Looking At Gold Miners? Consider 2013's Winners For 2014

by: Ben Kramer-Miller

(Editors' Note: This article covers a micro-cap stock. Please be aware of the risks associated with these stocks.)

2013 was an awful year for precious metals and even worse for the companies that mine them. The following data points sum this up.

  • The SPDR Gold Trust (NYSEARCA:GLD) is down 28% ytd.
  • The iShares Silver Trust (NYSEARCA:SLV) is down 34% ytd.
  • The Market Vectors Gold Miners ETF (NYSEARCA:GDX) is down 54% ytd.
  • The Market Vectors Junior Gold Miners ETF (NYSEARCA:GDXJ) is down 61% ytd.
  • The Global X Silver Miners ETF (NYSEARCA:SIL) is down 51% ytd.

However there were some winners among gold and silver miners in 2013, and for those who believe that the long-term secular bull market in the precious metals is intact these companies might be a place to start looking for opportunities -- if they can rise, or even remain flat in such a lousy price environment imagine what they would have done had gold and silver prices risen.

In this article I discuss the four winners among gold miners that are on my radar (I apologize if I missed any): Dynacor Gold Mines (OTC:DNGDF), Klondex Mines (OTCQX:KLNDF), Centamin PLC (OTCPK:CELTF), and Virginia Mines (OTCPK:VGMNF). I also give honorable mention to Tahoe Resources (NYSE:TAHO) which was flat. While it is true that these are not the stocks to look at if you want to go bottom fishing, keep in mind that these stocks went up in the face of immense pessimism, which implies that investors likely had very good reasons to bid these stocks higher.

Dynacor Gold Mines

Dynacor Gold Mines was the big winner in 2013 with shares soaring 43%. The company has a tiny market capitalization of just $65 million. It is not a gold miner in the traditional sense -- it is an exploration company that funds exploration through its ore processing division.

This means that Dynacor its revenues are tied to the amount of ore it processes. But it does have exposure to the gold price given its exploration properties, most notably Tumipampa. It should be able to define a resource here upon further exploration and develop it into a mine without diluting shareholders or seeking other sources of outside capital.

Of course this means that investors might not see the large upside that they would expect with a typical gold miner should gold prices rebound in the near term. However ore processing is a stable business that has proven to be profitable, and this in itself suggests to me that Dynacor has a place in a precious metals portfolio.

The company's shares are still relatively inexpensive despite the enormous price appreciation. It trades at about half of its annual revenues, and at just over 7-times trailing earnings. Investors who don't have an issue with investing in Peru should definitely consider taking a position.

Klondex Mines

Klondex Mines is up 20% year to date. The company has a $116 million market capitalization and it is in the process of developing its Fire Creek project in Nevada. The Fire Creek project has over 2 million ounces of gold using a 4 gram/tonne cutoff grade. Given the high grade of the gold found at Fire Creek, and given that the mine is located in a low-risk jurisdiction has given investors confidence in the company's ability to begin producing profitably. This confidence was bolstered by the company's successful bulk sampling results which yielded high-grade gold and provides further confidence that Fire Creek will generate a significant amount of cash-flow in the not too distant future. Most recently the company purchased a property from Newmont Mining (NYSE:NEM) with a lot of exploration potential and a milling facility in the vicinity of Fire Creek. The announced dilution did not hurt the stock price, which bodes well for the future.

While this gives us reason to be enthusiastic, investors should take into consideration the fact that this a speculative investment for several reasons. First the company doesn't have any mineral reserves -- the 2 million ounces of gold are mineral resources, which means that Klondex has not yet demonstrated that they can be mined economically despite informal evidence to the contrary. Second, the company has not yet released a feasibility study, which again leads to the possibility that the gold cannot be mined economically. Finally Klondex has several properties, but only one -- Fire Creek -- that makes up the bulk of its valuation, which means that if for whatever reason the company cannot mine at Fire Creek the shares are worth far less than they are today.

Centamin PLC

Centamin shares are up 14% year to date. The company has a market capitalization of $757 million. The shares are almost certainly up this year because of extreme weakness towards the end of 2012 when the shares lost more than half their value in response to legislative action in Egypt that threatened to rescind the company's mining rights. However this threat appears to have abated.

While the strength in the shares this year is seemingly incidental (the shares bottomed right at the end of 2012) this is no reason to ignore Centamin, although I still think the political risk is elevated. The Sukari mine is a huge property of which Centamin owns half. It has rising production and lowering costs which is an ideal scenario in a depressed gold price environment. Furthermore Sukari has over 10 million ounces of gold reserves which indicates that it will have a long life at the current production of nearly 500,000 ounces (250,000 attributable).

Virginia Mines

Virginia Mines shares are up 12% year to date. The company has a market capitalization of $365 million. Virginia Mines is an exploration company, although investors seem to be enthusiastic that the company's royalty on Goldcorp's (NYSE:GG) Eleonore mine will begin to generate cash-flow next year. As a result the company will have cash-flow to fund more aggressive exploration of its 5,600 square kilometers of potentially mineral-rich land.

Despite the fact that investors bid up Virginia Mines' shares this year I am not sure that this is justified, as I have expressed in my article: .Virginia Mines: This Darling Among Gold Bulls Is More Speculative Than You Might Think. By comparison we saw that Klondex furthered its Fire Creek project markedly, and it showed bulk sampling results that imply that the Fire Creek project may be more valuable than initially thought. Virginia Mines did not further any of its exploration projects. Further its Eleonore royalty may have gained in value somewhat because the cash-flow is more valuable on the discounted cash-flow basis than it was a year ago, but this is certainly off-set by the decline in the gold price. The only explanation that would justify such a strong price performance is that Goldcorp has been drilling at Eleonore in order to expand the estimated resource and the mine's annual production/life. While the company has not released its results yet it is plausible that insiders are aware of exceedingly positive results that would justify the price increase.

This being the case Virginia Mines remains a solid exploration company with enormous speculative upside, and I think that more aggressive investors can consider taking a position even though the relative strength of the share price performance is not justified in my mind.

Honorable Mention: Tahoe Resources

Tahoe Resources shares are basically flat year to date. The company has a market capitalization of $2.3 billion. It is in the final stages of developing its enormous Escobal silver mine in Guatemala. This project is expected to produce roughly 20 million ounces of silver annually for 20+ years. As production approaches investors are becoming more enthusiastic, especially since it seems that local opposition to the mine appears to be less of a threat.

While I liked the stock a lot at $12/share I am naturally less optimistic at $16/share, especially since I don't believe the political risk has gone away. Although this is a tail-risk, and once production actually commences next year local opposition will no longer be a significant headwind. Given that the company offers leverage to the silver price and yet will still be able to generate a sizeable profit at $20/ounce silver this is definitely a stock worth looking at.

Disclosure: I am long GG. 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. I may initiate a long position in Klondex Mines in the near future.