Top 2 Risk/Reward Mid-Tier Gold Producers

|
Includes: ARNGF, TGCDF
by: Don Durrett

Summary

Two quality mid-tier gold producers with good management teams.

Both have excellent risk/reward profiles.

Both are highly leveraged for higher gold prices.

Stock Name

Symbol (US)

Category

Share Price (US)

FD Shares

FD Mkt Cap 5/25/18

Argonaut Gold

ARNGF

Mid-Tier Producer

$1.30

183M

$239M

Teranga Gold

TGCDF

Mid-Tier Producer

$3.02

113M

$341M

Above are two quality gold producers. I have selected them as the current best risk/reward gold producers. These two stocks should outperform the price of gold significantly - if it rises. In fact, I expect these stocks to double in value if gold reaches $1,500. These are the stocks that you want to own if you are looking for high returns - if gold prices start trending higher.

These stocks have high leverage versus the gold price, so they also have high risk. In fact, I would say that they are both currently underperforming. If gold prices drop, they will likely fall hard. If investors don't like them at $1,200 gold, then they surely won't like them at $1,150 or lower.

My investment philosophy is to find stocks that will perform at higher gold prices. I like to chase future cash flow at future gold prices. I focus on the difference between a company's current FD market cap and their projected future FD market cap. I will show you how I calculate that for each of these stocks.

Below is my analysis from the GSD website (www.goldstockdata.com)for each stock on the list. Some of these analyses are not recent and the date of the analysis is included.

Note: The link to each company's share price chart is their symbol in the list above. The link to the company's website is the company name in the analysis below.

Argonaut Gold (5/28/2018)

Argonaut Gold is a solid mid-tier producer. There is a lot to like about this company. Their production is forecasted to grow from 170,000 oz. in 2018 to approximately 215,000 by 2020. They have three producing mines in Mexico with all-in costs (free cash flow) around $1,000 per oz. They have three more mines to build (two in Mexico and one in Canada) and all of them are similar. This is a very smart company that purchases economic projects with solid resources, low capex, and moderate cash costs. All of their mines should produce 80,000 to 150,000 oz. at low to moderate cash costs.

They have $21 million in cash and $8 million in debt. It’s amazing that a growth company that has purchased two companies (Pediment Exploration and Prodigy Gold) and a large project (San Agustin), and built three mines, has no debt. They need to build three more mines, so that will take some debt.

Their largest mine (Magino) has not been built yet. It has 4 million oz. and $320 million capex. It is in Ontario, Canada. Cero Del Gallo is a 900,000 oz. (.6 gpt) open pit in Mexico. It probably needs higher gold prices to get built. San Antonio (1.6 million oz. at .8 gpt) currently has a legal impediment over a blasting license.

Anyone who analyzes gold mining stocks has to be impressed with this stock. They have executed like pros. They now have 8 million oz. of M&I and excellent exploration potential. The only question to ask is how big is this company going to get. My guess is that they will continue to buy projects and build mines. With an FD market cap of $333 million, the upside potential is significant. My only concern is that they get taken out by a larger company, or perhaps have troubles in Mexico.

Properties and Projects

Do they have a pipeline of projects for growth? Yes, growth oriented.

Do they have the exploration potential to expand resources? Yes.

Is the grade and recovery rate satisfactory? They have below average grades at .8 gpt, but have moderate costs.

Is the location satisfactory? Mexico and Canada are acceptable locations.

Do they own their properties? Yes, 100%.

What are the resources? About 9 million oz. of gold. This is enough for them to grow.

Do they have long life mines? Yes.

What are the current and estimated cash costs and all-in costs per oz? Cash costs are moderate at around $750 per oz. All-in costs (free cash flow) are low at around $1,000 per oz. They should be able to keep their costs low.

People

Do you consider it a strong management team? Yes.

Is it an exploration or production team? Both.

Do they have experience? Yes. Substantial.

Do they have a track record for building mines? Yes. Excellent executors.

Are they investor friendly and not always diluting? Yes, they have done a good job containing share dilution.

Have you listened to a CEO interview? Yes, he a finance guy and focuses on the numbers, which makes him conservative. They tend to be slow and steady and are not aggressive.

Are they cash-focused? Yes, they have kept their debt low.

How much stock does management own? Unknown.

Do the website and company presentation provide adequate guidance and details? Yes, they do a good job keeping investors informed.

Risk Issues

The biggest issue is they don't have a lot of cash. Also, they have become a takeover target from their low valuation. Plus, they tend to grow slowly from their conservative approach.

Share Structure

Is it highly diluted? No, it has 183 million fully-diluted shares.

Stock Chart / Market Cap Size

Is this a good entry point? Yes, with their future reserves currently valued at $27 per oz., they are very cheap. Although, you may want to be patient and wait for a better entry price.

Balance Sheet

What is its cash/debt situation? $21 million in cash and $8 million in debt. With miners, their balance sheets tend to change dramatically over a short period of time. They plan to finance a new mine soon, which will add debt. For a mid-tier producer, it would be nice if they had more cash on their balance sheet.

