Gold And Silver Miners: Quality Producers

Don Durrett profile picture
Don Durrett
4.66K Followers

Summary

  • Gold and silver exposure at a good risk/reward.
  • Low all-in costs.
  • Likely to quickly double in value with higher gold prices.
  • Quality management teams.
  • Good properties. Good locations.

Consider investing in a mining stock the way you would a fortune 500 company. You would look for a profitable company with a good balance sheet and good management team. Below is a list of quality gold and silver producers with low costs and quality management teams.

The gold producers on this list have all-in costs (free cash flow) under $1,100 per oz. The silver producers have all-in costs (free cash flow) under $14 per oz. These are the companies that will likely double first when gold and silver prices rise. In the meantime, they are strong enough to withstand low price swings. None of them have debt issues.

Stock Name

Symbol (US)

Type

Rating

Share Price (US)

FD Shares

FD Mkt Cap 7/30/17

Coeur Mining

CDE

Gold

2.5

$7.61

181M

$1381M

Fortuna Silver

FSM

Silver

2.5

$4.35

160M

$696M

Guyana Goldfields

OTCPK:GUYFF

Gold

2

$3.59

179M

$642M

Hecla Mining

HL

Silver

2.5

$4.73

399M

$1887M

Kirkland Lake

KL

Gold

2

$10.59

212M

$2245M

Mag Silver

MAG

Silver

2

$12.60

83M

$1045M

McEwen Mining

MUX

Silver

2.5

$2.27

312M

$708M

New Gold

NGD

Gold

2.5

$3.37

617M

$2079M

Pretium Resources

PVG

Gold

2.5

$7.95

187M

$1486M

Silvercorp

SVM

Silver

2.5

$3.48

175M

$477M

St Barbara Ltd

OTCPK:STBMF

Gold

2

$2.22

518M

$1151M

Torex Gold

OTCPK:TORXF

Gold

2

$14.78

81M

$1207M

All of these stocks have been analyzed by me, and I own most of them. The ratings come from GSD. A 2 rating is a potential 3 bagger at higher gold/silver prices. A 2.5 rating is a likely 3 bagger at higher gold/silver prices.

I have learned from experience that when gold/silver prices are trending higher, you want to own producers. The reason why is because their cash flow immediately increases and that causes their share price to increase. There is a direct correlation.

I have also learned that quality producers tend to rise the fastest and tend to outperform as gold/silver prices rise. Whereas, companies with a few red flags tend to lag when we get higher gold/silver prices.

The gold/silver mining business is cash intensive. Not only does it cost a lot of money to produce gold/silver, but most mining companies continually explore and develop projects. For this reason, a company's balance sheet is always under scrutiny by investors. When gold/silver prices rise, it has the effect of improving a company's balance sheet, and sometimes dramatically.

When a quality producer improves its balance sheet, it nearly always rises in value. By quality, I am referring to its properties, costs, location, and management team. All of the companies on my list can be considered quality producers.

If you own a quality producer that suddenly finds itself with a pristine balance sheet with zero debt and a few hundred million in cash, that stock is going to explode in value as gold/silver prices rise. This is why you want to own them. If gold/silver prices rise for an extended period, nearly all of the stocks on this list are going to become very strong companies with strong balance sheets.

For this reason, my favorite stocks to own are producers. And the most ideal stock is a quality producer that is also a growth stock. What is powerful about creating a portfolio like the one above, is that many of these stocks are going to be growth stocks. In fact, that is the strategy of these companies. Once you become a strong producer, you are always looking for growth. What else are they going to do with their cash flow?

I expect a lot of consolidation in the gold and silver mining industry. For this reason, you want to own a lot of producers. Why? Because you want to own the stocks that are the most aggressive and the ones that are doing the acquisitions. You do not want to own the company that is acquired. The growth company is the one doing the acquiring.

Growth companies are usually quality producers with low costs that have high cash flow for acquisitions. However, beware of companies that try to create growth via debt. A quality company will not let their debt get out of hand.

