Miners Priced to Move: Gammon Gold

It's no secret that precious metal stocks have enjoyed noteworthy strength here as metal prices continue their multiyear advance. But even the hottest sector around will have its laggards.

When a rising tide like gold and silver seeks to carry all ships, turn on your Foolish sonar and locate some submarines before they rise to the surface.

Currently, some of my own sonar's loudest pings are bouncing off Gammon Gold (NYSE: GRS  ) . Gammon has disappointed investors so repeatedly and severely over recent years that many investors may refuse to reassess the company's prospects objectively. But just as with long-awaited turnaround stories like Coeur d'Alene Mines (NYSE: CDE  ) and Northgate Minerals (AMEX: NXG  ) , I believe that forgiving Fools may strike far more than fool's gold.

Gammon, whose modest gold reserves are substantially enriched by 66 million ounces of silver reserves, has seen its shares fall by more than 30% this year even as gold and silver proxies have surged by more than 20% and 60%, respectively. Ouch! When the company discontinued operations at its El Cubo mine due to a catastrophic impasse with the workforce, I believe the stock became grossly oversold at that juncture. Even today's improved price beneath $8 per share remains below levels seen all the way back in 2005, before the company even acquired the El Cubo asset (and gold fetched less than $500 per ounce!).

A summary of operations at the Ocampo mine for October and November reveals a mine that is finally hitting its stride after a major two-year overhaul. Production is rising, and costs are impressively low at $437 per gold equivalent ounce (GEO). A preliminary economic assessment (PEA) for the Guadalupe y Calvo property is due in a few weeks, and an updated resource estimate is slated for February 2011. Either of these could jumpstart Gammon's momentum.

After Capital Gold's board rejected a competing offer from Timmins Gold, Gammon is likely to win its bid for this promising gold producer, immediately adding 65,000 ounces of gold to 2011 production. Capital Gold's two compelling exploration properties, furthermore, bolster Gammon's long-term development pipeline considerably.

To be sure, Gammon has displayed a consistent knack for over-promising and under-delivering that rightly accounts for the stock's failure to track metal prices higher over recent years, but I believe the depth of the stock's multiyear dive has likewise failed to recognize the inherent buoyancy in this particular submarine. I have employed similar methods to highlight the unwavering value in shares of Yamana Gold (NYSE: AUY  ) , and I place Gammon in the same (submerged) boat.

The way I see it, anyone can latch on to gold and silver's obvious momentum leaders like Fronteer Gold (AMEX: FRG  ) or Hecla Mining (NYSE: HL  ) , and I personally see no obstacles in the way of further success for these proven highfliers. A clever Fool, meanwhile, may also wish to bet that the greatest upside potential in the sector lies in the previously punished shares of turnaround stories in the making.

Click here to keep your sonar focused on this particular stealthy submarine, and bookmark this link for easy, ongoing access to all my musings on the sector.

Fool contributor Christopher Barker can be found blogging actively and acting Foolishly within the CAPS community under the username TMFSinchiruna. He tweets. He owns shares of Coeur d'Alene Mines, Fronteer Gold, Gammon Gold, Hecla Mining, Northgate Minerals, and Yamana Gold. The Fool owns shares of Northgate Minerals. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.


Read/Post Comments (3) | Recommend This Article (13)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On December 09, 2010, at 12:01 AM, jlanganki wrote:

    This advice is not very useful without more information, like NPV's of operating mines, with sensitivity ratings, etc. It would be nicer if someone would calculate these and post it. Not every reader of this article has time to go build a spreadsheet with all the risk factors.

  • Report this Comment On December 09, 2010, at 4:27 PM, ValuePEG wrote:

    This article is rather useless without any comparative valuations other than stock price increase. Many times laggards are rightfully so because of a lack of improving metrics, or a high flier is for the opposite. With no information given is the purpose of the article to promote the author's personal investment or simply to bash others'?

  • Report this Comment On December 13, 2010, at 4:55 PM, speedybure wrote:

    I agree 100% and would add MineFinders (it was attractive a year and half ago and being a hybrid of gold and silver, this another I think belongs with this group. Even with the recent bought deal financing, it hasn't moved with metals.

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