Despite the perceivably lukewarm attitude toward gold lately, I would not wish for my readers to dip even a single toe into 2012 without some manner of exposure to gold. Yet the ferocity of the recent sell-off in gold-mining shares suggests that many investors -- both institutional and retail -- have opted to throw in the towel.
But seasoned gold investors have seen this dynamic before, where violent corrections swiftly shake the weaker, speculative, and leveraged capital out of their precious-metal positions and thereby set the stage for the next leg higher in this ongoing secular bull market. Does anyone out there remember 2008? And let's not forget, gold is still poised to close the year more than $150 higher than where it began!
For the stronger-handed Fools out there who intend to stay the course, I offer my top 10 gold stocks for 2012 as a tool to aid in the process of selecting from among some of the very best stocks that gold has to offer. Like any list of the sort, it is imperfect, incomplete, and subjective. I discussed my selection process a bit in Part 1, wherein I presented the first five picks in my countdown.
Let's pick up where we left off and dive right in with selection No. 5:
5. Eldorado Gold
Eldorado's pending $2.4 billion acquisition of European Goldfields launches one of the industry's most successful growth stories clear into the stratosphere. I have owned the stock for more than six years now, and if the company delivers on its new pro forma production targets the way it has done reliably over the years, then investors can look forward to a phenomenal 115% increase in annual output over the next three years (from 650,000 ounces in 2011 to 1.4 million ounces in 2014). And with a pro forma reserve base of 27.4 million ounces that will leap convincingly past rivals Agnico-Eagle Mines and Yamana Gold
Eldorado's stock has been pulverized during 2011 as a prior production target of 800,000 ounces gave way to revised guidance for 650,000 ounces. But because the longer-term growth scenario has held up very well, I believe the result is a deeply undervalued gold stock for which Fools have a predictably short-sighted equity market to thank.
As a consequence of its massive scale, Goldcorp could be classified as a surprisingly conservative top pick. But the selection is conceived as a complement to, rather than a replacement of, an allocation to the array of exciting multibagger opportunities in the sector. But keep in mind that cash remains king in a financial world still riddled with threats of systemic mayhem and credit-constraining crisis. And where cash is king, Goldcorp rules as a golden emperor, with $1.5 billion in cash and another $1.5 billion in an undrawn credit facility. And then there's this ceaseless flood of cash flow that seems to replenish its cash holdings as fast as Goldcorp's multiple construction projects and its masterful team of dealmakers can spend it. Goldcorp expects average annual cash flow of $2.5 billion over the next five years!
Goldcorp is not the cheapest stock on the block relative to its hoard of 62.25 million ounces of gold in reserves, but its relative premium is supremely justified by an industry-leading cost profile and a remarkable growth pipeline that envisions a 60% production surge from 2.5 million ounces in 2011 to 4 million ounces in 2015. As for catalysts in 2012 to move the stock higher, look to the launch of production at the world-class Pueblo Viejo mine beginning in mid-2012. Goldcorp retains what I consider the industry's premier profile for organic resource expansion, which combines well with management's proven gift for accretive acquisitions to ensure Goldcorp will continue to expand its resource base even as annual production surges. The stock pays a small dividend that is merely a taste of what's to come, and I stand by my oft-repeated assertion that these shares represent an unquestionable investment opportunity each and every time they dip beneath $50 per share.
3. Brigus Gold
Brigus has turned into something of a walking contradiction during 2011. On the one hand, the market has grown noticeably weary of the company's string of operating setbacks along the path toward its near-term goal of 100,000 ounces of steady-state annual production from the Black Fox mine. On the other hand, this Fool's gaze has remained firmly fixed upon the growing opportunity to significantly expand production at the complex as the company enjoys phenomenal exploration success in the satellite deposits known as the Contact and 147 zones. Even with assays still pending from some 95 drill holes, Brigus has already expanded total resources at Black Fox by 50% with these major discoveries. But the ongoing weakness in gold shares at large has severed the rational linkage between fundamental value and share prices, leaving rational Fools to watch in amazement as major strategic achievements of the sort seem to fall on deaf ears. The result is a glaringly undervalued stock that values each reserve ounce at just $117! I visited the Black Fox mine last summer, and I have studied this company from every conceivable angle. Clearly, timing was not on the side of my prior selection of Brigus among my top 10 picks for 2011, but I would be very surprised to see 2012 pass by without a significant appreciation from the current price.
2. AuRico Gold
When I picked that downtrodden one-mine stock called Gammon Gold a year ago as the industry's most powerful turnaround story in the making, the company held just 1.6 million ounces of gold in reserves and produced just 183,000 gold-equivalent ounces for 2010.
Fast-forward 12 months, and we find the newly named AuRico Gold boasting more than 6.5 million ounces of pro forma gold reserves after back-to-back acquisitions of Capital Gold and Northgate Minerals. Pro forma production for 2012 is now expected to reach 636,000 gold-equivalent ounces, or nearly 3.5 times the 2010 figure. And as the Young-Davidson mine acquired from Northgate Minerals continues to ramp up to 220,000 ounces of gold by 2015 (after production begins about three months from now), I see buckets of cash flow packing AuRico's coffers to fuel further pipeline development and acquisitive growth. And let's not forget Kemess Underground, that eye-catching wild card from the Northgate acquisition with the 860 million-pound copper kicker. Look for the company to monetize the high-cost Australian mines acquired from Northgate as Young-Davidson begins to chip in. Investors should keep an eye out for the PEA for the Guadalupe y Calvo project, which is expected by the end of January.
1. Primero Mining
To understand how profoundly cheap Primero's shares have become, one first needs to understand how poorly the company's currently stated reserves and resources capture the true productive potential of its flagship San Dimas mine. Goldcorp made that crystal clear when it sold the asset as Primero's founding transaction last year. But because the market clearly still doesn't understand this company, I am compelled to repeat Goldcorp's assertion:
The long history of continuous mining at San Dimas and the known occurrence of the mineral veins have overridden the need to prove up reserves for many years ahead. Consequently, the true potential of the deposits are neither fully realized nor reflected in the stated reserves and resources.
It is worth recalling, also, that Goldcorp's master dealmakers saw fit to take a 36% equity stake in Primero when the deal valued the San Dimas mine at about 1.8 times Primero's current market capitalization of $274 million. Not for nothing, but the company holds $107 million in cash! Primero CEO Joe Conway, who helped build mid-tier IAMGOLD into the powerhouse it is today, told me in September that he expects the operation to reach 200,000 ounces of annual gold-equivalent production by 2013 (from estimated 2011 production of at least 100,000 gold-equivalent ounces). Yet this 250-year-old mining operation with so much more to give is valued as though it were some two-bit exploration project with no sign of production in sight.
Primero's existing gold resource, not counting a stunning silver resource of 242 million ounces, weighs in at 2.87 million ounces. The market has seen fit to ascribe a value of only $99 to each of those gold ounces. Some of the weakness stems from a tax treatment issue relating to a silver royalty agreement with Silver Wheaton
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Fool contributor Christopher Barker can be found blogging actively and acting Foolishly within the CAPS community under the username TMFSinchiruna. He tweets. He owns shares of Agnico-Eagle Mines, AuRico Gold, Brigus Gold, Eldorado Gold, Goldcorp, IAMGOLD, Silver Wheaton, and Yamana Gold. The Motley Fool owns shares of Primero Mining. Try any of our Foolish newsletter services free for 30 days. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.