A lot of gold/silver mining investors like to invest in exploration stocks for the potential of quick big gains. A good example is the recent explosion in Novo Resources (OTCQX:NSRPF). But the risk/reward is much better chasing cash flow with quality producers. Yes, there is risk that gold/silver prices could remain low, or even crash and impact all producers. However, if you are a long-term investor and you guess right about higher gold/silver prices, you will be in a good position.

We have experienced a protracted downtrend with gold/silver prices. The last high was in August 2011. That was a long time ago and some people think the bull market for gold/silver is over. I'm not in that camp. I still expect a new all-time high. If you also expect the gold/silver bull market to resume, then buying some quality producers is a good bet.

Gold/silver investments in many respects are hedges against a financial crisis. Thus, if we do get higher gold/silver prices, the odds are that some of your other investments/assets went down. So, buying a few quality producers will offset losses in those other asset classes.

I'm in the camp that believes it is possible for nearly all assets to go down in value except a few types. For instance, I expect most stocks to crash, along with other assets such as real-estate, used cars, used motorcycles, used boats, used RVs, collectables, etc. Stuff that has value today, probably won't if the debt bubble bursts and we have a financial liquidity crisis.

If all of these other asset classes are at risk in the event of a major economic crash, then gold/silver is one of the few asset classes that will actually thrive in such a scenario. Can you imagine the cash flow at $2,000, $3,000, even $5,000 gold prices? Not owning quality gold/silver producers today is like not owning Bitcoin when it was trading under $1,000 - probably a mistake.

Some would argue to stay away from miners and any paper investment, and stick with physical gold and silver. I actually can't argue against that advice. I think physical silver is perhaps the best investment at this time (although Bitcoin also has my attention). I think physical silver has the best risk/reward characteristics of any investment, because of the current 75 to 1 gold silver ratio.

The problem if you are a big investor, is where are you going to store all of that silver? If you have to pay annual storage fees, those can add up. Yes, it's good to own some physical silver, but at a certain point, storage becomes an issue.

I think it is a good idea to own both: physical silver and shares. This way you have the safety of physical ownership and exposure to a potential blast off in precious metal prices.

Physical gold is good to own, because it may explode in value. But if it does, then a quality producer makes even more sense because of the leverage miners have with their costs. I always think of physical gold as an asset and not an investment. The gold producers have much more leverage than physical gold. This creates investment opportunities.

I think the miners are a screaming opportunity, much like Bitcoin was under $1,000. I was a buyer of Bitcoin at $450 and I recognized it as a long-term investment opportunity. I also recognize this opportunity with the miners. Ironically, it will likely take longer for Bitcoin to payoff than the miners. Bitcoin may be trending today, but at some point, so will the miners. I don't plan on selling my Bitcoin and could hold it for a decade, whereas I have an exit plan for my miners, and will likely sell them before I sell my Bitcoin.

The cash flow for quality producers is going to be incredible once gold takes off - and it will. Just don't ask me when, because I don't know. I do know that you can't print money to create prosperity, which is what central banks have been trying to do since 9/11. What they have been doing is creating a big mountain of debt, on top of a mountain of debt that already existed.

One of these days that debt bubble will pop. When it does, money will flood out of the $50 trillion bond market into gold. That's when you will want some exposure to quality producers. You can wait for it to pop, or get in early and take a position now.

Editor's Note: This article discusses one or more securities that do not trade on a major U.S. exchange. Please be aware of the risks associated with these stocks.

This article was written by

Don Durrett profile picture
4.66K Followers
Author of How to Invest in Gold & Silver: A Complete Guide with a Focus on Mining Stocks. Expert on gold and silver mining stocks. Website: https://www.goldstockdata.com.Twitter: https://twitter.com/DonDurrettYoutube: https://t.co/TKA05E3Gsr?amp=1Instagram: https://www.instagram.com/dondurrett/Website: https://www.dondurrett.com
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Disclosure: I am/we are long KL, MUX, HL, SVM, CDE, FSM. 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.

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