There are a few criteria that I regard as the sweet spot for the buy and hold gold stock investor:
- Positive earnings
- Market cap between $1 and $2 billion
- P/E ratio under 15
- Current ratio over 2
- No or very little debt
When a stock meets these criteria, I'm inclined to take a closer look at management, mining projects, jurisdiction, and other such issues to see if an investment is warranted.
And in this regard, one stock that has recently come to my attention (although I should've seen it earlier) is Nevsun Resources (NSU).
Here are the key details on Nevsun:
- Positive earnings, with a dividend yield that is currently 1.62%.
- With a market cap of $1.23 billion, it's in the market cap sweet spot; big enough to not be an extraordinary risk of losing all your money, but small enough to be a growth opportunity.
- P/E of 12.60 at the time of this writing.
- The balance sheet is very sound: assets have been growing every quarter since 2010, the current ratio is near 3, and there is no long-term debt. The stock is trading at a price-to-book ratio of around 2.68, which I find acceptable, though a little higher than similar companies; Newmont (NEM), Goldcorp (GG), and AuRico (AUQ) are all currently under 2.30.
As for the intangibles, I like much of what I see there as well:
Nevsun is operating primarily out of Eriteria, and its main project is the Bisha Mine. This mine is partially owned by the Eriterian National Mining Company, a parastatial entity with a 30% stake. I like to see mining companies form agreements with state enterprises, as I think doing so significantly decreases political risk -- the government is on your side at that point -- while also improving the outlook for fundraising, should it be needed. Tanzanian Royalty Exploration (TRX) is another mining company with a similar approach of partnering with parastatial entities, and is another example of a company I believe is pursuing the right strategy of ensuring government support obtaining the benefits of reduced risk that such a strategy offers.
The Bisha mine has three layers of mineralization that should keep the mine open and yielding gold, silver, copper, and zinc into 2023. While I'm most interested in gold, I do believe base metals will rally over the course of the next 10 years and so I consider this to be of some value as well.
One of my favorite aspects, in my opinion, is that Nevsun is currently proving to be very efficient and Bisha is showing that it can yield some high-grade ore. Nevsun continues to report a cost per ounce of around $300 -- in Q3 2011 the company reported cost per ounce of $264 -- and given that the bull market in gold is far from over, the prospects for this mine are outstanding.
Now it's time to turn our attention to the bottom line -- share price. Nevsun has gotten off to a great start in 2012, as it is trading near $6.20 and its 52-week high is $7.30. I like this stock very much, but I want to wait for a pullback. This pullback may never come, but I'd rather run that risk than try to chase the momentum Nevsun has going for it at the moment. In any event, this is one I'll be adding to my watchlist.
Disclosure: I have no positions in any stocks mentioned, but may initiate a long position in NSU over the next 72 hours.