Previously, I highlighted what I felt were top 5 best gold stocks for 2014. I based my picks on a number of factors, ranging from current valuation, resource upside potential and upcoming catalysts in 2014.
Specifically, what am I looking for in gold stocks?
- I want miners or streamers who have a solid balance sheet to weather the ongoing gold price weakness - but also hold big upside and leverage to the price of gold if it rises. (There is one exception to this rule in my picks listed below, however).
- Miners who produce gold at low all-in sustaining cash costs, or development companies which have projects expected to produce gold at very low costs.
- If I'm analyzing a development project (not a company which has a mine in operation, rather, one bringing a project to production very soon), then the project should have high grades and very favorable economics, with low capex to get into production. These projects are the most likely to finds sources of financing in this market.
- Project upside: A company which has the potential to significantly increase the production and reserves of their mine with minimal capital.
- Miners who operate in politically stable jurisdictions such as Canada and the USA are preferred.
- Takeover targets are a plus. I feel gold juniors which have great projects in safe jurisdictions will be a target in 2014 as M&A activity heats up.
- The bottom line is that I feel these picks will outperform the benchmark Gold Miners Index (NYSEARCA:GDX) as well as the Junior Gold Miners Index (NYSEARCA:GDXJ), and, of course, the price of gold (NYSEARCA:GLD).
While I still feel comfortable with my top 5 picks for the year, there are certainly some other miners which deserve to be recognized.
Here are my five other top picks for 2014:
#5 Allied Nevada (NYSEMKT:ANV)
Perhaps no other gold stock in the entire market possesses the kind of upside which Allied Nevada does. However, with that big upside comes considerable risk.
Allied Nevada operates in Nevada so it doesn't get much better than that in terms of politically stability. The company's flagship operation is the Hycroft mine, and the total reserve and resource base is 55.3 million gold equivalent ounces. That is a tremendous amount of resources and based on Allied Nevada's valuation, the company is significantly undervalued.
At the end of the third quarter, Allied Nevada had cash and equivalents of $154 million but also a total debt balance of over $600 million.
Despite this very large debt balance, it appears that Allied Nevada is turning the corner. The company released fourth quarter production and 2014 production guidance recently: 181K ounces of gold were sold this year with 858K ounces of silver, and in 2014 this number is expected to increase significantly to approximately 230,000 to 250,000 ounces of gold and 1.7 million to 2.0 million ounces of silver at Adjusted cash costs in the range of $825 to $850 per ounce (with silver as a byproduct credit).
The focus for 2014 is simple: free cash flow. Capital expenditures in 2014 are expected to decrease significantly with non-expansion capital expenditures expected to be less than $15 million in 2014 and exploration spending in 2014 approximately $2.9 million.
If gold miners are a good contrarian investment in 2014, then Allied Nevada is the ultimate contrarian investment.
#4 Pilot Gold (PLGTF)
Pilot Gold is currently one of the only non-producing gold companies I can recommend. In fact, Pilot Gold is a pure exploration and does not have any plans to try to bring their projects into production.
There are three main reasons why I'm bullish on Pilot Gold: the quality of the company's projects, the excellent management team with a proven track record and the high-quality mining partners on its projects (which also own a percentage of the company).
Consider the following:
- Pilot Gold has three very exciting gold development projects: TV Tower and Halilaga in Turkey and Kinsley Mountain in Nevada.
- TV Tower is an exciting gold-silver-copper discovery. Pilot Gold has a JV with Teck and owns a 40% interest and is earning into 60%. Drill results at TV Tower have been very impressive, with highlights of 136.2m of 4.28 g/t Au; 15.8 g/t Ag; 0.68% Cu, and 114.5m of 0.87 g/t Au including 15.4m of 2.83 g/t Au. Other impressive drill results include: 15.3 g/t gold over 45.2m in KCD-142, and 93.0 g/t silver over 122.7m in KCD-108.
- Halilaga, on the other hand, is a copper-gold deposit which Teck is the operator and 60% joint-venture partner. The project already has an initial resource estimate: an indicated resource of 1.665 million oz Au at 0.31 g/t Au, 1.112 billion lbs Cu at 0.30% Cu, and an inferred resource of 1.661 million oz Au at 0.26 g/t Au, and 1.007 billion pounds of copper at 0.23% copper (198,668,000 tonnes).
- The preliminary economic assessment at Halilaga was very positive and revealed the following highlights at $1,200 gold and $2.90/lb copper: a pre-tax NPV7% of $675 million, 26% IRR and 2.1 year payback.
- At Kinsley Mountain in Nevada, Pilot Gold owns 78%. 2013 drill results including 15.6 g/t over 3m and 2.51 g/t over 16.8m.
