Can These Speculative Precious Metal Mining Stocks Continue To Outperform?

by: Christopher F. Davis

Precious metals have had an amazing month in anticipation of a third round of quantitative easing in the United States and potential European Central Bank bond buying. The SPDR Gold Trust ETF (NYSEARCA:GLD) was up 4.9% while the iShares Silver Trust (NYSEARCA:SLV) was up 13.5% in August. The miners of gold and silver far outperformed the metals however. The Market Vectors Gold Miners ETF (NYSEARCA:GDX), the Market Vectors Junior Gold Miners ETF (NYSEARCA:GDXJ), and the Global X Silver Miners ETF (NYSEARCA:SIL) were up 12.1%, 12.8% and 17.4% respectively. Anticipating the potential outperformance of the miners I argued that it was time to pick up the gold miners at the end of July. Shortly thereafter I highlighted two speculative gold miners that have outperformed the mining space as a whole. I am reiterating my recommendation on these speculative names as I believe they can continue to outperform their peers in the gold mining space and far outperform the physical metals.

Almaden Minerals (AAU): AAU is an exploration company that specializes in the generation of new mineral prospects with excellent long-term 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 were beyond the exploration stage though substantial progress is being made in 2012. AAU 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 it is 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 I would expect the stock to see $5.00 a share rapidly.

At the time of my initial recommendation shares traded at $1.94. Now, shares currently trade at $2.76. This represents a share appreciation of 42.2% since my initial call a month ago. This far outperforms both the GLD and the gold mining indexes GDX/GDXJ. The company is still speculative but its market cap has grown to $161 million. There is only a small short interest in the stock with 0.55% of the float being short. The stock has a 52-week range of $1.55-$3.67. AAU is on a tear this past month and should the gold mining sector continue to outperform the market, I expect AAU will continue to outperform other mining stocks given the speculative nature of the company.

Minco Gold Corporation (MGH): As I stated in my original recommendation of MGH, I have been watching the stock since it dipped below $1.00 a share. It had sold off with the sector but also because MGH has been losing money over the last few quarters as it continues to develop. MGH is a very speculative exploration stage company. It is 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.

At the time of my initial call on MGH shares traded at just 37 cents a share, having been battered along with the entire sector over the last year. I believe the company could provide a good return if the gold mining stocks as a whole start to move, and move they did. Shares currently trade at $0.54 representing a share appreciation of 45.9% since my recommendation. MGH is still small and speculative with a small market cap of $28 million. I believe that the stock has more room to run and can continue to outperform its peers should gold and silver continue their ascent. Further, 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 (NYSE:GG) or Barrick Gold (NYSE:ABX).

Bottom Line: I think the gold miners will continue to outperform gold. I further believe that the smaller more speculative names can continue to outperform their larger peers in the sector. Having made successful calls on AAU and MGH I am once again reiterating my recommendation on these two speculative stocks as I think they can indeed continue to outperform the GDX and GDXJ.

Disclosure: I am long SLV. 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.