5 Potential All-Stars From Gold's Junior League

You don't need to have been head cheerleader or captain of your football team -- or even the class valedictorian -- to excel in the game of Motley Fool CAPS. All you need is a penchant for recognizing a winner when you see one.

If you recognize gold as a winning prospect in this epoch of spiraling debt crises and unbridled deficit spending, then you will want to read on.

Where the real talent hides
As I have revealed to my readers of late, my own investment focus within the gold sector has moved steadily away from the major and mid-tier producers, landing among the higher-growth prospects of the junior miners. Although select exploration or development-stage companies may offer even greater growth prospects, I encourage Fools to consider the strategic compromise offered by those small-cap miners that are already producing gold within this high-margin operating environment.

Now that gold has finally retreated a touch from repeated forays into record territory, the gold mining sector beckons yet again with renewed relative bargains among the junior producers that will vie to earn your votes for "most likely to succeed."

Introducing the starting line-up
To pare down the long list of holdings within the Market Vectors Junior Gold Miners ETF (NYSE: GDXJ  ) into a Foolish starting line-up of junior all-stars, I considered only those companies that: are primary gold producers (this particular ETF is rather silver-heavy); sport a market capitalization roughly between $500 million to $1 billion; and offer convenient access to investors through a listing on a major U.S. stock exchange. Utilizing those parameters, the following five producers stood out like a golden thumb:

  • Aurizon Mines (AMEX: AZK  ) is employing its inaugural Casa Berardi mine as a springboard into further growth by pursuing fast-tracked development of the nearby Joanna mine. Continued success in exploration efforts at Joanna telegraphs a strong boost to the project's reserve base once the feasibility study is completed during the fourth quarter. Aurizon is targeting a 60% surge in production from Joanna by 2013, and recently acquired several option agreements on prospective properties in Quebec to extend its project pipeline. Since mid-tier heavyweight Agnico-Eagle Mines (NYSE: AEM  ) operates three gold mines in the same region, this Fool considers Aurizon Mines an attractive bolt-on acquisition target.
  • Gammon Gold (NYSE: GRS  ) failed to resolve labor issues that had stymied production at the El Cubo mine, and showed little mercy to shareholders when it decided last month to shelve the operation entirely. Since the flagship Ocampo mine accounts for 77% of Gammon's reserve base, however, I find compelling opportunity in the monster sell-off that has battered Gammon's shares. With resources from El Cubo being reallocated to enhance the Ocampo operation, and exploration at the prospective Guadalupe y Calvo project returning bonanza ore grades, Gammon may yet find a way to redeem itself.
  • Golden Star Resources (AMEX: GSS  ) , at 26 years of age, is the elder statesman of the junior gold league. The company's two prolific mines in Ghana are slated to yield 400,000 ounces of combined production this year, and the company is placing additional golden eggs into these baskets by focusing upon brownfield exploration and mine expansions. By developing the Prestea South deposit of the Bogoso/Prestea complex, for example, Golden Star looks to add a further 75,000 to 100,000 ounces of annual production.
  • Jaguar Mining (NYSE: JAG  ) pounced out of the 2008 gold correction with smooth advance to reach $14 per share in January 2010. After a nearly 40% retreat from that peak, I became curious to see how the miner might stack up against its peers in relative valuation terms. As you will see in the table below, Jaguar carries an enterprise value that is equivalent to just 14% of the present market value of its proven and probable gold reserves. With the fresh inauguration of the impressive Caete mine, Jaguar now boasts 4 producing gold mines. Following a positive pre-feasibility finding for the Gurupi project, a fifth mine could join the party as early as 2013.
  • Northgate Minerals (AMEX: NXG  ) is my personal favorite of this all-star line-up. For starters, Northgate enjoys substantial cash reserves (net of total debt!) of $178.2 million. With a share price beneath $3, it's hard to ignore a cash position that accounts for some $0.61 per share. Thanks to prolific copper reserves of 2.36 billion pounds, Northgate's reserve base dwarfs the competition with a present market value of $11.6 billion. Construction is now under way at Young-Davidson in Ontario, which is expected to add 180,000 additional ounces of gold per year beginning in 2012.

Reviewing the stats
Now that you have surveyed some of the key factors impacting share prices and outlooks for these five junior gold producers, take a moment to consider how they stack up against each other in the following table:

Metric

Aurizon Mines

Gammon Gold

Golden Star Resources

Jaguar Mining

Northgate Minerals

CAPS Rating (out of 5)

***

**

***

****

****

Market Capitalization

$776.7m

$724.0m

$1.1B

$692.7m

$846.4m

Enterprise Value

$670.1m

$658.4m

$1.0B

$749.1m

$676.8

Percentage Below 52-Week High

16.6%

57.2%

15.3%

39.5%

18.1%

Total Cash

$107.9m

$125.0m

$164.9m

$100.9m

$230.3m

Total Debt

$ 1.3m

$35.9m

$133.3m

$137.9m

 $52.1m

P&P Gold Reserves

2.03m. oz.

1.42m. oz.

3.73m. oz.

4.34 m. oz.

