This article discusses micro-cap stocks. Please be aware of the risks associated with these stocks.
With gold prices depressed, many producers cannot turn a profit. Furthermore, in some cases their survival is questionable if we assume that gold prices will remain low for an extended period of time. In this article, I describe four small gold mining companies that investors should consider if they are bullish on the price of gold, but who want to be prepared in case gold prices remain weak. All of these companies are relatively small with just one to three operating mines, and so their share prices have been hit particularly hard. However they are all profitable at $1,250/ounce gold, and they are all positioned well financially so they will not have to go to the debt or equity markets for essential capital needs. Ultimately, these stocks are all excellent additions to a gold portfolio, and they should be added on those days where miners are down 5% - 10% that gold investors are all too familiar with at this point in the game. 5 years down the road, I suspect you will be extremely happy that you took the plunge.
1: Timmins Gold Corp.
Timmins Gold Corp. (TGD) has a market capitalization of $173 million. The company owns and operates the San Francisco gold mine in northwest Mexico, which produces about 130,000 ounces of gold annually. It also owns some early stage exploration properties throughout Mexico.
Management has grown resources and production every year for the past four years. Furthermore, it has been profitable in the downturn, having earned $20 million thus far in 2013 despite low gold prices. This is due to production growth and management's ability to contain costs at just over $1,000/ounce.
Despite everything the company has going for it, Timmins Gold Corp. trades at a very reasonable valuation with a single digit P/E ratio. Aside from the company's $22 million in debt, which it can easily service at the current gold price, Timmins Gold appears to be an outstanding investment opportunity, and gold bulls should accumulate shares at the current valuation.
2: Primero Mining Corp.
Primer Mining (PPP) has been one of the better performing gold miners with its shares down just 18% this year. The company's value is rather high compared to is depressed peers at $625 million. It is estimating that it will produce 165,000 ounces next year and it should have costs of just $1,100/ounce, making it highly profitable at $1,250 gold (it should have about $25 million in cash flow). This makes it rather expensive compared to a company such as Timmins. However investors should keep in mind that Primero is adding a second mine to its arsenal--Cerro del Gallo--which will increase the company's attributable production to over 200,000 ounces.
This rapid growth is not the only appeal of Primero: the company has an outstanding capital position with $125 million in cash and just $27 million in debt. This puts it in an excellent position to grow its business through acquisitions while small exploration and development companies have extremely depressed share prices.
The only thing I don't like about Primero is that it has to sell a great deal of its silver production from San Dimas to Silver Wheaton (SLW) at just over $4/ounce, well below the current spot price of $20.25/ounce. The company has to sell up to 3.5 million ounces of annual silver production to Silver Wheaton, and if it produces beyond that figure it has to sell half of the silver it produces to them. This 3.5 million ounce threshold increases to 6 million in August of next year. However this is priced into the stock, and it doesn't change the fact that Primero is a low cost, growing gold producer that is well positioned financially.
3: SilverCrest Mines Inc.
SilverCrest Mines (SVLC) is a favorite among precious metals investors. SilverCrest is valued at $172 million. Despite the name, and the fact that it calculates its production in "silver equivalents," SilverCrest produces more gold than silver, with over 40,000 ounces of gold equivalent ounces to be produced this year. This isn't a lot compared to Timmins, which is valued the same. However there is a lot to like about SilverCrest.
First, it is developing the underground portion of its Santa Elena mine, which will add between 25,000 and 50,000 ounces of gold annually, and over 1 million ounces of silver annually for 8 years. Second, the company just released a summary of the results from the PEA for its La Joya silver-gold-copper property, which was very positive, estimating its value at nearly $150 million. This is just for the "starter pit." The mine has potential to be much larger. Third, the company is one of the lowest cost producers in the industry. In the most recent quarter, despite depressed metal prices, the company reported earnings of $3.7 million, which is nearly $15 million annualized. Thus it trades at a reasonable P/E ratio despite its growth. Finally the company is in impeccable financial condition with $30 million in working capital and no debt.
Given the company's high growth potential, low cost production, and its strong financial position, SilverCrest appears to be an excellent way to get low-risk exposure to gold mining.
4: Alacer Gold Corp.
Alacer Gold (OTCPK:ALIAF) is the largest company selected here both in terms of market capitalization ($613 million) and in terms of annual production (300,000). Most of Alacer Gold's production comes from its Copler mine in Turkey, which is a country that investors are concerned about considering the recent political upheaval. As a result Alacer Gold shares are incredibly inexpensive. They trade at a single digit p/e multiple even at this depressed gold price.
The company is generally a low cost producer at about $1,050/ounce. However this figure is low as a result of the company's low cost Copler mine--its two Australian mines are much more costly to operate and they will probably be cash-flow negative at the current gold price. Yet nearly 2/3 of the company's production comes from Copler, and this one concern shouldn't be an issue. In fact it could turn out to be an advantage relative to the other companies discussed here. If the price of gold falls even further and remains there for an extended period of time then Alacer can cease production at its Australian mines and substantially reduce its costs while retaining most of its production.
Financially the company has a huge cash position of $222 million, and no debt. Thus like Primero it is in a position to make acquisitions while the market is depressed. Furthermore, with more than a third of the company's market capitalization in cash there is a fairly solid floor to its valuation should the market become more depressed.