Small & Established Producers
- Low hedging exposure - preferebly only hedged from a higher or lower $A. I see the $A stable in the short term (1-3mths), rising in the medium term(3-12mths), falling in the longer term (1-3yrs)
- Long life reserves - most analysts assess gold producers in terms of their revenue security, which can be assessed only if they have a resource within a mining plan (feasibility study). We therefore want to see in excess of 10yrs mine life.
- Mine costs: We prefer established miners with the higher cost output because they have the greatest leverage to an increase in the gold price.
- Location of mines: We prefer miners with projects in western markets, but better still if their projects are outside established gold-producing countries like Australia, South Africa, Chile, since a stronger currency will undermine mine revenues. Eventually the revenues have to be paid back.
- Debt burden: Preferably the miner will have no or low debt, so they will be in a position to finance dividends or expansion.
- Management: Preferably they will have management with commercial acumen so they are always looking to acquire under-valued projects.
- Low cost capital expansion: Its preferable to buy companies that can implement low-cost capacity expansion. We want to avoid being diluted by capital raisings.
The companies with these characteristics in order of preferences are:
- Emperor Mines (EMP): Its a high cost producer of 130,000oz per annum, so it has the most to gain from higher gold prices. Its based in Fiji, though the $Fiji follows the $A. Unfortunately it has diversified its assets by taking over other DRD assets in PNG, and its got shit South African management, which causes tensions with Fiji workers. Too risky.
- Dragon Mine (DRA): Its established a new operation in Sweden, and plans a 2nd. It has exploration interests in Eritrea. I dont like the capital outlays required to get these small, scattered projects into production, and the incessant need for hedging. It will rise, but a disappointment in the making.
- Resolute Mining (RSG): It operates several gold mines in Africa (Tanzania & Namibia), and Ravenswood, Qld. I dont know enough about this company.
- Perseverence Mining (PSV): They operate a bio-leach gold mine in Victoria producing 130,000oz per annum. Hedging is a problem.
- Gallery Gold (GGN): They produce gold in Africa. Know little about this company.
The companies I don't like on these terms are Dioro Exploration (DIO) as it moves underground.
Emerging Gold Producers
The risk with emerging gold producers is that they the gold price action supporting the market might be over by the time they commence production. The qualities we look for are:
- Reserves: Looking for the maximum ounces, even if they are not currently in the mine plan because of the current price of gold.
- Capital cost: Looking for miners that can establish a production capacity for the lowest possible cost. If a company needs to finance plant, they are likely to need gold loans (hedging) to finance it. This means they are limited in their upside exposure to higher gold prices. It also means it will be longer before they can pay dividends. The best producers are those close to several treatment plants (for toll treating) or have had the forsight to purchase a 2nd hand plant.
- Cash reserves: We are looking for project sponsors with sufficient cash for the next year (preferably over $1.5mil) because we don't want to be diluted by a share issue, nor have those new shareholders dumping their stock in the market.
- Mine costs: Looking for projects with low unit mining costs to ensure that we are supporting a project with a high Net Present Value (NPV).
- Upside: Some type of upside in the company, whether investments, other projects or adjoining exploration targets.
By these stakes the best emerging gold companies are:
- Gleneagle Gold (GLN.ASX): They have a strategically located treatment plant in WA and a significant resource which can quickly be commissioned using their established gold treatment plant. Very quickly they can go from an explorer to a producer. They have alot of exploration upside. Currently 28c - target 70c.
- A1 Minerals (AAM.ASX): They have a very attractive gold project in WA close to the old Sons of Gwalia gold plant. They have high grade gold close to the surface. They have alot of exploration upside. They are promising because they might not need to purchase a treatment plant to get into production. Currently 26c - target 75c.
- Great Basin Gold (GBG.TSX): This Canadian-listed company is developing 2 exciting projects. The most attractive is a 1Moz resource on the Carlin Trend in Nevada, which is currently being developed by a JV partner. They have alot of exploration upside. I recommended them at 90c, now $2.30. Target? No longer follow this stock.
- Red 5 Ltd (RED.ASX): They have 1.7mil oz of resources and a relationship with Anglogold which will help to finance the project. They have alot of exploration upside. This company is under-performing because it contracted out mine services, as a result the project is behind schedule. The IRR was not great either. But alot of exploration upside. Will they need to hedge forward gold output? Risk?
These are the best gold stocks I can recommend. They stocks will multiple in value over the next year by about 300-500%.