Gammon Lake Resources: Attractive Company, Excessive RSI

There is nothing tiny about a Chihuahua Mexico Gold-Silver Project called Ocampo.

Ocampo has 2.9 million oz of gold and 133 million oz of silver (measured and indicated) and another 3.0 million oz of gold and 162 million oz of silver inferred. Production is underway, and this is now the largest and most sophisticated precious metals mine in Mexico.

Production will be about 400,000 gold equivalent oz/year at just under $200 cash cost per oz.

BMO bank raised $160 million in equity for the company, and to be fair to my readers, it was a BMO rep who put the bug in my ear. Nevertheless, this is a company I like, and I am writing it up for that reason alone.

Gold equivalent production is going to ramp up quickly: 480,000 oz (2007); 560,000 oz (2008) and 690,000 (2009). The mine is almost pure gold and silver – it has very little other metal involved – and has a relatively long mine life.

BMO is estimating 2007 earnings of US$1.32/share, so the stock is selling at one of the lowest price to earnings multiples.

At $599 gold, Gammon Lake (AMEX:GRS) has a Net Asset Value per share of US$20.72. Normally these stocks are trading at a 1x-3x multiple of NAV, and you can see that at today’s price of US$12.85, it’s trading at only about 0.62 pct of NAV.

There is some debt – about $84 million – on the books, but that is insignificant. And, there is no county risk involved here.

All in all, I think the company is just not as well promoted as some of the other intermediate producers that have brought on new production recently.

This is definitely one you want to have a look at. The stock price did take quite a hit during the final hour Monday. It had been over-bought as the daily chart shows (at right, top).

As you know, I’ll buy stock, sometimes, in a relatively high Monthly and Weekly RSI-7 situation, but never when the Daily and Hourly RSI-7 in the 70-80-90 range, like GRS was on Thursday. After all, the stock bottomed at US$9.50 in early October and then powered north to US$13.12 Monday morning. Too much of a good thing…

I say, let the good ones come to you. Never ever chase them... including the not-so-little ones from Chihuahua.