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As a tough year for gold stocks draws to a close, the equity markets appear as devoid of bullish sentiment toward precious metals as I've witnessed in quite some time. With Europe's crisis continuing to drive expectations of relative near-term strength from the U.S. dollar, Pierre Lassonde -- chairman of gold royalty company Franco-Nevada (NYSE: FNV ) -- sees a relatively flat year ahead for gold with a price target of $1,500 to $1,700 per ounce. Even as well-known gold bull Jim Sinclair lays out a plausible scenario for gold in the "high-$2,000s" during the coming year, in this thought-provoking interview, he concedes that a more modest range of $1,700 to $2,100 per ounce could be in the cards for 2012.
What I believe Fools need to realize, however, is that quality miners of gold stand to enjoy another blockbuster year of robust cash flow even if gold were to temporarily stagnate or rise only modestly from the current price. Gold mining equities are already down quite substantially following an obvious and indiscriminate flight of investment capital from the sector (and commodities in general) during the latter half of 2011, and I perceive a deep and pervasive disconnect from fundamental and rational valuations. As a long-term investor focused on those fundamentals, I delight in the opportunities presented by periodic market dislocations, and I still consider gold stocks among the most attractive investment options out there for Fools seeking solid returns during 2012 and beyond.
Selecting the purest nuggets of gold
To add some important context to the selections listed below, I need to disclose a few elements of my process. It is important to state that companies with a market capitalization beneath $200 million were removed from consideration at the start, with the sole exception of one company that only recently slid beneath the mark. Gold investors with particular interest in the micro-cap segment of the industry are encouraged to bookmark my CAPS blog for regular discussion of compelling opportunities in that space.
Given the dynamic, impaired, and uncertain state of global financial markets, I have adopted a strategic bias for 2012 that favors existing cash flow over pre-production companies. For a non-producer to make the list, the story and the valuation must be extraordinarily compelling. Under the circumstances, furthermore, I consciously sought to include a couple of larger-scale producers that -- while they may not match the sheer upside potential of smaller growth stories in the making -- offer some of the lowest-risk access to reliably profitable gold production.
Finally, I must concede to a geographical bias as well, wherein the gold stocks that I follow most closely are the U.S. and Canadian-listed stocks with property holdings in stable jurisdictions of the Americas. More specifically, for various strategic reasons, my own investment focus has centered intensively around assets in Canada and Mexico, and my selections may be influenced by that.
With all of that said, it's time to list and discuss my top 10 gold stocks for 2012. I will offer brief synopses of picks 10 through 6 below, and dive in a little deeper when highlighting my top five selections in Part 2 of this discussion. Early in the new year, keep your eye out for in-depth analysis of each of the selected companies. Please bookmark my article list or follow me on Twitter to ensure you don't miss Part 2 or any of the subsequent analyses.
10. Kinross Gold (NYSE: KGC )
I did not expect Kinross Gold to make my top 10 list this year, nor did I expect I would ever see the stock trading this close to its 2008 mid-crisis low (a time when gold traded for less than half of its present price!). To be sure, Kinross has disappointed investors on multiple occasions over that time, but a fresh analysis of the company's position unveils a potential 77% increase in gold production (through 2015) to reach an incredible 4.7 million ounces of annual production. Each of Kinross' 63 million ounces of gold in reserves is valued at just $201 per the current enterprise value, representing a truly remarkable discount to its mega-mining peers. Because several assets are located in jurisdictions that I consider less favorable, I do not necessarily view Kinross as a top long-term pick. But perceiving a low risk of further downside, and a potential re-rating as looming growth begins to be priced in, I see Kinross offering reliable upside potential during 2012.
