Precious Metal Miners: Post Earnings Season Analysis, Part 1

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Includes: ABX, AEM, AUY, EGO, GDX, IAG, JAGGF, KGC, LIHR, RBIFF
by: Hyperinflation

Despite the flurry of disappointing quarterly reports from an earnings point of view, several were badly misinterpreted by the market, providing several bargain basement prices to take advantage of. Even some analysts familiar with the mining industry missed the underlying results, which aren't always best characterized by looking at the bottom line.

Firing On All Cylinders :

1) Yamana Gold (NYSE:AUY) - Discussed in detail in a recent article. After many frustrating quarters which fell short of expectations, this is Yamana's coming out party, yet the market price still reflects some negative market sentiment. Yamana around $12, while gold is at $1080/oz is a bargain.

2) Lihir Gold (LIHR) - Forget the record quarterly profit, the announcement of a dividend and their much improved balanced sheet. Lihir increased reserves to 28.8m ounces at Lihir Island (36%) which extends the mine life and increases potential output at full capacity. They have raised production guidance earlier this year and will likely do it again. The market more or less ignored the higher production guidance earlier in the year, making Lihir an incredible valuation play.

3) Redback Mining (RBIFF.PK) - Like Lihir, you can ignore the record profits, high net cash position and focus on the important news regarding the completion of their expansion projects , increase in resources and reserves and expansion of the west wing at Tasiast. They will likely decide to commence development of the Paoboase deposit in Q1 2010.

4) El-Dorado (NYSE:EGO) - Aside from the brilliant acquisition of Sino Gold, They recently increased resources at their core mines and reported cash costs of $297/oz.

5) IamGold (NYSE:IAG) - Despite not having announced preliminary operating results, they shouldn't disappoint when they report tomorrow ( Nov, 4 ). They have increased production guidance for the current and future years. Other than Redback, IamGold is my miner of choice in Africa.

Misunderstood:

6) Agnico- Eagle (AEM) - They didn't actually lose money as the headline results convey. This Fx loss was entirely on paper. Guiding down production for 2009 for the second time in a year is never a good thing, but this will not have a material effect on the Intrinsic value of the company. This has to be expected when a dramatic ramp up in production from several mines is done simultaneously. They hit a few production snags, but production growth really began to kick into full gear during the last month of the quarter. 2014 production of 2m/oz is still expected to be achieved and still maintains one of the lowest cash costs profile in the industry.

7) Jaguar (JAG) - Was right inline with production forecasts but had higher overall cash costs, due to the ramp up of a new project. This, however , is expected to decline to just over $400/oz in 2010, while their production growth potential continues to increase. The recently acquired a new property, adding 1.8m ounces of resources ( with a feasibility study in Q1 2010 to determine the annual production capacity). Given the meticulous nature of management, this will likely be the mine that raises the ceiling on peek production to 850-1m ounces a year. They are fully funded to move this project to development very quickly and are trading a bargain basement price. Avoiding a cash flow analysis, just think about why Jaguar is trading at 1/5 the market cap of redback and 1/11 of Yamana, despite having a higher peak production level and more diversified mining portfolio than Red Back.

Ugly:

8) Kinross Gold (NYSE:KGC) - Despite revised production guidance to the downside, this isn't what bothers me about kinross. It is because of their Russian operations ( which constitute a meaningful proportion of overall production ), and the overhang that will continue to remain barring an acquisition or Kinross moving their projects awaiting development ahead of schedule.

9) Barrick (ABX): It is only because of the incredible $5.3 billion writedown as a result of extinguishing their hedgbook. Management should have done this when gold was trading between $800 - $900/oz. They should have a better eye than most regarding where gold prices are headed. That being said, at least this was done at the start of the second leg up in the precious metals bull market.

Of Those discussed in Part 1: Here is my outlook regarding the most attractive investments:
1) Jaguar Mining (JAG) - Priced to perfection at current market price
2) Yamana (AUY) - Initiate position and add on pullbacks
3) El - Dorado (EGO) - Wait for a pullback to initiate position
4) Lihir Gold (LiHR) - Initiate position
5) Agnico - Eagle (NYSE:AEM) - Buy at-the-money Calls for 2011, buying more every points it drops ( should it happen)
6) Red Back (OTC:RBIFF) - Wait for 20%+ correction to initiate position
7) Iamgold - Same as 6
8) Kinross - Buy warrants or options
9) Barrick - Buy competitors Goldcorp or Newmont first

Next: Silver Miners Outlook, and those Gold miners set to release results over the next week.

Disclosure: Long AEM 2011 Calls, AUY, JAG, RBIFF.PK