10 Small Caps to Rule Them All

Small-cap companies are absolutely one of my favorite areas to research because you can often uncover hidden gems that analysts have either neglected or simply not discovered yet. They can offer the ultimate risk versus reward ratio, but they also are often not for the faint of heart.

Over the past week, I have been voraciously scouring countless small-cap companies ranging in market cap between $100 million and $1 billion and have discovered 10 I feel have what it takes to effectively be called the "10 small caps to rule them all." Over the next 10 weeks, I'll be highlighting one company a week across many sectors that could put some added pep into your portfolio. And to kick off this series, I'd like to highlight junior miner Golden Star Resources (AMEX: GSS  ) .

What it does
Golden Star Resources is a junior gold miner working out of Ghana. Its two most productive mines, for which it owns a 90% interest in both, are the Bogoso/Prestea mine and the Wassa mine. Golden Star estimated in February that its proven and probable gold reserves totaled 4.62 million ounces based on data collected at the end of 2010, which is a 24% increase over its projected totals from last year.

How it stacks up
Golden Star Resources has lost more than half of its value since November because of a lower gold production forecast. The company blames abnormally high rain amounts, which have made mining conditions difficult, and lower ore recoveries as the main culprits behind the fall in production. This dramatic tumble has left Golden Star at dramatically inexpensive levels when compared side-by-side with its peers.

Company

Forward P/E

Price-to-Sales (TTM)

Price-to-Book (TTM)

Golden Star Resources 8.4 1.7 1.4
Northgate Minerals (AMEX: NXG  ) 40.3 1.8 1.4
Jaguar Mining (NYSE: JAG  ) 12.1 2.5 1.3
Tanzanian Royalty Exploration (AMEX: TRE  ) N/A N/A 14.8
Claude Resources (AMEX: CGR  ) 16 6.3 3

TTM = trailing 12 months; N/A = not applicable.

Most junior miners are trading at double-digit forward earnings multiples and in some cases, like Tanzanian Royalty, haven't even produced a cent of revenue yet. It appears investors are deeply discounting shares of Golden Star from a balance sheet perspective, despite the projected increase in gold reserves.

How it could make you money
Golden Star Resources is just as much as a play on the price of gold as it is on the company itself. The main knock against the company is its higher production costs, which often can be leaps and bounds higher than those at larger operations like AngloGold Ashanti (NYSE: AU  ) or Gold Fields (NYSE: GFI  ) . You can use these production costs to your advantage. They leave Golden Star more highly leveraged to rising gold prices because the company relies on higher spot prices to increase margins. Long-term gold bulls who feel strongly in continued gold appreciation would be smart to consider Golden Star as a leveraged play.

The company also knows how to grow organically rather than through acquisitions. Although gold production fell by 55,000 ounces in 2010, it generated $11 million more in cash flow than the previous year. This year should also mark the beginning of mining operations in the Bogoso Tailings Retreatment, which will add to gold yield at significantly lower production costs.

Golden Star is net cash positive, trades at a mere 8.4 times forward earnings, and looks poised to capitalize on rising gold prices. For that reason, it's my first selection in my series of 10 small caps to rule them all.

Do you have a favorite gold play I've overlooked or perhaps a different outlook on Golden Star? Share your thoughts below and consider tracking my calls with My Watchlist, our free stock tracking service.

Fool contributor Sean Williams does not own shares in any companies mentioned in this article. He once went panning for gold but only wound up collecting aspirin for his sore back afterwards. You can follow him on CAPS under the screen name TMFUltraLong. 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 that glitters like gold.


Read/Post Comments (3) | Recommend This Article (20)

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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 March 10, 2011, at 12:31 PM, galaxysurfer77 wrote:

    I think gold is a bubble is the price discounted for that

  • Report this Comment On March 10, 2011, at 12:52 PM, hheiserman wrote:

    Wrong!

    All fiat currencies, but especially the USD, are the bubble.

    The $USD's buying power is down 95%-97% since the Federal Reserve was created in 1913/1914. The dollar will keep falling until it reaches intrinsic value; i.e., zero.

  • Report this Comment On March 31, 2011, at 6:10 PM, vespa330 wrote:

    Don't bother on Northgate nor Golden Star. Both have DERIVATIVE exposure and are short GOLD. TRE is being run by the GOLDEST of gold guru's on the planet and is sure to be the best GOLD business model going forward a ROYALTY co. See ROYAL GOLD as an example.

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