Valuation

What is its potential future market cap growth rate at $2,500 gold? 800% at 300,000 oz. annual production (see below).

What is its potential future free cash flow at $2,500 gold? $420 million annually at 300,000 oz. (300,000 x $1,400). (This assumes all-in costs are $1,100 per oz.).

What are its future reserves valued at today? $27 per oz. at 9 million oz. ($239 million/9 million oz.). I consider anything below $50 to be undervalued.

Future market cap growth calculation

Current Market Cap: $239 million.

Potential Future Market Cap: 300,000 oz. x $1,400 = $420 million annual cash flow x 5 = $2.1 billion

Compare the two values and you get an 800% increase.

Is Argonaut Gold highly undervalued? Yes, with a potential increase of 800% and future reserves valued at $27 per oz., it is highly undervalued.

This valuation assumes they will reach 300,000 oz. of annual production, all-in costs will be $1,100 per oz., and future gold prices will reach $2,500. It is a best-case scenario and a potential valuation.

Note: You can check the data included in this analysis at Argonaut Gold's websiteandwww.argonautgold.com.

Teranga Gold (9/19/2018)

Teranga Gold is a mid-tier producer in West Africa. Their Sabodala project in Senegal is a large (4.4 million oz.) open pit project. Cash costs are projected to be around $650 per oz. in 2018, with all-in costs around $1,000 per oz. They are currently building their second mine (Wahgnion), which is a 2.4 million oz. open pit project with low-cash costs. Their production should increase over of the next few years from 230,000 oz. in 2018 to 350,000 oz. in 2020.

Sabodala and Wahgnion give them two long-life, low-cost projects to build on. I expect them to find at least a third mine and maybe more. They have two early exploration projects in Burkina Faso: Golden Hill and Gourma. Both have a lot of drill targets on large land areas and another potential mine. Plus, they have 4 projects in Cote D'Ivoire with significant potential.

Currently, their FD market cap is $353 million, so they are super cheap. The key for them is going to be production growth beyond 350,000 oz. If gold prices rise, they should have enough cash flow to acquire another company. The only red flag for them is the locations of their mines in West Africa.

Properties and Projects

Do they have a pipeline of projects for growth? Yes, growth oriented.

Do they have the exploration potential to expand resources? Yes.

Is the grade and recovery rate satisfactory? Yes, grade is around 1.4 gpt.

Is the location satisfactory? Their locations in West Africa add risk.

Do they own their properties? Yes, 100%.

What are the resources? About 8 million oz. of gold. This is enough for them to grow.

Do they have long life mines? Yes.

What are the current and estimated cash costs and all-in costs per oz? Cash costs are low at around $650 per oz. All-in costs (free cash flow) are low at around $1,000 per oz. They should be able to keep their costs low.

People

Do you consider it a strong management team? Yes.

Is it an exploration or production team? Both.

Do they have experience? Yes. Substantial.

Do they have a track record for building mines? Yes. Excellent executors.

Are they investor friendly and not always diluting? Yes, they have done a good job containing share dilution.

Have you listened to a CEO interview? Yes, he is very impressive and will likely build a large company.

Are they cash-focused? Yes, they have kept their debt low.

How much stock does management own? Unknown.

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

Risk Issues

The biggest issue is the location of their mines in West Africa, which my keep investors away.

Share Structure

Is it highly diluted? No, it has 113 million fully-diluted shares.

Stock Chart / Market Cap Size

Is this a good entry point? Yes, potential high return stock. Although, it would be nice to buy it at $250 million. You may want to be patient and wait for a better entry price.

Balance Sheet

What is its cash/debt situation? $92 million in cash and $75 million in debt. With miners, their balance sheets tend to change dramatically over a short period of time. They plan to finance a new mine soon.

Valuation

What is its potential future market cap growth rate at $2,500 gold? 700% at 350,000 oz. (see below).

What is its potential future free cash flow at $2,500 gold? $490 million annually at 350,000 oz. (350,000 x $1,400). (This assumes all-in costs are $1,100 per oz.).

What are its future reserves valued at today? $48 per oz. at 7 million oz. ($341 million/7 million oz.). I consider anything below $50 to be undervalued.

Future market cap growth calculation

Current Market Cap: $341 million.

Potential Future Market Cap: 350,000 oz. x $1,400 = $490 million annual cash flow x 5 = $2.4 billion

Compare the two values and you get a 700% increase.

Is Teranga Gold highly undervalued? Yes, with a potential increase of 700% and future reserves valued at $48 per oz., it is highly undervalued.

This valuation assumes they will reach 350,000 oz. of annual production, all-in costs will be $1,100 per oz., and future gold prices will reach $2,500. It is a best-case scenario and a potential valuation.

Note: You can check the data included in this analysis at Teranga Gold's websiteandwww.terangagold.com.

Disclosure: I am/we are long ARNGF, TGCDF.

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 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.