- Pilot Gold has a current share price of $1.06 and with 89 million shares outstanding, a market cap of approx. $95 million. Newmont Mining owns 15.3% and Teck Resources owns 8.77%.
- As of Sept. 30, 2013 the company had $24 million working capital, so I feel that Pilot Gold is well capitalized into 2014 and most likely will not need to raise more money until the end of the year or early 2015.
- Pilot Gold's Board of Directors is led by Chairman Dr. Mark O'Dea, former President and CEO of Fronteer Gold. The management team is led by Matt Lennox-King, a member of the Fronteer Gold team since the company's startup. The management team at Pilot discovered or advanced seven deposits since 2003 under Fronteer Gold and eventually sold the company for $2.33 billion or $14 a share to Newmont Mining - a spectacular rise from $2 a share just a few years earlier.
I feel that Pilot Gold will be an obvious takeover target someday and I look forward to seeing the company further develop its exciting projects. I feel that this is a management team you can trust and I plan on holding my shares for the long-term.
#3 New Gold (NYSEMKT:NGD)
New Gold is one of the lowest-cost gold producers in the entire world and I expect this to continue in 2014.
The company has four producing assets located in very politically stable jurisdictions - The New Afton Mine in Canada, the Cerro San Pedro Mine in Mexico, the Mesquite Mine in the United States and Peak Mines in Australia. Of the company's 29.2 million ounce gold resource base, 62% or 18 million ounces comes from its Canadian operations.
New Gold also owns 100% of the exciting Blackwater and Rainy River projects, both located in Canada, as well as 30% of the El Morro Project in Chile.
Here are some reasons why I'm bullish on New Gold in 2014 and beyond:
- New Gold reports all-in sustaining cash costs around just $900 an ounce, among the lowest in the industry (senior average is $1,100, according to the company). Therefore, New Gold is currently profitable and will remain so even with a much lower gold price. Not many mining companies can say this.
- Q3 2013 was a record quarter for New Gold in terms of its low costs, as the company reported all-in sustaining costs of just $779 an ounce. Adjusted net cash from operations totaled $54 million.
- The company estimates 390 - 400K ounces of gold production in 2013, along with 78-88 million lbs. of copper and 1.3 million silver ounces. I see the metals diversity as a plus as I am bullish on silver and copper in the long-term.
- The company is well capitalized, with $429 million in cash and equivalents and $100 million in an undrawn credit facility. The company does have over $800 million in debt but it appears manageable, given the company's profitability.
- I believe the company is doing the right thing by focusing on advancing its Rainy River project right now instead of Blackwater. While Blackwater would average 485,000 ounces of production at low all-in costs for the first nine years - more than doubling New Gold's current total production - the mine comes with development capital costs of $1.86 billion, which is clearly too much.
- The Rainy River project, on the other hand, carries a resource base of 6.2 million ounces and is expected to produce 225,000 ounces a year for 15+ years, at below-average cash costs.
- Initial capital expenditures for Rainy River were listed as $713 million in the Rainy River Resources Feasibility Study. This is still a lot of capex, but much more manageable than the amount of money it would have taken to get Blackwater into production.
I also feel the money it would take Rainy River to get into production would be worth it. The project boasts a pre-tax Net Present Value of $1 billion - even at $1250 gold and $25 silver. At $1600 gold and $35 silver, the NPV is $1.7 billion.
New Gold could consider selling a gold or silver stream on Rainy River if it needed the capital. A 10 percent gold stream would easily net the company at least $100 million (give up 22-25K annually at a fixed price per ounce). Or, the company could JV the project if it needed to.
The company has a number of key catalysts ahead, mainly the Rainy River project feasibility study update, exploration and resource updates at New Afton and New Afton throughput expansion update.
For those seeking more leverage to the price of gold and New Gold shares, I feel that the 2017 warrants could be the best way to play $1,500 gold.
#2 Kirkland Lake Gold (KGILF)
Kirkland Lake is an obvious takeover candidate for a number of reasons.
First, investors should take note that nearly every takeover or merger of a gold miner has been done at a premium - consider the Brigus Gold (BRD) takeover by Primero Mining (NYSE:PPP), an offer which represented 43% premium to Brigus' 20-trading day volume weighted average price and a 45% premium to Brigus' previous day closing price. I mention Brigus because I feel that Kirkland Lake Gold is a very similiar company, but actually even more attractive than Brigus and deserving of a higher valuation.
As I mentioned in a previous article, Kirkland Lake Gold has a lot of things going in its favor - from its location of operations in mining-friendly Canada, to its super-high grades, tight share structure and recent arrangement with Franco Nevada.
