Top 15 Gold Mining Stocks

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Includes: ALO, ARNGF, BGMZF, FPRGF, GLDLF, HUMRF, KNTNF, LMCNF, LRTNF, ORZCF, PZG, RPMGF, TGCDF, VGZ, VITFF
by: Don Durrett
Summary

Best risk/reward gold stocks.

Producers and development stocks.

How to values gold stocks.

Stock Name

Symbol (US)

Risk

Share Price (US)

FD Shares

FD Mkt Cap 12/2/2017

Alio Gold

ALO

Moderate

$2.87

52M

$149M

Argonaut Gold

ARNGF

Moderate

$1.82

182M

$334M

Barkerville Gold Mines

BGMZF

Moderate

$0.49

442M

$216M

Falco Resources

FPRGF

Moderate

$.77

206M

$159M

Goldmining Inc.

GLDLF

Moderate

$1.07

152M

$163M

Hummingbird Resources

HUMRF

Moderate

$0.52

354M

$184M

K92 Mining

KNTNF

High

$0.36

230M

$83M

Leagold Mining

LMCNF

Moderate

$2.17

155M

$337M

Orezone Gold

ORZCF

High

$0.55

167M

$92M

Paramount Gold Nevada

PZG

High

$1.29

20M

$25M

Pure Gold Mining

LRTNF

Moderate

$0.39

227M

$89M

Rye Path Gold

RPMGF

Moderate

$0.18

484M

$87M

Teranga Gold

TGCDF

High

$2.00

111M

$224M

Victoria Gold

VITFF

Moderate

$0.35

563M

$197M

Vista Gold

VZG

Moderate

$0.62

109M

$68M

Above are my current Top 15 gold mining stocks. There are 7 producers, and 8 development stocks. Most of these stocks have been falling in price and have become attractive. Now seems like a good time to take a position.

The HUI (mining stock index) has crashed from a high of 625 in 2011. Today the HUI is at 185 (see chart below). To reach a new high, it will need to gain 230%. That will be the average returns for Majors. For the stocks in the list below, the average returns will likely be much higher.

HUI

What I like about this HUI chart is that it appears to have formed a reverse head and shoulders pattern (refer to the green lines). These patterns have a propensity to foretell breakouts. Also, in conjunction with this chart we have one of the longest bear markets ever in silver, as well as one of the longest bull markets in the stock market. A turn is coming, and perhaps soon.

Most of these stocks have an FD market cap under $200 million, with the highest at $337 million. What they all have in common are large resources, which gives them the potential for high cash flow at higher gold prices. Thus, they are all highly leveraged to higher gold prices.

My investment philosophy is to chase potential cash flow, and my favorite numbers are to compare current FD market caps to potential future cash flow at future gold prices.

Some of these stocks have high risk, but their risk/reward is still enticing based on future gold prices. Even those with moderate risk are dependent on higher gold prices for large returns. The key for all of these stocks will be higher gold prices, along with the ability to avoid a takeover by a larger company.

If you are bullish that gold prices are heading higher, then these are the current and future mid-tier producers with significant upside potential. If you want to ensure that you have a position before the next uptrend begins, these are the stocks you want to take a look at. Most of them are going to do extremely well.

My investing style is to focus on potential future cash flow in conjunction with higher gold prices. For instance, what is the future value of XYZ gold stock if it develops a 2 million oz project and produces 100,00 oz annually at $2,500 gold? If you do a quick and dirty analysis using potential future cash flow, you get the following:

100,000 oz x $1,500 (estimated cash flow per oz using all-in costs of $1,000 per oz) = $150 million in annual cash flow.

If you multiply that by 10, you get a $1.5 billion estimated valuation.

Nearly all of the stocks in the list above have potential higher annual future cash flow versus their current FD market cap. This gives them very high leverage to the gold price.

Note that some gold mining companies were valued at 30x cash flow during the last mania in gold mining stocks in 1980. And a 10x cash flow valuation is quite common today for strong gold mining companies. A conservative method is to use 5x cash flow to value a company. However, my expectation is that we should see 10x cash flow valuations as gold prices rise and companies obtain much more healthy balance sheets.

It's amazing how valuable a gold mining company could become at higher gold prices when it owns large profitable projects. There are many development stocks today with solid projects that are valued unbelievably cheap. Not all of them will be successful in building their mines, so it is a crapshoot picking the winners early. The smart play is to watch these stocks and see which ones are going to get financing. Of course, the longer you wait, the higher your entry price will be, and many will no longer be available at low valuations.

