Buy, Sell, or Hold: Brigus Gold

Does the potential here outweigh the risk?

Selena Maranjian
Selena Maranjian
Jan 24, 2013 at 10:32AM
Energy, Materials, and Utilities

When considering any stock for your portfolio, don't be swayed by just the positives. Examine its pros and cons, and decide whether it's possible upside outweighs its risks. Let's take a look at Brigus Gold (UNKNOWN:BRD.DL) today, and see why you might want to buy, sell, or hold it.

Founded in 1936 and based in Halifax, Canada, the company sports a market capitalization of about $210 million, making it a small-cap stock. It's in the business of finding and producing gold as well as silver, and has interests primarily in the Black Fox Mine, in Ontario, and the Goldfields projects, in Saskatchewan. Before 2010, the company was known as Apollo Gold.

The company's stock is down about 15% over the past year and has averaged annual losses of 13% over the past five years. That's enough to keep some people away, but it also makes some wonder whether the stock is a bargain now.

One attraction for the stock is its valuation. While its recent price-to-earnings (P/E) ratio is around 12, higher than its five-year average of 8, its price-to-sales ratio of 1.9 is below its 2.1 average and its forward P/E is just 4. Its price-to-cash-flow average, meanwhile, is around 7.6, which is lower than the industry average and that of the S&P 500, as well.

The company has been making some promising moves, as well. Gold-streamer Sandstorm Gold (NYSEMKT:SAND), which makes its money by lending to miners in exchange for a discount cut of production, held the rights to 12% of Brigus' production for $500 per ounce – at a time when gold has been selling for more than $1,600 per ounce. (Sandstorm's business model is quite compelling.) Brigus, though, has bought back 4% of its stream, for more than $24 million, which reflects confidence in its worth.

Plenty of the company's numbers are encouraging. Free cash flow has recently turned positive, with cash from operations generally trending upward. Significant short-term debt has been replaced by long-term debt, too. Also, its cash costs per ounce of gold have been falling recently.

Good management is critical when investing in stocks, and it's worth noting that in its recent earnings report, the company just beat its projections for the year, suggesting that its leaders have a good handle on operations. Management has been buying shares recently, too, which is always promising.

In addition, early results at Brigus' Grey Fox mine near the Black Fox mine are promising, with some high grades.

One reason to consider steering clear is the stock's price: With a price tag of less than $1 per share, it's firmly in penny stock territory. Not every low-priced stock is a bad egg, but penny stocks tend to be very volatile, and many have resulted in huge losses and headaches for investors.

You might also worry about the company's business. Small gold miners can suffer from delays and disappointing production, both of which plagued Brigus not so long ago. To its credit, though, the company seems to be turning itself around. My colleague Christopher Barker reported earlier in the year that at the Black Fox mine, new management had successfully prioritized improving the grade and had doubled the yield to six grams per ton.

Stock dilution is a concern, too, as the company's share count has gone from about 61 million in 2009 to 293 million recently. Of course, money raised from issuing new shares is not always a bad thing, when put to productive use – but that's rarely a sure thing.

Hold (off)
Given the reasons to buy or sell Brigus Gold, it's not unreasonable to decide to just hold off on it. You might want to wait for it to post more years of growing net income, or for stock dilution to become less of a concern. You might also want to see production levels rise more, or promising results from newly evaluated sites.

You could also check out some other interesting precious-metal-related companies, to see if they seem like better bargains. Perhaps take a look at Sandstorm Gold, or a much bigger company with a similar "streaming" business model – Silver Wheaton (NYSE:SLW). It's poised to profit from increases in the price of silver, it already has fat profit margins, and analysts see it as undervalued, as well.

Or perhaps look at another small company, Sabina Gold and Silver (NASDAQOTH:SGSVF), which has been called "the best kept secret in gold." The company boasts some high-grade mines and promising exploration targets. Indeed, Silver Wheaton recently owned nearly 8% of the company's stock.

You might also branch out, away from gold or silver. Thompson Creek (NASDAQOTH:TCPTF), for example, is a major molybdenum miner serving the steel industry, among other things. It's trying to work its way out of penny-stock territory and has plenty of fans. Its stock has fallen in recent years, and some worry about its debt and dearth of free cash flow.

The verdict
I'm holding off on Brigus Gold for now, but I'm intrigued. Everyone's investment calculations are different, though. