Since I recommended Hecla Mining (NYSE:HL) at the end of last year (Hecla Mining - A Small Cap Precious Metals Stock For The Medium To Long Term), those who took that advice will have seen the silver and gold miner's stock price appreciate by over 240%. Not a bad performance but one could have done even better in another silver and gold miner - Coeur Mining (NYSE:CDE) - up over 500% year to date. CDE's performance brings home the value of investing in something which is both a positive investment choice and also rather more of a recovery stock. At a time of rising metal prices - particularly when one of the main metals concerned is the very volatile silver ('gold on steroids' in a rising precious metals market scenario as some would refer to it!), the combination may make for awesome gains.
Silver has indeed been the best performing metal commodity so far this year, up 47% since the beginning of January, but the performance of companies like HL and CDE, and of most other primary silver stocks, shows the huge benefits of investing in the producing mines, rather than in the metal itself, or in the gold or silver ETFs.
But, as is always the case, investing in mining companies carries its own particular risks - particularly if one invests in those which have few operations over which to spread technical, and sometimes political, risk which can fall outside direct management control. Both HL and CDE are reasonably diversified in this context and have benefited from silver outperforming gold too.
So who do we look for as potential market beaters in the second half of the year in the gold and silver sectors on the assumption that the two most prominent precious metals remain at least around current levels, or rise by a few more percent in the remaining five months of the year? If precious metals really take off between now and the year-end, as some of the more bullish followers have been suggesting, then almost any gold or silver stock will soar with perhaps the junior miners (with all their inherent risks) ending the year with multiples of their current prices. Obviously the much safer stocks with a little more substance behind them will do well too, but increased safety of investment invariably means lower stock price advances in percentage terms. It's all something of a trade-off.
I'll restrict this article though primarily to investment in the more secure stocks. If you like the idea of juniors I'd suggest the Van Eck Market Vectors Junior Gold Miners ETF (NYSEARCA:GDXJ) which balances a multiplicity of stocks held against the inherent risks of investing in gold and silver juniors, but which could really soar in a continuing rising price scenario. Since I recommended this as worth looking at investing in back in mid-December last year (See: GDXJ - Limited Downside And Great Upside Potential In A Rising Gold And Silver Price Scenario) this has risen over 160% - not as much as some of its constituent companies, but better than others which shows that not all junior gold and silver miners outperform in the kind of steady rising price scenario we have seen so far this year. Thus, for continued potential strong upside in junior precious metals miners GDXJ could still be a contender over the remainder of the year and could see spectacular gains in any soaring precious metals price upturn, but without some of the enormous downside risks inherent in individual junior mining stock investment.
As I particularly like the rising price prospects for stocks which could be considered to be in a recovery phase, I have already recommended Goldcorp (NYSE:GG) in these pages: Goldcorp: Good Time To Buy as well worth looking at, assuming management is not exaggerating its potential H2 improvements. It has just come up with some pretty dismal Q2 earnings figures which mean its stock price, if not depressed, has been significantly underperforming that of its peers. But, assuming its management statements and forecasts for the second half are not being economical with the truth much of the Q2 production downturn was due to planned technical adjustments and to operating management restructuring put in place by new CEO, David Garofalo, making his mark on the company. Garofalo may not have had a great track record at Hudbay, where he was previously CEO, but he had to deal with sharply falling base metals prices over his time in place there which will have made life difficult. We'll have to see if he fares better at GG. For the moment we are giving him the benefit of the doubt in that his restructuring, and the return to full output at the flagship Penasquito mine in Mexico, will see some very big improvements in terms of rising income, and lower costs, over the remainder of the year.
Looking at the other major gold miners there is mostly a prevailing theme in their recent performances here - lowering operating and management costs, reducing debt largely through asset sales and an all round efficiency drive. To our thinking, much of the technical and administrative cost lowering has now to be in the past. Earnings comparisons with those of a year ago, rather than with the previous quarter, can still make results look pretty positive, but those are perhaps not the data one should go by. Comparisons with the immediately prior quarter may be the best guide.
Asset sales are bringing overall production down - most of the majors are currently in a falling gold output phase - and this has been having a beneficial effect on operating costs given that generally the disposals being made are those of higher cost operations. These may be being sold off at bargain prices to more flexible junior and mid-tier companies not saddled with the overheads of the majors, and who thus may be able to generate better profits from some of the older and lower grade operations being disposed of. This indeed should make the majors leaner and meaner in costs terms, but be warned that some of the cost benefits which have come in from lower oil prices and declining local currencies against the dollar should not necessarily be considered as permanent.
Of the majors we do quite like Newmont (NYSE:NEM), where falling production - after taking into account the sale of the big Batu Hijau gold and copper mine in Indonesia, which has been providing almost constant executive management headaches for some time - is not as severe as with some of its peers. Newmont's share price has not risen as far or as fast as most of the other majors and may be ripe to play catch-up.
Agnico Eagle (NYSE:AEM) and Randgold (NASDAQ:GOLD) have been among the best overall performers in the Tier 1 gold mining sector in a technical and earnings sense, if not in actual stock price appreciation, but that is something of a function of not being sold down to the extent of the other majors when gold was in its declining phase. Likewise although we would expect them to continue to be strong performers the upside potential is unlikely to be as great as some others.
Yamana (NYSE:AUY) has been something of a recovery stock to date and its stock price has risen accordingly up 195% so far this year. Whether it can continue moving up at this rate is perhaps less certain.
Harmony (NYSE:HMY) has been the best performer stock price-wise of all the gold mining majors (+330% year to date), but at best most of its mines have to be seen as being in the marginal category and marginals do perform best in a rising price scenario but can crash and burn if the price falters or turns down. Not for those who can't afford to lose in a downturn! But the rewards could continue to be very strong should gold continue on its upwards path and the South African Rand continues to weaken against the US dollar.
Of the next tier down, where gains can turn out to be greater in a rising price environment than for the Tier 1 gold and silver miners, but the risks can be greater too, we like B2Gold (NYSEMKT:BTG) which is up around 200% this year. It has good properties but perhaps in slightly less politically stable environments which adds to the risk element.
So which stocks would we tend to recommend for the moment. In truth if gold and silver continue to rise almost any respectable gold or silver mining stock will appreciate decently - some more than others, often in inverse proportion to risk, which might seem a bit of an anomaly.
Tier 1 Gold Miners: We like GG as a recovery stock and NEM to play catch-up. GOLD reports Q2 figures tomorrow and is expected to show a positive quarter and has had a rising dividend pattern contrary to that of its bigger peers in the plus 1 million ounce per year space.
Mid Tier Gold: BTG - but note the risk elements which will be higher than for the majors.
Silver: We still like HL, but almost any primary silver miner should continue to show good returns providing gold and silver prices continue to run higher - but they are also perhaps more vulnerable to sharp falls if gold and silver fall back.
Juniors: Stick to GDXJ in a potentially highly volatile sector and spread the risk!
Derivatives: The big royalty and streaming companies should continue to do well. Take a look at Royal Gold (NASDAQ:RGLD), Silver Wheaton (NYSE:SLW), while the Daddy of them all - Franco Nevada (NYSE:FNV) is always a pretty safe bet but doesn't have quite the leverage of its major peer companies.
Overall we would tend to err on the side of caution. The above picks perhaps won't necessarily provide the biggest potential gains, but they do provide a lower degree of risk should precious metals not perform as expected.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
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.