The most ideal risk/reward stock is an undervalued producer, or near-term producer that is both permitted and financed to build its first project.

The only way you can understand the risk of a stock is to do your own due diligence. Below, I will go step by step and show you what to look for when analyzing a mining stock. However, even with this data in hand, you should do your own due diligence to confirm what I have written.

Even if you think you know a stock intimately, the data will change. If there is one constant in the story of a stock, it is change. And for stocks with high risk, it seems like the data changes more frequently. Whereas a major or a strong mid-tier producer can survive a data change without much impact, a junior can drop in value a significant percentage on small changes. The volatility can be stunning, and sometimes juniors do not survive these changes.

Here are my two most important rules to limit your risk exposure:

1) Only invest in a company that has the goods. Make sure that your company has at least one very good project. In other words, do not chase drill results (and if you do, then do it rarely). Exploration should be the icing on the cake, and not the cake.

2) Do not invest more than 1% of your portfolio's cost-basis into a single high-risk stock. Thus, if your total invested dollars is $100,000, then your max is $1,000 for a high-risk stock. You can break this 1% rule, but do it rarely.

This 1% rule may seem too low, but you have to stay humble and acknowledge the high risk with mining stocks. If you think the stock is low risk, then you can triple this total to a maximum of 3%. For any single stock, except mutual funds or ETFs, I would not exceed 3%. Remember, this rule only applies to your costs basis. If a stock that you own increases in value, that does not apply to this rule.

You may be thinking that you could end up with 50 or more stocks. Perhaps, but this won't happen if you buy bullion and/or ETFs as a foundation. With bullion, mutual funds, and ETFs, you can go over the 3% limit.

Here are some of the criteria that I use when valuing gold mining stocks:


The 3 Ps

Properties

Do they have a flagship project?

Do they have a pipeline of projects for growth?

Do they have the exploration potential to expand resources?

What is the size in acres?

Is the location satisfactory?

Is there a nearby mine?

Has there been any mining resistance in this location?

Do they own it?

People

Do you consider it a strong management team?

Is it an exploration or production team?

Do they have experience?

Do they have a track record for building mines?

Are they investor friendly and not always diluting?

Is the team large enough to build a mine?

Have you listened to a CEO interview?

Are they cash-focused?

How much stock does management own?

Do the website and company presentation provide adequate guidance and details?

Projects

What are the resource amounts?

Is the grade and recovery rate satisfactory?

Is it dependent on base metal offsets?

Is it a long-life mine?

What are the current/estimated cash costs and all-in costs per oz?

What documentation has been released for first mine (Preliminary Economic Assessment, Pre-feasibility Study, Feasibility Study)?

What is the capex for its first mine?

What is the after-tax IRR for first mine?

Can its first mine be financed?

How will its first mine be financed (debt, equity, streaming)?

How long until production?

How much cash will be needed between now and completing the final feasibility/permitting?

Share Structure

Is it highly diluted?

Timeline Risk

Timeframe until production?

Market Cap Size

What is the FD market cap?

Stock Chart

Is this a good entry point?

Balance Sheet

What is its cash/debt situation?

Insiders

Insider ownership percentage?

Valuation

What is its potential future market cap growth rate at $2,500 gold?

(see example below)

What is its potential future free cash flow at $2,500 gold?

(see example below)

What are its future reserves valued at today?

XYZ Gold example: 3 million oz / $60 million FD market cap = $20 per oz.

Future market cap growth calculation (Example for XYZ Gold)

Current Market Cap: $60 Million.

Potential Future Market Cap: 100,000 oz x $1,500 = $150 million annual free cash flow x 10 = $1.5 billion

Compare the two values and you get a 2,400% increase.

Is XYZ Gold highly undervalued? Yes, with a potential increase of 2,400% and future reserves valued at $20 per oz, it is highly undervalued.

This valuation assumes they will reach 100,000 oz of annual production, all-in costs will be $1,000, and future gold prices will reach $2,500.

My website (www.goldstockdata.com) has future cash flow calculator that is easily configurable to estimate future cash flow for a company.

Disclosure: I am/we are long ALO, ARNGF, BGMZF, FPRGF, GLDLF, HUMRF, KNTNF, LMCNF, PZG, RPMGF, TGCDF, VITFF, VZG, LRTNF. 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.

Editor's Note: This article covers one or more microcap stocks. Please be aware of the risks associated with these stocks.