2 Miners Set for Growth and 1 That Should Be Avoided

Watch stocks you care about

The single, easiest way to keep track of all the stocks that matter...

Your own personalized stock watchlist!

It's a 100% FREE Motley Fool service...

Click Here Now

Without a doubt, one of the market's most volatile sectors is the mining industry. The recent downturn in the price of precious metals has sent shares of mining companies spiraling downwards. However, for contrarians this has presented some great opportunities, particularly in the case of Alamos Gold (NYSE: AGI  )  and Lundin Mining (NASDAQOTH: LUNMF  ) . That said, recent declines have also created a number of so-called "value traps," and I feel that IAMGOLD (NYSE: IAG  ) is an example of this.

Every company is different
Every mining company is different: Some have survived the recent downturn in the sector better than others. In particular, miners with a combination of low costs and high-quality assets are likely to be able to ride out the tough times easier and benefit more from the good times.

Alamos gold has two main projects, one in Mexico (Mulatos) and two others in Turkey (Agi Dagi, Kiralzi). Full-year 2013 results have not been finalized, but the company forecasts that its cash cost per ounce of gold produced will be in the region of $500 to $520 for the year and the all-in-sustaining-cost, or AISC, will be in the range of $780 to $825 for the same period.

Unfortunately, for 2014 the company expects costs to rise. Alamos' management have predicted that the cash cost per ounce of gold mined will be in the region of $700 to $740 during 2014, and the AISC will be in the range $960 to $1,000 for the same period. This rise in costs is due, in part to a projected fall in output and grade of ore mined as the company transitions to underground mining at two of its mines. However, the company is also developing two more low-cost mines, which should push down the cost of production from the end of 2014 onwards.

So Alamos' current production is low-cost, and after a slight rise, production costs are expected to remain low in the future.

Other things to consider
It's not just current production that you should consider in a mining company; you also need to take a look at plans for future growth and how the company plans to accomplish them. Now strictly speaking, Lundin Mining is not a gold miner, but the company has some impressive plans for growth, and this makes the company highly attractive to both investors and predatory peers.

For example, Lundin mainly produces copper, zinc, lead and nickel and over the next three years until 2016, the company plans to increase output of each metal by 23%, 19%, 20%, and 280% respectively. To do this Lundin will spend $460 million during 2014, which it can easily afford. The company generated $100 million in cash from operations during the first nine months of 2013 and has a net debt-to-equity ratio of only 2% as reported at the end of the fiscal third quarter.

Now, personally, I'm not a big fan of far-out analysts' earnings forecasts but current predictions suggest that thanks to this expansion plan Lundin is set to more than double net income over the next 2 to 3 years.

But while Lundin and Alamos look like great picks, investors need to be aware of 'dogs with fleas' in the mining sector and IAMGOLD may turn out to be one of these dogs.

A value trap
Back in December of last year, I flagged IAMGOLD, warning investors that the company's dividend payout did not look sustainable. A day later, the company cancelled its dividend for "the foreseeable future."

This was followed by further bad news in the form of the company's 2013 production guidance and outlook for 2014, both of which were dismal. The company revealed that AISC for 2013 would be at the high end of estimates of approximately $1,235 per ounce, and guidance for 2014 was not much different with the AISC of production per ounce expected to be in the region of $1,150 to $1,250.

Further, IAMGOLD's capital spending budget for 2014 is expected to be in the region of $400 million, but management has stated that they believe gold output for full-year 2014 will be in the region of 830,000 to 900,000 ounces, only a marginal increase on 2013's projected output. So it's questionable whether the company is overspending. Certainly, with cash, cash equivalents and gold bullion (market value) of approximately $380 million in the bank as of December 31, 2013 and razor-thin margins on gold produced, IAMGOLD needs to be careful what it spends. Still, the company has deferred three of its mine developments indefinitely.

Foolish summary
So in summary, there are some great deals to be had in the mining sector at present. However, investors need to be more vigilant and scrupulous than ever when evaluating investments in this environment. Both Lundin and Alamos look like great plays due to their plans for growth, cost of production, and strong balance sheets. On the other hand, I feel that IAMGOLD should be avoided.

They said it couldn't be done
But David Gardner has proved them wrong time, and time, and time again with stock returns like 926%, 2,239%, and 4,371%. In fact, just recently one of his favorite stocks became a 100-bagger. And he's ready to do it again. You can uncover his scientific approach to crushing the market and his carefully chosen six picks for ultimate growth instantly, because he's making this premium report free for you today. Click here now for access.

Read/Post Comments (0) | Recommend This Article (0)

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.

Be the first one to comment on this article.

Sponsored Links

Leaked: Apple's Next Smart Device
(Warning, it may shock you)
The secret is out... experts are predicting 458 million of these types of devices will be sold per year. 1 hyper-growth company stands to rake in maximum profit - and it's NOT Apple. Show me Apple's new smart gizmo!

DocumentId: 2814591, ~/Articles/ArticleHandler.aspx, 8/28/2015 11:34:43 PM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...

Rupert Hargreaves

Rupert has been writing for the Motley Fool since December 2012. He primarily covers tobacco and resource companies with a passion for value-oriented investments. .

Today's Market

updated 2 hours ago Sponsored by:
DOW 16,643.01 -11.76 -0.07%
S&P 500 1,988.87 1.21 0.06%
NASD 4,828.33 15.62 0.32%

Create My Watchlist

Go to My Watchlist

You don't seem to be following any stocks yet!

Better investing starts with a watchlist. Now you can create a personalized watchlist and get immediate access to the personalized information you need to make successful investing decisions.

Data delayed up to 5 minutes

Related Tickers

8/28/2015 4:01 PM
AGI $4.13 Up +0.38 +10.13%
Alamos Gold CAPS Rating: ***
IAG $1.71 Up +0.14 +8.92%
IAMGOLD Corp (USA) CAPS Rating: ***
LUNMF $3.22 Up +0.06 +1.76%
Lundin Mining Corp… CAPS Rating: ****