9. Paramount Gold & Silver (AMEX: PZG )
I can't say for sure that 2012 will be the year that the market comes to its senses and begins to reflect some semblance of fair value for this highly successful explorer, but in the meantime, I am happy to continue building my stake. Paramount carries a lowly enterprise value of just $281 million for a high-quality gold resource of 4.85 million ounces. Accounting for the 118 million ounces of silver discovered to date, the stock values Paramount's treasure of nearly 7 million gold-equivalent ounces at a ridiculous $58 apiece. Would you pay $58 for an ounce of gold buried beneath one of the company's projects located near key assets of major miners? The correct answer to that question is a resounding "yes." Because I employed a bias toward existing cash flow, the stock's position on this list does not entirely reflect the degree of the valuation disconnect here.
8. Sabina Gold & Silver (OTC: SGSVF)
Sabina Gold and Silver may not have any cash flow just yet, but the explorer's massive treasury of $160 million clinches its position as the top non-producing selection on my list. I have been a delighted shareholder of Sabina for several years. After shaving some profits when the stock floated above $7 earlier this year, I have jumped right back in here beneath $4.
The complex of claim blocks comprising Sabina's sprawling Back River project in Canada's Nunavut Territory has already shown its golden promise with a 6-million-ounce total resource. The project's path to production is eased, furthermore, by Xstrata's pending construction of a mine at the nearby Hackett River project Xstrata purchased from Sabina. Importantly, Sabina retained a royalty on 22.5% of the first 190 million ounces of silver from that mine and 12.5% of all silver beyond that quota. Identifiable catalysts for 2012 include a preliminary economic assessment on the Goose claim block during the first quarter and likely exploration success at the nearby Wishbone project. The stock currently values each gold resource ounce at just $90, which I consider an unmistakable bargain.
7. Osisko Mining (OTC: OSKFF)
Osisko beat out some stiff competition to earn a spot on this list, including some lower-cost producers like New Gold (AMEX: NGD ) and larger rivals like Agnico-Eagle Mines. But with the industry's most noteworthy production surge on tap for 2012, and the stock languishing nearly 44% beneath its 2011 peak, Osisko is a no-brainer as a top pick for the coming year (and beyond). From estimated 2011 output of about 190,000 during the inaugural year for the company's world-class Malartic mine, Fools will watch with delight as 2012 production surges toward steady-state production beyond 600,000 ounces of gold! And that's just from the first of Osisko's 10-million-ounce mega-deposits! At Hammond Reef in Ontario, Osisko has already booked an inferred resource of 10.52 million ounces of gold, and an updated resource estimate during the first quarter of 2012 could offer an added catalyst for the shares. As major cash flow from Malartic begins to pour in, I believe Osisko will have adequate means to simultaneously pursue advancement of Hammond Reef, while potentially acquiring one or more of the very promising gold development projects that abound in Quebec and Ontario.
6. Allied Nevada Gold (NYSE: ANV )
Because my own investing style tends to favor battered stocks like Kinross that are poised for a profitable turnaround, I have occasionally been guilty of letting tremendous and sustained growth stories like Allied Nevada Gold slide off my Foolish radar. In retrospect, I certainly wish I had been aboard for Allied's 20-bagger bonanza from a 2008 low beneath $2 to better than $40 earlier this year. But after a report from GARP Research & Securities offered me a second chance to contemplate the growth trajectory yet to come, I have no intention of missing this boat this time around.
As the company continues to harness the extraordinary treasure of its Hycroft mine in Nevada, annual output is slated to multiply six-fold through 2015 (a CAGR of 32%!). If you expect to pay a premium for growth that robust, prepare to be delighted by an EV-to-reserves valuation of just $253 per ounce (which does not even take the company's world-class silver reserves into consideration!). Allied holds an impressive array of exploration targets in Nevada, including the Hasbrouck gold and silver discovery for which a PEA (along with an updated resource) is anticipated during the first quarter of 2012.
Naturally, I have issued bullish calls for each of the CAPS-ratable stocks on this list within my Motley Fool CAPS portfolio, and I invite each of you out there to consider following suit. Please stay tuned for the second half of this list, and in the meantime, I encourage you to share your thoughts on the above selections using the comments section below.
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