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One of the most hated sectors of the last six months has been mining and metals, particularly the gold miners. This of course is in large part due to the falling price of gold. Gold prices slipped in July only to rebound in the last week or so on increased QE3 likelihood, and possible European stimulus. A July jobs number that was strong, but not too strong, weak in general, but not very weak, sent stocks soaring Friday. Gold prices, however are down almost 7% from their march highs, and down nearly 30% from the highs of last year. The Gold ETF (GLD) is nearly flat on the year and also down in similar fashion with gold. In the past, the gold miners have seemed to trail the price of gold, with a general expectation that the mining stocks could potentially catch up to the move in gold prices. However, with gold now back above $1,600 an ounce, the miners are starting to look like a strong buy in my opinion.

In recent articles, I have highlighted why it's time to start picking up the gold miners in addition to the GLD, as well as recommended my top picks in the space for the next year. I also featured NovaGold (NG) resources as a potential long term, but speculative investment at current share levels. Stemming from feedback and inquiries received following these writings, I felt it prudent to respond with an article highlighting the speculative names in the gold mining sector that I am watching. Thus, this article highlights three speculative names that I think may be able to provide outsized returns over the next few years, should the gold mining stocks return to favor with Wall Street.

My top three speculative gold mining plays that I'm watching are:

Minco Gold Corporation (MGH): I have been watching MGH since it dipped below $1.00 a share. MGH is an exploration stage company engaged in exploration and evaluating gold dominant mineral properties and projects in China. MGH has large potential gold deposits all throughout China, which has become a hotspot for gold mining in the last few years. MGH's wholly owned subsidiary, Minco China, currently possesses 12 exploration permits in the Longnan region of south Gansu Province, within the southwest Qinling gold field, in China. The Changkeng gold deposit it owns is located approximately 45 kilometers southwest of Guangzhou. The Gold Bull Mountain property is located in Yuanling County, Western Hunan Province. The Yejiaba Sub-project area consists of four exploration permits. The Company's wholly owned subsidiaries include Minco Mining China Corporation, Yuanling Minco Mining Ltd, Huaihua Tiancheng Mining Ltd. and Triple Eight Mineral Corporation. MGH also owns a 23% interest Minco Silver. MGH is currently trading at penny stock valuations of 37 cents a share, having been battered along with the entire sector over the last year. MGH has been losing money over the last few quarters as it continues to develop. In my opinion this company could provide a good return should the gold mining stocks as a whole start to move. Its properties may also be of interest to a larger mining company, making it a possible takeover target for a larger operation, such as Goldcorp (GG).

Sandstorm gold (SNDXF.PK): This is the second company on my speculative list. It's a very speculative name with a very interesting business model. It is a gold streaming company. SNDXF.PK provides upfront financing for gold mining companies that are looking for capital. In return, SNDXF.PK receives a gold streaming agreement. A so called gold streaming agreement gives SNDXF.PK the right to purchase a percentage of the life of mine gold produced, at a fixed price, in return for making upfront payments to acquire the gold stream. More specifically, they have the right to a percentage of a mine's gold production for the life of the mine. SNDXF.PK is currently a non-operating gold mining company with a portfolio of seven gold streams, five of which are producing gold, and two royalties. SNDXF.PK plans to grow and diversify its low cost production profile through the acquisition of additional gold streams. SNDXF.PK is a growth focused company that is seeking to acquire more of these so called gold streams from companies that have advanced stage development projects or operating mines. SNDXF.PK helps other companies in the resource industry grow their businesses, while acquiring attractive assets in the process. SNDXF.PK is in the process of being up-listed to the US stock exchanges, and recently underwent a reverse stock split in order to do so. Given the increased exposure this move should have for the stock, it is definitely one to consider, albeit it is a speculative pick on an interesting business model. Shares currently trade at $9.00.

Almaden Minerals (AAU): AAU is an exploration-stage company. AAU is an exploration company specializing in the generation of new mineral prospects with excellent potential in my opinion. The company currently has over 40 properties in its portfolio at various stages of exploration and development. AAU is further engaged in the business of the acquisition, exploration and development of mineral properties. AAU possesses property interests in Canada, the United States and Mexico. As of the end of 2011, none of AAU's property interests is beyond the exploration stage, though progress is being made in 2012. The Company has two primary property interests: the Tuligtic prospect which includes the Ixtaca zone in Mexico, and the El Cobre copper-gold prospect. AAU also has some potential diamond exposure interests, such as the ATW diamond prospect in Canada. Unfortunately, almost all of AAU's mineral deposits that were visible from the surface have been discovered, which means they are looking for deposits that are concealed by rock, volcanic ash, glacial debris, vegetation, or some other surface cover. This is an expensive process, and includes various techniques including drilling, which has a lot of upfront costs. Should one of these deposit locations contain a sizable find, expect the stock to soar. Shares currently trade at $1.94. Should the gold mining space as a whole start to move, I expect AAU will outperform other stocks given the speculative nature of the company.

While I have highlighted my favorite miners in prior writings as being Eldorado Gold (EGO), Agnico Eagle Mining (AEM) and Anglogold Ashanti (AU) and I recommend them as buys right now, the plays outlined above are my favorite speculative stocks in the gold mining space. I cannot stress enough the speculative nature of these companies. Although the potential rewards are high, there are inherent risks with these companies. When mining internationally in politically unstable areas, it is not outside the realm of possibility that the government could cease any concession a company may find. This would worry me about MGH. As gold prices rise, gold companies can make more for every ounce of gold they produce, but their net profit depends on their cash costs how much it costs them to produce an ounce of gold. With AAU, they are still looking for actual gold to produce! This could mean that the company goes broke, taking your investment with it as they search.

Costs of mining vary from company to company, are subject to currency issues, energy costs and geopolitical factors. However, AAU is in the process of finding gold, MGH is in China, where there is gold but the cost of extraction is high. And then there is SNDXF.PK's approach through so called gold streaming. Here they are taking a percentage of profits or buying gold at a fixed cost. While the company is growing at a healthy clip, any sign that this growth slows could punish the stock miserably. Finally, they are all levered to the price of gold. While I believe this is a reason to consider the gold miners, it is important to understand that these speculative names generally get crushed on dips in gold prices, given their volatile nature. Should the dollar continue to rally, or the world become less volatile in general, this could send the price of gold down several hundred dollars an ounce, destroying your investment (the same applies even for the mid level and large cap gold miners).

These stocks, while risky, also offer huge upside potential should they discover large gold deposits, or in the case of SNDXF.PK, continue to invest capital successfully in existing mining operations. However, these are just a small sample of the speculative gold miners out there. There are many others, but these are the companies I am watching. I further believe these stocks will soar should the gold miners finally return to favor among investors, or at the very least catch up to the prices of gold. These companies' stocks offer a massive potential reward, if you are willing to take the massive risk associated with them.

Source: 3 Speculative Gold Miners With Large Upside Potential On My Radar