Digging for Deals in the Gold Mining Sector

During the last month has been somewhat of a resurgence in the mining sector. The Market Vectors Gold Miners ETF has bounced from October's lows of $23 to a high of $26 at the end of the month. This has rekindled some interest in the sector.

However, the price of gold has started to decline once again, and although it is far from June's low of $1,205 per ounce, I would not rule out the price of the yellow metal falling once again to this level.

So, for investors who are seeking some exposure to the mining sector, where are the best opportunities?

Hunting for gold
Hecla Mining
  (NYSE: HL  ) describes itself as the largest primary silver producer in the U.S., one of the lowest-cost producers, and a growing gold producer.

That said, the company's production has been held back during the past two years as it conducted a major overhaul of its Lucky Friday silver mine. However, during the third quarter the Lucky Friday mine ramped back up to full production. During the quarter Hecla produced silver at Lucky Friday for a cash cost of just over $9 per ounce, 49% lower than the second quarter, and management expect costs to fall further into the end of the year.

All in all, for the fiscal third quarter Hecla reported a cash cost per ounce of silver produced, after by-product credits, of $7.40. However, with costs at the lucky Friday mine expected to fall further, this overall cost should follow suit.

Historically, Hecla has been debt-free but the company borrowed $500 million during the third quarter to acquire Canadian gold producer Aurizon as well as other mining interests. The additional gold production added $42 million to Hecla's top line during the third quarter, boosting year-on-year revenue by 30%. Still, Hecla's acquisition of Aurizon is only just starting to contribute to the company's bottom line, and further efficiencies should start to filter through during the next few quarters.

So overall, Hecla's mining costs are falling and output is rising. Good times should be ahead for Hecla and its investors.

A very low-cost producer
Another company that I am positive about is Alamos Gold  (NYSE: AGI  ) . In fact, Alamos is probably one of the best long-term gold mining investments available right now. Why? Well, the company's main asset, the Mulatos Mine in Mexico is guiding for an all-in-sustaining cost of $785 to $825 per ounce of gold produced for 2013, which is extremely low. In comparison, industry leader Barrick Gold produced gold at an all-in-sustaining cost of $918 per ounce during 2012 .

Investors need to focus on Alamos' low production costs of gold. In particular, Alamos' low cost of production means that the company is well placed to ride out any volatility in the gold market. Actually, Alamos has singlehandedly proven this point during the past five years, and the company has remained cash generative throughout this period. In particular, while many miners are struggling with writedowns and rising levels of debt, Alamos reported a strong net cash balance of $492 million at the end of the fiscal second quarter, this works out at around $3.82 per share. Once again if I use industry leader Barrick Gold as a comparison, Barrick has accumulated $14.2 billion of debt, a debt-to-equity level of approximately 100%.

What's more, Alamos has a number of low-cost projects under construction, including two mines in Turkey, which are currently predicted to have low production costs of around $600 cash cost per ounce.

However....
Unfortunately, with the price of gold consistently falling, some miners are struggling to stay above water. One such company is Brigus Gold  (UNKNOWN: BRD.DL  ) , a relatively small producer, mining only 23 thousand ounces during Q2 2013 (Alamos produced 53 thousand ounces during the same period). However, Brigus' total cash cost per ounce was $908, and due to the company's relatively small production run and lack of any serious economies of scale, the company's all-in sustaining production cost was $1,365. That said, this figure was lower than the figure of $1,717 per ounce reported during the second quarter of 2012.

Unfortunately, this indicates that Brigus is going to be making a loss at current gold prices. Actually, Brigus' all-in-sustaining cash cost per ounce is 49% above that of industry leader Barrick.

Foolish summary
The gold mining sector is beaten down, and miners could be sailing into rougher waters. However, Alamos and Hecla are both good companies that are working toward low-cost production and high profits.

On the other hand, perhaps investors should avoid high-cost Brigus as the company's second quarter all-in-sustaining production cost per ounce of gold indicates that the company will struggle to make a profit with the yellow metal trading below $1,300 per ounce.

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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 November 12, 2013, at 9:14 AM, Griffongate wrote:

    Actually Brigus Gold (BRD) AISC for Q3, Q4 and into 2014 are anticipated to be 1100. As you're aware AISC include the cost of exploration - quite formative for BRD who is presently reporting bonanza grade discoveries in the new zones they are presently mining. Refer to the recent CEO release and drilling updates within the last two months.

  • Report this Comment On November 12, 2013, at 5:46 PM, motleyanimal wrote:

    Maybe you should have waited a day before you published your article.

    Halifax, Nova Scotia; November 12, 2013 Brigus Gold Corp. (“Brigus” or the “Company”) (NYSE MKT: BRD; TSX: BRD) today reported financial results for the third quarter ended September 30, 2013.

    "Brigus delivered strong operating and financial results during quarter three. The Black Fox mine achieved record gold production while costs on a per ounce basis were at an all-time low, and lower than guidance. Moving forward, our top priorities continue to be safe production, cost management, and disciplined capital allocation." commented Wade Dawe, Brigus’ Chairman and Chief Executive Officer. “I am proud of our team’s operational performance and the fact that our workforce has worked over 1,400 days without a lost time incident.”

    Third Quarter 2013 Financial Highlights

    Sold 28,344 ounces of gold, a 49% increase over Q3 2012

    Cash costs of $617 and All in Sustaining Costs (AISC) of $992 per ounce of gold sold

    Made long-term debt repayments of $4.9 million

    Revenue of $36.9 million, a 22% increase over Q3 2012

    Adjusted cash flow from operations of $15.5 million, a 38% increase over Q3 2012

  • Report this Comment On November 12, 2013, at 5:50 PM, Griffongate wrote:

    Even better - congratulations to the team at Brigus Gold (BRD)

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