Here are the main reasons on why I am bullish on Kirkland Lake Gold:
*Great Location: The company has operations located in Kirkland Lake, Ontario, Canada, which is among the best places to mine gold in the world.
*High Grades: The company has proven and probable reserves of 2.9 million tonnes @ 15.4 g Au/t). This amounts to 1.4 million proven and probable ounces)
- The total of the Estimated Measured and Indicated Resources of Macassa Mine at January 1, 2013 is 3.8 million tons at a grade of 0.49oz Au/ton (3.5 million tonnes @ 16.8 g Au/t), or 1.87 million measured and indicated ounces).
- In addition, there is an estimated 2.2 million tons at a grade of 0.52 oz Au/ton (2.0 million tonnes @ 17.8 g Au/t) that is classified as an Inferred Resource. (1.157 million ounces inferred).
- The Proven and Probable Reserve in the South Mine Complex is 1.5 million tons at a grade of 0.52 oz Au/ton (1.4 million tonnes @ 17.8 g Au/t).
- In total, the company has gold reserves of 4.42 million ounces, all high grade.
*Compelling Valuation: Following the $50 million net smelter royalty sold to Franco Nevada (NYSE:FNV), Kirkland Lake Gold has approximately $75 million in cash (Oct. 31, 2013). Total debt is primarily made up of $103.7 million in convertible debentures and $16 million in finance lease liabilities.
- With a current share price of $2.59 and 70 million shares outstanding, Kirkland Lake has a current market cap of $181 million. To get the enterprise value, we minus cash and add debt, so we come up with an enterprise value of approximately $225 million.
- Since Kirkland Lake has gold resource base of 4.42 million ounces in all categories, the market is placing a value of just $50 on each gold ounce. The producer average for gold miners is around $100 an ounce and recent takeovers and offers have been much higher than this $50 figure. For example, I've estimated that Goldcorp's (NYSE:GG) recent takeover offer for Osisko Mining (OSKFF) values Osisko resource base at $135 per ounce. Other producers have the following EV/Ounce valuations: Agnico Eagle ($138 an ounce), Barrick Gold ($97 an ounce), Yamana Gold ($103 an ounce). (Source: GoldMinerPulse.com).
- For comparison's sake, Primero Mining's takeout offer of Brigus was valued at $220 million, which is around Kirkland Lake's enterprise value. However, Brigus' operations and development project have much less ounces than Kirkland Lakes and at much lower grades - Black Fox holds 764K ounces proven and probable, with 924K ounces measured and indicated, while the company Grey Fox project holds just 730K ounces indicated and inferred, for a total resource of about 2.4 million ounces.
According to YCharts.com, Brigus has an enterprise value of $240 million, giving Brigus an EV/Ounce of $100 (not counting the company's Goldfields project).
Therefore if we give Kirkland Lake's resource base an EV/ounce valuation of $100 per ounce, which I feel is very reasonable given its high grades and exploration upside, then Kirkland Lake would have an enterprise value of $442 million, nearly double the company's current value!
The bottom line is that I think Kirkland Lake is a great buy at current prices and I think a takeover or merger is in store for 2014.
#1 Midway Gold Corp. (NYSEMKT:MDW)
Midway Gold is one junior mining company which I only just learned of recently. The company aims to bring the Pan gold mine, located in Nevada, into production in 2014.
At $.85 a share and 130 million shares, Midway gold carries a market cap of $110 million.
There are many positives to the 1.13 million ounce Pan project. First, it is located near existing infrastructure which decreases the company's capital requirements to get into production, and lower overall cash costs. In fact, just $99 million is required to get Pan into production.
The mine is expected to produce 81,000 ounces a year for nine years. While the gold isn't high grade, economics are extremely favorable as the November feasibility study estimated $824/oz all-in fully loaded cash costs. Therefore, Pan should be a mine that is profitable at any gold price. At $1,200 gold, Pan carries a Net Present Value of $123 million and a super-high internal rate of return of 32%! This is more than the company's entire market cap and more than double its enterprise value.
The company has a sister project in Gold Rock, located just 8 km away from Pan. Gold Rock contains 661K ounces in indicated and inferred and production is targeted for 2016.
In addition, Midway owns 40 %the Spring Valley project, with Barrick Gold completing a 60 % earn-in in April 2013. Barrick is funding the project fully to production
The biggest risk investing in Midway, besides a large drop in the price of gold, is financing risk. However, as of Sept. 30, 2013, the company has a solid cash balance of $58.3 million with virtually no debt ($4.7 million current liabilities). I believe that Midway with have very little problem getting the remaining funds for Pan, and I think the remaining balance could come from either debt or perhaps a small gold stream and/or equity.
Disclosure: I am long PLGTF, BRD. 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.