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Gammon Basks in the Glow of Silver and Gold

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Amid this concerted commodity sell-off that has seen mining stocks systematically trimmed around the edges, Gammon Gold (NYSE: GRS  ) has once again proven that its superior growth profile makes it worth its weight in gold and silver.

Sales volume from Gammon's flagship Ocampo mine grew by 34% for the first quarter to more than 50,000 gold equivalent ounces, or GEOs. At a realized gold-to-silver ratio of 43:1, my top pick among precious metal miners scored a remarkable cash cost of just $382 per ounce. Considering Barrick Gold (NYSE: ABX  ) , the world's largest gold producer, reported a cash cost of $308, I consider Gammon's achievement noteworthy. With only the one producing mine, Gammon generated more cash flow than undervalued competitor Northgate Minerals (AMEX: NXG  ) did from three mines combined.

Importantly, Gammon is now leaping in scale from one mining operation to three this year. Even while the company celebrates a defining strategic victory in the acquisition of Capital Gold -- and its former flagship El Chanante mine -- the long-awaited return to production for Gammon's El Cubo mine is poised to chip in 20,000 to 30,000 ounces of gold during the second half of 2011 alone. Stepping back to appreciate the emerging consolidated footprint, we find that Gammon is positioned to deliver year-over-year production growth of between 39% and 58% for 2011.

No matter which Foolish lens one employs to examine Gammon Gold, I believe the miner stacks up as an enormously compelling vehicle for precious metals exposure. I have previously highlighted the company's exciting exploration success, the remaining potential for sustained organic reserve growth, and a low cost-structure sustained by the recent acquisition as major feathers in this gold miner's cap.

But what happens when we pause to view Gammon Gold as if it were a primary silver miner? After all, Gammon's consolidated silver reserves of 71 million ounces make the miner a veritable powerhouse in silver. If we shift our view to consider gold as a by-product of Gammon's silver production, we discover a silver miner with silver-equivalent production volume to match Hecla Mining (NYSE: HL  ) , but at cash costs beneath those of major producer Pan American Silver (Nasdaq: PAAS  ) . Whereas Gammon shares recently traded for six times estimated 2011 cash flow, Silvercorp Metals (NYSE: SVM  ) commanded twice that multiple. Comparing multiples to net asset value, Gammon slays nearly the entire silver group, including Coeur d'Alene Mines (NYSE: CDE  ) .

Whether Fools are drawn to Gammon Gold by the miner's rapidly expanding gold production, or the powerful silver kicker derived principally from the flagship Ocampo mine, Gammon Gold stacks up against the competition through every precious lens.

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, Gammon Gold, Hecla Mining, Northgate Minerals, and Silvercorp Metals. 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's disclosure policy looks the same through any lens.

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  • Report this Comment On May 13, 2011, at 3:46 PM, rfaramir wrote:

    "If we shift our view to consider gold as a by-product of Gammon's silver production, we discover a silver miner with silver-equivalent production volume to match Hecla Mining (NYSE: HL), but at cash costs beneath those of major producer Pan American Silver (Nasdaq: PAAS)."

    Without numbers I can't tell for sure, but surely you're not double-counting here, are you? You get to EITHER count the gold as silver-equivalent ounces (times 40-ish) OR subtract their value from cash costs, right?

    Normally, counting gold as a by-product means that the silver-equivalent ounces are all silver, right? (Unless you have some platinum or palladium in there as SEOs.) And the by-product is sold to decrease the cash costs (along with non-precious by-products, copper, zinc, lead, moly).

    I'm confused about whether I should be amazed!

    (long GRS and CDE)

  • Report this Comment On May 13, 2011, at 7:21 PM, XMFSinchiruna wrote:


    It's vital for investors to remain alert to these issues, as miners often shift fluidly between metrics to cast operations in the best possible light. So long as investors remain clear about the important distinctions, I have no problem with miners offering multiple perspectives through which to consider operating results.

    For example, Gammon's total cash cost of $382 per GEO is based upon the company's realized gold:silver ratio of 43:1, though the company also reported the $427 figure based upon the 55:1 ratio that can properly be understood as a trailing average. Since many miners will likely employ such a trailing average ratio (always specified), investors seeking to compare cost structures between miners must keep close track of such metrics.

    To address your specific question, there is no double counting or other inconsistency in those numbers as presented. Ocampo is a pure-play gold and silver mine. When production volume is expressed in terms of GEOs or SEOs as opposed to the primary metal alone, then total cash costs will properly be stated in terms of that same production measure (but you are right, there is no by-product credit to factor into those costs, since the conversion of production to GEOs or SEOs treats the mine's production like a one-metal mine). In the case of miners with non-pm by-products, you will have those credits factored into cash costs per GEO or SEO.

    Now, I encourage you to place Gammon's numbers in front of you, as I am sure you will be "amazed" to find that when you apply by-product credits to costs for production volume as expressed solely in terms of gold, Gammon's by-product total cash cost for gold production of 25,882 ounces came in at NEGATIVE $572 for Q1. The company's by-product cost for Q1 silver production of 1.035m oz came in at NEGATIVE $15.76 per ounce.

    Amazing, right? :)

    Thank you for raising a very important question.

  • Report this Comment On May 17, 2011, at 3:58 PM, rfaramir wrote:

    That IS amazing. Negative cash costs, whether calculating the cost of gold minus silver by-product credits, or cost of silver minus gold by-product credits.

    And that's why you could mention both in one sentence which made me think that there was some double-counting going on with gold included in SEOs (or silver included in GEOs) and by-product cash cost subtraction. The AND was you could do it right either way. Very cool!

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