alpha.
Additional disclosure: This should not be viewed as an investment recommendation and I am not a financial advisor. Please do you own due diligence when investing.