The field of gold miners can be a minefield for investors. But like any challenge worth tackling, well-selected gold miners offer the promise of gains well in excess of price advances in the underlying metal.
After reviewing both Part 1 and Part 2 of this series, please join us below as we learn how to gauge a miner's all-important potential to expand resources through ongoing exploration, assess the strategic health of a miner's development pipeline, and pinpoint management teams that possess the golden touch.
5. Exploration upside
I have said it before: Nothing delivers shareholder value to gold investors quite like the exploration drill. A single set of successful drill holes can launch a micro-cap exploration company from obscurity into the limelight, or constitute a strategic game-changer for an already successful locator of gold. But what of the gold discoveries that have yet to be made? The market tends to overlook that question, creating opportunity for the forward-looking investor. For those Fools willing to dive deep into due diligence to ascertain a company's capacity for significant exploration upside, I believe the greatest gains attainable in the sector await.
Primero Mining offers an ideal case study in underappreciated exploration upside, landing the stock at No. 2 in my list of Top 10 Gold Stocks for New Money Now. Created from Goldcorp's (NYSE: GG) mid-2010 sale of the San Dimas mine in Mexico, Primero has a golden opportunity to capitalize on an unusual condition whereby an incredible 250 years of successful gold and silver extraction precluded the need for Goldcorp to develop a comprehensive reserve base for the full deposit.
"Consequently," Goldcorp explained, "the true potential of the deposits are neither fully realized nor reflected in the stated reserves and resources." Goldcorp has essentially guaranteed a further 220 million ounces of silver production, and I suspect that agreement was based upon conservative projections of the mine's remaining potential. On that basis, I conclude that Primero will yield at least 2.5 million ounces of additional gold, and that a pattern of substantial exploration success driving powerful share price gains will characterize the journey.
Foolish update: As this story was going to print, Northgate Minerals announced a deal to acquire Primero Mining in an all-stock transaction. Please bookmark this link to watch for my analysis and to follow all my precious metals coverage.
Like Primero's San Dimas, Great Panther Silver (AMEX: GPL) enjoyed consistent success over recent years by drilling immediately in advance of underground production, and so the full productive potential of its deposits remained obscured from widespread view. And yet, everywhere a drill entered the ground, the miner encountered ultra-high-grade mineralization within a vein structure that had likewise supported generations of historical production. Observing Great Panther's unbroken pattern of bonanza exploration success over the years, its incredible exploration upside, and the added bonus of an aggressive production growth spurt in the making, I recommended Great Panther to my readers at $0.87 per share last September. The stock has appreciated nearly 350% in that span, and I am delighted that many of my regular readers have joined me for the profitable ride.
Here's a tip: When you encounter references to "strike length," or the lateral distance over which contiguous mineralization has been found, aim to place that within the context of the broader geological feature that prompted the target's selection. If a 500-meter strike length has been established, for example, but the deposit remains "open along strike" within a two-kilometer target of interest, then you may have found yourself some exploration upside. The same can be said for any of the three axes over which a deposit is measured (strike, width, and depth), and the ideal condition for investors occurs when a deposit remains "open in all directions" to further expansion. That gives subsequent drilling a high probability for success, which can often lead to strong upside for the shares as well. Brigus Gold's (AMEX: BRD) exciting new 147 Zone discovery remains open in all directions, and that is music to this Fool's ears.
6. Development pipeline
As long-term investors, gold-savvy Fools are not solely focused upon a miner's highest-priority development target. In order to sustain growth momentum over the long haul, a high-quality miner will offer a balanced portfolio of development projects spread across the myriad stages of a mine's multiyear development cycle. Gaps in the portfolio are never welcome, while concentrations within a stage of development are perhaps less problematic the further back one travels along a development timeline. I think the best way to illustrate the balance we seek is by pointing out what we want to avoid.
A miner with multiple projects under construction simultaneously can seem like a golden ticket, but anyone familiar with Agnico-Eagle Mines' recent past knows that can generate some execution risk. My observation of a gap in Kinross Gold's development pipeline in mid-2009 contributed to an appropriately cautious outlook on that serial underperformer. Shares of Northgate Minerals (AMEX: NXG) have been crushed under the weight of a gap in its development pipeline that recently saw its Kemess South mine close before its next flagship Young-Davidson mine could enter production. Please note: With the pending acquisition of Primero, Northgate has effectively just filled that gap!
7. Management gold
Gold doesn't erupt from the ground on its own, so gold investors are universally subject to how effectively a management team can target, locate, and extract its mineral treasure while safeguarding shareholder interests.
When assessing a mining management team, I home in on the geological component. In the case of junior exploration companies, especially, I like to see CEOs who double as the company's leading geologist. For emerging or existing producers, Fools will welcome specialization within those roles, but I still want to see a vice president for exploration with a proven track record of mineral discovery and resource expansion (ideally within the same region or geological trend as the company's principal development asset). As you might imagine, skilled and experienced geologists are in increasingly high demand as this bull market rages on, which means those companies who secure the very best geological personnel can lay claim to a competitive advantage! The same can be said for experienced mine operators and supervisors. I consider Brigus Gold CEO Wade Dawe one of the industry's up-and-coming greats, but his hiring of COO Richard Allen -- former senior director of mining for none other than Barrick Gold -- may be his crowning achievement to date.
Project financing presents one of the most challenging hurdles for miners, and one could argue that gold investors are particularly prone to frown upon oversized bank debt. I prefer a management team that seeks creative combinations of byproduct royalty streams, joint venture arrangements, or even an outright sale to avoid excessive debt or dilutive offerings. A select few miners -- most notably Endeavour Silver (NYSE: EXK) -- manage to achieve production without resorting to any of the aforementioned vices.
Increasingly, the welcome flood of cash flow enjoyed by quality miners offers an opportunity for management teams to showcase their commitment to growing shareholder value by issuing dividends. Yamana Gold (NYSE: AUY) and Newmont Mining (NYSE: NEM) are leading the charge thus far with annual yields of about 1.5%, but as gold prices climb toward my $2,000 price target, I intend to ascertain true commitment to shareholders by observing which miners grow dividends most aggressively.
In Part 1 of this series, we scanned the globe for some of the most prospective golden real estate that coincides with friendly geopolitical and regulatory settings, and outlined key aspects of mineral geology. In Part 2, we touched upon some important characteristics to watch for within project feasibility studies and permit application dynamics. And here in our final installment, we discussed some means to assess: exploration upside, development pipelines, and management acumen. Although these discussions just skimmed across the surface of some topics that I consider important, I hope Fools emerge from the discussion with a slightly better grasp of the primary tools within a successful gold investor's toolbox.
- Add Northgate Minerals to My Watchlist.
- Add Brigus Gold to My Watchlist.
- Add Yamana Gold to My Watchlist.
- Add Great Panther Silver to My Watchlist.
- Add Endeavour Silver to My Watchlist.
- Click here for my recent gold series: Top 10 Gold Stocks for New Money Now.
