The Best Stocks for 2011: Gammon Gold

This article is part of our "Best Stocks for 2011" series where our Foolish writers pick their top stock ideas for the year ahead. Click here to see a review of last year's picks and our 12 recommendations for the year ahead.

I will wrestle with this decision no longer.

Over recent weeks, I have tossed and turned (even toiled and troubled) over my top stock pick for 2011. Eager to repeat the success of my pack-devouring selection of Silver Wheaton (NYSE: SLW  ) for 2010 -- which has rewarded like-minded Fools with a dramatic gain of more than 140% -- I was determined to identify the next stock that could muster that sort of one-year return.

And then I realized I had it made. You see, looking to the correct sector in the first place is half the battle. Over the past couple of years, in particular, gold and silver have stunned the investing mainstream with the strength and persistence of their ongoing bull market trend. With leveraged debt instruments continuing to fester deceptively in the shadows of fanciful accounting methods and cleverly named "legacy" portfolios -- and considering all the resulting implications both for nation-states in Europe and the 50 states here at home -- I still maintain that precious metals offer a rare form of protection from risks that have not yet been defused within this powder keg that we call a financial system.

However convenient it may have been, it is no longer permissible for those opting out of the precious metals bull market to dismiss expectations of substantially higher prices as the ravings of some misguided fringe within the investing populace. Indeed, the managing director of Barclays Capital, Paul Horsnell, sees gold reaching $1,850 during 2011. Goldman Sachs has set its sights on $1,690 by year's end. Suddenly, my long-term price target of $2,000, which I've kept unchanged for several years running, seems decidedly less controversial.

With the right catalysts in place, even a consummate underperformer like Gammon Gold (NYSE: GRS  ) is capable of surging dramatically to play catch-up with this advancing bull market for gold and silver.

Adversity becomes the advantage
It's a rough road indeed that leads a gold mining stock down a multi-year decline in the midst of a historic bull market for the metal. Alongside silver's whipping post Coeur d'Alene Mines (NYSE: CDE  ) , Gammon Gold may be one of the least-loved stocks in the precious metals patch. For many, the 2010 closure of the El Cubo mine (following irreconcilable labor disputes) may have added the final straw to a continuum of justifiable frustrations.

For this bargain-seeking Fool, however, the El Cubo debacle yielded a massive distraction that I believe prevented the market from evaluating a vast array of positive achievements for the company during 2010. These achievements form the core of an exciting turnaround story in the making and recently led me to place Gammon Gold at the pole position of my top-ten gold and silver stocks for 2011.

Gammon's bread and butter
It was precisely Gammon's prowess on the exploration front that led me to build an initial position several years ago, so I find it fitting that Gammon's recent exploration success forms a core of my updated investment thesis. During the first half of 2010 alone, Gammon discovered three new deposits at its Ocampo gold and silver mine, and it swiftly replaced nearly two-thirds of estimated 2010 production with 127,750 gold-equivalent ounces (GEOs) in new reserves. One of those three deposits, Santa Eduviges, has been fast-tracked for development, and production is expected to commence any day now.

This month, Gammon's year-end exploration update included four more newly discovered veins at Ocampo. El Rayo, just 100 meters from existing underground infrastructure, looks particularly promising with concentrations as high as 33.29 (gold-equivalent) grams per ton (gpt). Thanks to Gammon's enhanced development capacity (now that El Cubo resources have been reassigned to Ocampo), several newly defined deposits may be mined as early as mid-2011. Beyond the Ocampo camp, Gammon has moved to test the district-scale potential of the region by securing strategic option agreements for highly prospective nearby properties.

Gammon's growth capital
Capital Gold
's (AMEX: CGC  ) board has unanimously endorsed Gammon's proposed merger, and in this Fool's view, the pro forma company emerges as a titan among the smaller mid-tier gold producers. Capital Gold's El Chanante mine will double Gammon's gold reserves to 3 million ounces -- apart from Gammon's existing trove of 66 million ounces of silver. Using robust silver production as a by-product credit, Gammon sees pro forma production averaging 230,000 ounces of gold per year for 2011 and 2012 at a jaw-dropping production cost of $78 per ounce.

As of Sept. 30, Gammon held a cash balance of $107 million and carried a debt-to-equity ratio of just 3.7%. Between that capital strength and the prospect of a Capital Gold merger, I see a golden opportunity for Fools to capitalize upon one of the industry's most promising turnaround stories. A forthcoming preliminary assessment of Gammon's Guadalupe y Calvo project, a cementing of the Capital Gold merger, and impressive reserve expansion from that successful 2010 exploration campaign could all provide dramatic upside catalysts during 2010.

Sure, Yamana Gold (NYSE: AUY  ) could yet prove the greater bargain of the two, and the potential for silver to outperform even gold could propel small-cap silver stand-outs like Endeavour Silver (AMEX: EXK  ) and Alexco Resource (AMEX: AXU  ) to the pinnacle of the sector's scoreboard. That's why my own precious metals portfolio contains them all! Given the unique combination of persistently negative market sentiment with an impressive succession of overlooked upside catalysts, however, I encourage Fools to select Gammon Gold as their top stock pick for 2011.

Which is the best stock for 2011? See all 12 candidates here. Or if you're interested in more information on the company, add Gammon Gold to your watchlist.

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 Alexco Resource, Coeur d'Alene Mines, Endeavour Silver, Gammon Gold, Silver Wheaton, and Yamana Gold. 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 gilded disclosure policy.


