NEW YORK (ResourceInvestor.com) -- Since the beginning of fall gold has taken off, recently trading above $495 per ounce. Along with this move, scores of miners have seen their stock prices skyrocket – with industry heavyweights like Goldcorp [TSX:G; NYSE:GG], Glamis Gold [TSX:GLG; NYSE:GLG] and Placer Dome [TSX:PDG; NYSE:PDG] all moving toward multi-year highs. But while some traders prefer to get into a hot momentum play during gold’s upturn, common wisdom holds that an investment in a solid company that trades at an attractive discount will yield the best longer-term results.
Many of the companies highlighted below shined in the sector’s late 2003 surge – only to be chopped back down to size over the past 18-24 months. In the case of those selected, we posit that this trend has gone too far – making these miners and explorers compelling value propositions. It’s also notable that insiders at all four of our producer picks (data was unavailable for the two explorers) have actually been net buyers of stock since the start of the year – an almost unheard of idea for the heavy option issuers in the precious metals industry.
Without further ado, here a few selected picks to make up an ‘under-appreciated’ miner portfolio. While it’s quite likely that one or two of the companies below won’t dazzle over the next couple years, when taken as a whole the group’s results should be striking.
For those of you interested in jumping around, the stocks highlighted below are:
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Northgate Minerals [AMEX:
NXG; TSX:
NGX]
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Golden Star Resources [AMEX:
GSS; TSX:
GSC]
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Cambior Inc. [AMEX:
CBJ; TSX:
CBJ]
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Nevsun Resources [AMEX:
NSU; TSX:
NSU]
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Wolfden Resources [TSX:
WLF]
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Nevada Pacific Gold Ltd. [TSX:
NPG]
Northgate Minerals
We’ve been bullish on Northgate since right around the time it bottomed at $0.92 last May (“Northgate Strikes Backs,” May 26). Still, even at the recent $1.62 stock price, Northgate trades exactly where it was about 2 years ago – and is well below its cycle high in the $2.50 range.
The stock took a hard hit early last year as earnings stalled while the company took the time to access higher-grade ore at its flagship copper-and-gold Kemess South mine. With that ore now accessible and a brief labor strike well behind it, Northgate’s looking to continue producing about 300,000 ounces of gold and 75 million pounds annually from Kemess South with life of mine cash costs (net of copper credits) of about $170 per ounce through 2009.
Much of the company’s future is tied up in the nearby 4.1 million ounce Kemess North deposit, where a production decision is expected early next year. Given that many analysts and investors are now ascribing little or no value to Kemess North, if the project does go ahead this alone will provide upside momentum to the stock. After speaking with CEO Ken Stowe last May, it seems that management is committed to making the necessary decisions to generate shareholder value on the property..
Additionally, Northgate recently acquired Ontario’s Young-Davidson Mines [TSXv:ODM], and will begin a drilling programme on that company’s prospective land holdings early in 2006.
On November 24, Northgate also announced the discovery of a potentially large mineralized system elsewhere on the Kemess property – which propelled the stock up over the short term. Based on initial drill results, Northgate’s shelling out $2.5 million for drilling on that property in 2006.
All told, Northgate remains a bargain today. Kemess South has several good years of production left, the company has several very good exploration prospects, there’s little debt on the balance sheet and the company holds a miniscule hedge book (about 140,000 ounces). If gold trades flat in the near term, the stock could move back down to the $1.50 level – working off some of its near-term ebullience, and making it ripe for a long-term investment.
Golden Star Resources
Since early 2004, only gluttons for punishment – or deep value investors – have been attracted to Golden Star Resources. Once soaring to over $8 per share, Golden Star’s languished in the $2.50 range when we first profiled it back in April (“Beaten Down Golden Star Tries to reclaim Its Footing,” April 25). Since then, the stock has worked its way down to as low as $2.10, before recently bouncing up to $2.44.
Under $2.50 a share, Golden Star remains a compelling investment in the potential of West African gold mining. This year was marked by a series of transitional problems –costs at the Wassa mine ran up quite high, and there was a month-long production delay at Prestea. Longer-term, however, it appears that Golden Star has made the necessary infrastructure upgrades and commitments to more than double production to 500,000 ounces by 2007 – at a cash cost of about $220 per ounce.
The company also recently signed an agreement to purchase St. Jude Resources [TSXv:SJD], adding to its prospective projects in Ghana. Golden Star also has solid investments and JVs with several other African explorers.
Obviously, the proof will be in the pudding – but where Golden Star is priced right now, it appears that investors have all but written off this promising growth story. The bulk of Africa’s gold resources remain vastly under-exploited – and Golden Star is solidly positioned to take advantage of this over the long-term.
Cambior
The mining world has thumbed its nose at this old-time French Canadian gold mining company – and often with good reason. In the past, Cambior was laden with a decent debt load, a hefty hedge book, and had a string of assets that were slowly deteriorating. While some of this story remains, Cambior has taken solid strides to revamp its operations in the past couple of years – and remains a compelling value at $2.33 per share.
While Cambior’s debt still remains high (at 12% of total capital) it’s not at the point that it is unwieldy for the junior producer. The hedge book is down to just 150,000 ounces or so, and the company’s Roesbel mine (put into production in 2004) is churning out about 300,000 ounces per year – nearly half of the company’s total gold output.