3.75m. oz

Other Stated Reserves

NA

66.07m. oz. silver

NA

NA

2.36B lbs. copper

MVPPR*

$2.42B

$2.82B

$4.44B

$5.16B

$11.54B

EV/MVPPR*

0.28

0.23

0.23

0.15

.06

Estimated 2010 Production

150,000 oz.

105,000 oz.**

400,000 oz.

205,000 oz.

310,000 oz.

Q1 Cash Cost of Production

$538 / oz.

$530 / oz.

$612 / oz.

$597 / oz.

$654 / oz.

No. of Producing Mines

1

1

2

4

3

Operating Jurisdictions

Quebec, Canada

Mexico

Ghana, West Africa

Brazil

Canada; Australia

Note: General statistical and performance data was sourced from Yahoo! Finance as of July 6, 2010. Assumes $1190 for gold, 17.75 for silver, and $3 for copper.
* EV/MVPPR -- which divides enterprise value (EV) by the market value of combined proven and probable reserves (MVPPR) -- provides one crude (but meaningful) measure of relative share valuation among broadly similar mining companies.
** Gammon projects 105,000 ounces of gold production and nearly 5 million ounces of silver production from the Ocampo mine, which Gammon expresses jointly as 190,000 GEOs (gold equivalent ounces). These figures exclude realized production from the recently discontinued El Cubo mine.

As they so often do, I believe that the CAPS community collectively has already done an outstanding job of ranking these five junior mines according to their relative value and emerging growth potential. Northgate Minerals and Jaguar Mining have both earned a four-star CAPS rating, and I believe that their comparatively lower EV/MVPPR values and slated production growth spurts justify that confidence. Given the likely reserve growth forthcoming at Joanna, and buried treasures like the nearly 600,000 ounces of indicated resources already identified at Aurizon's newly optioned Marban Block in Canada's Malartic gold camp, I give a clear edge to Aurizon shares over those of the Golden Star. Under the circumstances, a meager two-star ranking is well deserved by Gammon Gold, though I remain cautiously optimistic on the company's long-term prospects.

Time to cast your vote
Although we have only scratched the surface of the constant due diligence required to successfully select top performers among junior gold miners, I suspect that each of you will already have been drawn to one of these five gold producers while reviewing the information and comparative data presented above. You will see I have selected all five of these companies to outperform the S&P 500 within my silverminer CAPS portfolio, reflecting my bullish expectations for the sector. In fact, I own four of them in real life.

For those seeking just one or two investments within the sector, your vote in our Motley Poll below may help your fellow Fools to pick the ultimate superstar of the junior gold league. If you have alternate nominations in mind, please add a pitch to your CAPS portfolio and discuss them in the comments section below.

Fool contributor Christopher Barker carries a silver coin that reads: "Honest value never fails." He can be found blogging actively and acting Foolishly in the CAPS community under the username TMFSinchiruna. He tweets. He owns shares of Aurizon Mines, Gammon Gold, Golden Star Resources, Market Vectors Junior Gold Miners ETF, and Northgate Minerals. The Motley Fool's disclosure policy is 0.999 pure.


Read/Post Comments (5) | Recommend This Article (28)

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 July 08, 2010, at 7:19 PM, kurtdabear wrote:

    I agree with your assessment of Gammon. In addition to having more than 3/4ths of the reserves, Ocampo accounts for more than 2/3's of production. Production costs at Ocampo are also much lower than El Cubo, so the shutdown there should actually produce some favorable comparisons in that area as well. Finally, it's refreshing to see management with enough backbone to tell unreasonable labor leaders where they can stick it. (Too bad Rick Wagner wasn't made of the same stuff--"GM" today might not stand for Government Motors.)

  • Report this Comment On July 08, 2010, at 7:41 PM, XMFSinchiruna wrote:

    kurtdabear,

    It's hard to know all of the facts surrounding the labor issues. I personally was disappointed by the brief period between the announcement of labor issues and the cessation of operations. It seems to me that a lengthier negotiation process could potentially have resolved the issue, but then again Gammon may have had strong reason to believe that they faced an irreconcilable impasse. Whatever the circumstances, the lost production is certainly a disappointment, and the onus is on Gammon management to restore the faith of shareholders.

  • Report this Comment On November 10, 2010, at 2:58 PM, Beladis wrote:

    What does it take to leave the ranks of "JUNIOR"? NXG has three(3)...count them...KS, Stawell and Fosterville mines producing gold. They projecting 274,000 oz this year.

    http://www.prnewswire.com/news-releases/northgate-minerals-r...

  • Report this Comment On December 01, 2010, at 9:23 AM, silverminer wrote:

    Author's note: In the data for Northgate Minerals above, the figure for copper reserves should have been 74.5m lbs, as the 2.36 billion pound figure corresponds to Measured & Indicated resources. Using market values at the time this article appeared, MVPPR would then have been only $4.73B, for a corresponding EV/MVPPR of 0.14. My apologies for inserting data from the wrong row of Northgate's table when transposing.

  • Report this Comment On December 30, 2010, at 6:03 PM, SN3165 wrote:

    If I had to chose one here I would go with Gammon (or Jaguar?) I like Brigus more than all of these, however.

Add your comment.

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: 1228523, ~/Articles/ArticleHandler.aspx, 9/30/2014 6:15:53 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...


Advertisement