Read/Post Comments (10) | Recommend This Article (38)

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 30, 2010, at 12:38 PM, NanooGeek wrote:

    If the broader markets tank, sometime in 2011, there may be better opportunities ahead for buying into junior miners.

  • Report this Comment On December 30, 2010, at 12:52 PM, XMFSinchiruna wrote:

    That may be true, but if the broader markets tank, I expect any correlative sell-off in miners to be relatively short-lived. During the panic selling of 2008 and 2009, investors were ditching everything in sight and moving into Treasuries (of all things). A next time around, I suspect gold and silver's role as safe haven assets would be recognized far earlier in the liquidation process (and by far more market participants).

  • Report this Comment On December 30, 2010, at 1:13 PM, XMFSinchiruna wrote:
  • Report this Comment On December 30, 2010, at 2:18 PM, HarryCaraysGhost wrote:

    Hi Sinch,

    I was hoping you were going to pick Endeavour since I own it. But I can see the allure of gammon and will add as a Caps pick.

    Happy, healthy and prosperous New Year to you and yours.

  • Report this Comment On December 30, 2010, at 3:06 PM, silverminer wrote:

    HarryCarysGhost,

    I think Endeavour is a fantastic stock, and I hold its management in the highest regard of any in the industry. I also own shares of Endeavour Silver, and consider it among my highest-quality holdings.

    But consider the comparison this way: Gammon's market cap of $1.1B is 2.2X that of EXK ($500m). Silver reserves from Gammon's Ocampo mine alone are 2.9X those of Endeavour's combined silver reserves, while Ocampo's 1.12m oz of gold reserves are 25X the scale of Endeavour's 44,000 ounces. So one can completely ignore the .5m GEOs stuck underground at the discontinued El Cubo mine, and still realize a highly favorable value comparison versus even a great value like EXK.

    Endeavour's combined resources (M&I+Inferred) are 45.6m oz silver and 230k oz gold. Ocampo's resource from the inferred category alone is 55.8m oz silver and 1.18m oz. gold (>5X Endeavour's gold resource).

    And then you have the clinchers, namely Gammon's Guadalupe y Calvo and the prospective addition of Capital Gold's assets. Guadalupe y Calvo's inferred resource is currently 45.6m ounces silver and 1.08m oz. gold, though much of that inferred resource is likely to be upgraded to M&I with the forthcoming PEA.

    As much as I adore Endeavour Silver, side-by-side Gammon simply stacks up as a better bargain with equal or better growth potential.

  • Report this Comment On December 31, 2010, at 7:50 AM, skypilot2005 wrote:

    Sinchi,

    I like GRS over TC, as well. ( Best Stocks List to choose from)

    I am also, very comfortable owning select mining companies in this fiscal environment.

    I own both but TC’s Mt. Milligan project isn’t due to come to fruition until 2013. That places it solidly outside of this year’s contest time parameters. In my opinion, that is a significant disadvantage.

    The case being made for TC by many seems to be primarily dependent on macro economic conditions. I submit the likelihood of predicting those accurately are similar to rolling sevens during a game of craps.

    On the flip side, I see some possible turbulence safely landing GRS in first place with the labor unrest recently experienced by them. Although, worker rights in South America seem to be nonexistent. That’s the only situation I see now remotely preventing a safe landing in first place in 2011.

    Even taking that into consideration, I still like GRS. You have earned my vote. I do not feel TC is going to be able to pull up to the gate in 2011 quicker than GRS.

    My experience flying with you has been very rewarding, monetarily. I have accumulated a lot of Frequent Flier Investor miles purchasing many stocks you have featured over the past year.

    My seat belt is fastened, I will take some of the money I received in my holiday stocking and add to my GRS position at the appropriate time.

    Happy New Year !

    Skypilot

    Disclosure:

    Mentioned in this article I own: SLW, GRS, TC, EXK, AUY, AXU

  • Report this Comment On January 03, 2011, at 2:50 PM, altruria wrote:

    I think there are compelling reasons to own both GRS & TC. GRS may have have a better position in the immediate term but TC is positioned well for the longer term. I voted for GRS on that basis.

  • Report this Comment On January 04, 2011, at 7:26 PM, rfaramir wrote:

    I'm totally with you (yay!), except I haven't bought any, yet (boo!).

  • Report this Comment On January 08, 2011, at 3:47 PM, ddepperman wrote:

    Gammon's mines are in Mexico. Isn't this country almost entirely run by narco gangs?

    If you are salivating over the company's potential, what do you think they--the narcos--are in position to do about it?

    Will they 1) take over the mines 2) kill the owners and take over ownership 3) threaten owners for payoffs 4) Buy stock in the company(Don't pick this option!)

  • Report this Comment On January 10, 2011, at 4:25 PM, silvermind wrote:

    Christopher,

    Hey --- wow great stock pick. Just voted GRS!

    Thanks for the quick down-load as to why GRS will beat the others. May even beat SLW this year (I know - you couldn't pick SLW because you had some real-world stock activity in SLW too close to writing the article)!

    Just look at the history for the last 7 years on GRS and you know this stock has got to move up! Talk about a SUBMARINE! I have avoided purchasing it in the real world - worrying that management is messed up (witness the strike).

    You have to respect them for moving on past El Cubo! Too bad GM didn't do the same thing in the 70's!

    With reserves equaling a large multiple over the market cap, I believe you have the winner!

    Do you know the management at GRS? Are they as solid as Endeavor's management - or close to the same league as Great Panther's? What percentage of the stock is insider (management) owned (over 20% is a good sign!)?

    Fool On!

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