The biggest near-term problem plaguing Cambior is finding additional resources. The company’s shares took a hit in late 2004 when an agreement to acquire a controlling stake in Peru’s Compania Minera Podersa fell apart. Still, the company’s production should be boosted by its recent decision to move its Camp Caiman project – located in French Guiana with an estimated reserve base of 1.1 million ounces - toward production. Additionally, Cambior has significant land holdings throughout stable countries in South America (re: not Venezuela), giving it decent exploration upside. Another plus is that Cambior recently raised $37.5 million through the sale of its Carlota Copper Project to Quadra Mining.
At current gold prices, Cambior pretty much trades at its net asset value (with a 5% discount), according to Canaccord, well below the 1.62 average multiple currently ascribed to intermediate producers. While production should be more or less flat over the next couple of years, the development of Caiman should put Cambior on track towards its goal of producing 800,000 ounces annually within the next few years. Given its low multiple and the current consolidation environment, Cambior just might get snapped up by a larger company looking for sound assets.
Earlier this month, Cambior’s shares dipped as low as $1.70 – an ideal time for bottom pickers to grab a quick gain. Still, even in the current price range the shares represent a solid value. The stock got an 8% boost on Nov. 25 after it was announced that a minor problem at a milling facility would be rectified – so look for the shares to work off part of this gain before jumping in.
Nevsun Resources
Like its African brother Golden Star, Nevsun Resources was the stock to own in the last cyclical upturn – soaring to above C$9 per share in late 2003 after a little help from the well-known (and now-defunct) “Thom Calandra’s Stock Watch.” After the junior hype wore off in 2004, Nevsun was dealt a huge blow later that year when it was inexplicably kicked out of its flagship Bisha property in Eritrea by that country’s government. The stock recently hit bottom at C$1.56 (or $1.31 – the company did not acquire an AMEX listing until early this year), where it more or less trades today.
While an investment in Nevsun is fraught with political uncertainty, it appears that at current prices the ‘Eritrea effect’ is more than factored into the share price. The company has been back in the country working since early 2005, and appears to have patched up its relationship with the government (by giving it the option to purchase a larger minority stake in Bisha.) The company’s recently opened Tabakoto mine is set to churn out about 100,000 ounces in 2006, at a cost of $250 per ounce. Additionally, recent drill results on other exploration properties have been quite favorable.
While uncertainty abounds in Eritrea, Nevsun’s Bisha project has the potential to be developed into a world-class gold and base metal mine – the oxide zone alone is expected by many to contain 1 million ounces of easily extractable gold. A feasibility study due in early 2006 will shed better light on the project’s potential – but those speculators who can stand the political risk would do well to get into Nevsun at today’s prices.
Wolfden Resources
One of the most prolific and better known explorers of Canada’s northland, Wolfden Resources is hoping to make the jump to junior producer within the next couple years.
Another former highflyer, Wolfden’s shares peaked at about C$7.50 per share in late 2003 before sliding down to C$2.05 this past September. The downward spiral may have ended, though, as the stock has rebounded up to about C$3 in the last three months on the back of a resurgent gold price and Wolfden’s property consolidation in the well-known Red Lake mining district.
All told, Wolfden holds an interest in seven highly prospective Canadian projects. Two of its more advanced assets are the wholly-owned Ulu Gold and High Lake Copper-Zinc projects – both located in Nunavut. Ulu is believed to contain about 565,000 ounces of gold and is open for expansion, while a pre-feasibility study on High Lake should be released in early 2006.
Wolfden also holds JVs with several producers – including Placer Dome on the East Bay project (near Placer’s Campbell mine in Ontario) and Bema Gold on the Monument Bay project in Manitoba.
The company’s Bonanza-Follansbee project in the Red Lake district also appears to have strong potential – recent drill results found intersections of 16.39 g/t Au over 6.8 metres and 4.97 g/t Au over 14 metres.
As with any explorer, much of Wolfden’s valuation remains dependent on the eventual quality of its assets. But with potential winners in Red Lake and at High Lake, Wolfden is one of the most prospective explorers on the market. As shown with its meteoric rise in 2003, it’s also among the most leveraged stocks to the HUI when that index takes off.
Much of the recent upswing in Wolfden has come in the last couple weeks, and given the typical pattern of consolidation after short-term gains it might be wise to see if the stock comes down by about 8%-10% before looking to invest. U.S. investors purchasing shares on the sparsely traded Pink Sheets would be very wise to use a limit order.
Nevada Pacific Gold
The market has again taken notice of Nevada Pacific Gold. Mentioned just weeks ago as “a bottom-picker’s dream” (“McEwen Looks to Nevada Consolidation,” November 16) Nevada Pacific has since then taken off – zooming from C$0.38 to C$0.58 for a 53% gain in 2 weeks! Much of this may be due to the company’s large land holdings in and around the much-touted Cortez Trend, or perhaps some as-of-yet unrevealed insider news. While Nevada Pacific’s exploration results haven’t been remarkable to date, its land position alone lends credence to the idea that the company could get taken out – and that it may move up at a sizable multiple to any coming appreciation in the HUI index.
Although its appreciation has been quite sudden, shares of Nevada Pacific may come down slightly with the recent news that Placer Dome has terminated one of its three JVs. Still, the shares trade well below their C$1.60 cycle-peak – and today trade only a bit higher than they did before their massive 2003 run-up. The company also has a strong management team made up of Bema Gold and El Dorado Gold alums. In the half-a-loonie (C$0.50) range, Nevada Pacific likely has considerable upside.
Conclusion
Even if you’re not investing, let’s take this model portfolio and run with it. Assume a full position in Northgate, Golden Star, Cambior and Nevsun, and a half position in Wolfden and Nevada Pacific (due to their more speculative status) at the prices outlined above. We’ll take a look back in several months to see how we did – and if our undervalued picks beat the HUI.
