Gammon's Jammin' Once More

When presenting my rationale for selecting for Gammon Gold (NYSE: GRS) as my top stock pick for 2011, I identified three looming catalysts that could launch these shares out of an extended malaise.

This was not one of them. Before you can launch, you need a steady foundation beneath you. Gammon's tally of 2010 production and cost figures from the Ocampo mining camp in Mexico offers investors the peace of mind to know that Gammon's launchpad is sound and secure.

Gammon's Ocampo mine produced 183,538 gold equivalent ounces (GEOs) during 2010 at a highly competitive cash cost of $422 per GEO. The company's record fourth quarter margin of $955 per GEO -- for a full 69% of operating revenue -- offers gold and silver investors a savory preview of soaring profitability from lower-cost mining operations.

Although miners often employ distinct methods to calculate costs, I nonetheless find Gammon's cost structure very appealing on a relative basis. Facing a tough transition year in its long-term growth trajectory, junior miner Northgate Minerals (AMEX: NXG) expects 2011 costs (net of copper production) to trend above $800 per ounce. Meanwhile, Gammon's cost profile stacks-up nicely even alongside a major producer like Goldcorp (NYSE: GG). Goldcorp recently estimated its co-product total cash cost for the fourth quarter of 2010 at about $450 per ounce.

Both gold and silver production increased at Ocampo during each successive quarter of 2010, highlighting a gathering momentum "in virtually every key performance indicator." With commercial production now under way at the exciting Santa Eduviges zone, and redeployed resources from the discontinued El Cubo mine accelerating the development of underground targets, I expect another solid year from Ocampo during 2011.

With Gammon's foundation of low-cost production secure, Fools are free to return their focus to the company's looming growth catalysts. From the company's board-welcomed bid to merge with competitor Capital Gold (AMEX: CGC), to the series of exciting new option and purchase agreements that herald a potential explosion of the company's long-term development pipeline in Mexico, Gammon is positioned squarely upon a golden launchpad. With $113 million in cash on hand, Gammon enjoys "the flexibility to invest in our future, and fully fund our growth strategy." Again, the preliminary assessment for Gammon's Guadalupe y Calvo project is expected in late January or early February.

I expect another terrific year overall for the miners of silver and gold, amid further pricing strength from the metals themselves. I have identified several potential outperformers within the industry, including some larger-cap names like Yamana Gold (NYSE: AUY) and Coeur d'Alene Mines (NYSE: CDE), but for this year I think the hot one to hold will prove to be Gammon Gold.

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