5 Gold Miners With Big Upside Potential for a Flight to Safety

by: Danny Furman

I just watched a video featuring a refreshingly lucid explanation of how gold miners do best in a contracting global economy. Jay Taylor discusses the adverse effect of high base metal and energy prices on miners' profits, which largely explains poor performances of late by many mining stocks. While global growth has been strong in recent years and many emerging economies show few signs of slowing, the U.S. and EU received widespread downward revisions in estimated GDP growth shortly before Japan was violently shaken. The situation in Japan has inspired arguments both for and against developed markets, which I considered in decline before the earthquake-- and more so since.

Industrial commodities began selling off fiercely in February and-- despite a strong bounce last week-- Dr. Copper appears to be resuming its slide, down 1% as stock indexes hold onto gains approaching 2%. Even with strong emerging market growth, sub-normal conditions in the economies that account for a vast majority of worldwide spending kill corporate profits. High input costs exacerbate this problem and recent reports from Nike (NYSE:NKE) and other manufacturers confirm that the re-leveraging process cannot continue (profitably) without consumers absorbing costs of inflation in raw materials.

While gold has nearly doubled since late 2008, oil has risen by 200% and copper 300%. With gold currently trading near $1430/oz and silver over $36/oz, precious metals themselves are once again on the cusp of new highs. Anyone who owns mining shares knows that PM producers (besides a few juniors and silver producers) haven't kept pace, however their turn to shine may be fast approaching.

There is certainly an additional margin of safety investing in mines achieving steady profits under current conditions, not to mention the potential to ramp up production in the case of better conditions. If, however, the recent trend continues and precious metals outperform industrial commodities, producers currently trading closer to book value, with large reserves and without terrible burn rates, may outperform significantly. Additionally, stocks that haven't performed well in recent months have attracted short-selling from momentum traders. If rallies take place in these stocks, they will be amplified by short covering.

The following five U.S. listed mining stocks currently trade 25% or more below highs achieved since 2009 and are at the top of my buy list.

1. Compania de Minas Buenaventura (NYSE:BVN) operates gold and silver mines in Peru. Other assets include a power company and interests in several other local mines. BVN has a long standing history of profitability, low debt and high exposure to silver, making it very appealing at a P/E of 17. Alberto Benavides de la Quintana recently retired as Chairman of the Board, but neither the 90-year-old billionaire nor any other insiders have sold shares in the last year. BVN traded over $55/share, an all-time high, in November 2010.

2. Jaguar Mining (NYSE:JAG) better fits the mold of a company that is currently treading water but figures to thrive if conditions improve. Seeking Alpha contributor Hyperinflation considered JAG "ripe for a takeover" at over $6/share, which has me quite keen on shares at today's price of $5.15. JAG briefly traded over $13/share in early 2010.

3. Kinross Gold (NYSE:KGC) has a global portfolio of mining assets and successfully increased profitable output in 2009 and thus far in fiscal 2010. Having flirted with $20 in October 2010, KGC shares look like a strong pick for growth and limited downside currently at $15.

4. Randgold Resources (NASDAQ:GOLD) operates highly regarded mining properties in South Africa, the world's long-standing leader in gold production. With relatively low costs for incremental increases in output, GOLD garners a higher valuation than many peers. After trading above $100/share six months ago, the stock sits at $73/share today.

5. Crystallex International (KRY) was briefly halted from trading in early February and is currently pursuing arbitration with regards to it's mining interest in Venezuela. I'm not personally considering buying shares, although bottom feeders may be intrigued at 15 cents each, an 80% discount to last year's high.

Disclosure: I am long BVN.

Additional disclosure: May initiate a long position in KGC and/or JAG in the next 72 hours.