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Gammon's Jammin' and Mining More Ore

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While global industry languishes in a fog of uncertainty, and steelmakers like Nucor (NYSE: NUE  ) concede that those offering guidance are "kidding themselves", the way forward for precious metal miners remains substantially clearer.

As the world struggles beneath a Mt. Everest of debt and a reserve currency in crisis, the long-term fundamental picture for gold glimmers across an unshrouded horizon. Global gold production hit a 12-year low amid soaring investment demand. Now emerging gold miners like Gammon Gold (NYSE: GRS  ) are determined to maximize gold production to take full advantage of rising prices and declining production costs.

Gammon Gold delivered a three-year outlook this week that sheds some light the kind of production growth investors can expect from this mid-tier gold miner and its two operating mines in Mexico. Gammon is targeting completion of a mill expansion at the flagship Ocampo mine by the third quarter of 2009. The upgrade is expected to boost production by at least 32% from 2008 levels, to 333,000 gold-equivalent ounces (GEOs) in 2009. From there, the projected production growth levels off substantially, but the company expects significant reductions in the byproduct cost of mining gold to as low as $14 per ounce by 2011.

With larger mid-tier rivals like Agnico-Eagle Mines (NYSE: AEM  ) and Yamana Gold (NYSE: AUY  ) forecasting much greater production gains -- 300% by 2010 in the case of my top pick -- production growth alone does not justify interest in Gammon. If the company delivers on those stated cost projections, however, Gammon would indeed radiate like a gamma ray. Considering that just last November the company spooked this Fool by reporting cash costs of $735 per ounce during a restructuring process, Gammon has already made significant strides by reducing costs to $384 during the fourth quarter of 2008.

Because the company used what I consider an extremely conservative price target of $12 per ounce of silver through 2011, I find the projections reasonable, as long as mining input costs don't experience another run like we saw last year. Then again, if my long-term expectations for silver prices pan out, Gammon Gold's anticipated annual production of more than 8 million ounces of silver could offset a whole heap of rising input costs. With more than one-third the estimated silver production of primary producers like Pan American Silver (Nasdaq: PAAS  ) and Coeur d'Alene Mines (NYSE: CDE  ) , Gammon goads Fools with gumption to take a closer look.

Further Foolishness:

Gold is a hot topic on the blogs at Motley Fool CAPS. Join the free service today, and see just how many Fools are taking the long view when it comes to investing in gold. The "Gold" tag at Motley Fool CAPS lists 36 companies, and you'll find Christopher's comments on most of them.

Fool contributor Christopher Barker sees a pot at the end of the rainbow for investors who obtain exposure to gold. He can be found blogging actively and acting Foolishly within the CAPS community under the username TMFSinchiruna. He owns shares of Agnico-Eagle Mines, Coeur d'Alene Mines, Gammon Gold, Pan American Silver, and Yamana Gold. The Motley Fool has a gilded disclosure policy.

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