(Editors' Note: This article covers a micro-cap stock. Please be aware of the risks associated with these stocks.)
Recently I wrote an article pointing out four small cap low cost gold producers that longer term gold bullish should accumulate on weakness. 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. Small cap miners are especially vulnerable and have seen exaggerated weakness in their share prices. It is for this reason that I believe that longer term gold bulls should focus on these smaller unappreciated companies.
In this article, I describe three additional 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 in the short to intermediate term. 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 will all be 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: Teranga Gold
Teranga Gold (OTC:TGCDF) is one of the most undervalued gold stocks. It has a market capitalization of just $177 million and yet it produces around 200,000 ounces of gold annually. Furthermore, while the company had relatively high costs in the most recent quarter, it has generally kept its all in sustaining costs under $1,100/ounce. Thus at $1,250/ounce gold the company is capable of generating $27 million in cash-flow.
One of the reasons that the stock is so inexpensive is that it's Sabodala property is located in Senegal, and investors have been especially cautious when it comes to owning mining companies operating in Africa. However Senegal is in western Africa, which has not had the political and labor problems that have impacted mines in Tanzania, Kenya, or South Africa. Furthermore, labor issues often arise as a result of poor working conditions in underground mines. But the Sabodala mine is an open pit mine. Therefore the "Africa discount" is unfounded.
Teranga Gold has $85 million in debt, which is slightly above what I am looking for, but given its cash-flow, and given its $44 million cash position I think that this one flaw in the balance sheet can be overlooked. Ultimately Teranga Gold will survive the low gold price environment, and it will generate an enormous amount of cash-flow in the future at higher gold prices, making it an excellent stock to buy on weakness in today's environment.
2: Centamin PLC
Centamin PLC (OTCPK:CELTF) is an intriguing stock. The company has a valuation of $770 million, and it has seen its shares rise recently despite weakness in the overall sector. However this price increase must be viewed in a broader context, which includes a share price collapse on fears that the company could lose its right to mine at its Sukari mine in Egypt.
On October 30th, 2012 a court ruling came down in Egypt claiming that Centamin had violated its mining concession agreement, and it subsequently rescinded the company's right to mine at Sukari. The company is appealing the ruling, however it came out on May 10th with a press release saying that the Egyptian State Commissioner's office produced a report that was against Centamin's interests, and the stock fell from $0.708 to $0.578 in just one day. The issue remains unresolved at the present time. The rise in the stock price indicates that these fears appear to have subsided, although the risk is still out there.
The Sukari mine, of which Centamin owns half, will produce in excess of 400,000 ounces of gold at a relatively low cost below $1,000/ounce, which would give it cash-flow of $50 million and a comfortable cushion below the current gold price. While this would give the shares a relatively high price to cash flow ratio relative to the other mining companies I have discussed, Centamin has more than $200 million in cash. Thus it has an additional cushion should the aforementioned fears of the Sukari mine shutting down come to fruition. Furthermore the company has the potential to grow production at Sukari to over 500,000 ounces (250,000 attributable ounces), and it has continually cut production costs over the past several quarters.
This stock has political risk that has deterred investors in the recent past, myself included, although there is no denying the enormous opportunity for growth and strong cash flow should the situation work itself out.
Oceanagold (OTCPK:OCANF) is a larger company than the first two with a valuation at about $485 million. Oceanagold is incredibly inexpensive, although it has declining production at its New Zealand operations. Furthermore the company has over $200 million in debt and virtually no cash.
However I have decided to include it anyway. The primary reason for this is the company's Didipio mine in the Philippines, which will produce 100,000 ounces of gold per year for 16 years with negative cash costs as a result of copper offsets. If Didipio is able to produce 100,000 ounces per year at $1,000 cash flow per ounce of gold (and this is a conservative estimate), the property will have $100 million in annual cash flow. Thus the stock would trade at just 5 times its annual cash flow excluding the cash flow from the company's two New Zealand mines, which investors would essentially get for free. At $1,250/ounce gold we can project an even higher cash-flow estimate for the Didipio mine.
Besides the company's high debt-load (which can easily be serviced) and its dwindling New Zealand assets, investors might not be comfortable investing in the Philippines, which has punitive environmental standards and strict regulations. However the Didipio mine is already in production, and the risks that regulation pose tend to be highest when companies are trying to get mining permits. With Didipio already in production this shouldn't be an issue.
Ultimately OceanaGold is incredibly inexpensive and it is highly profitable even in a depressed gold price environment (it earned $44 million in the last quarter alone). Therefore it should have no trouble servicing its debt and perhaps building up a cash horde in order to expand production in the future. This makes it one of the best opportunities among small gold miners today.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.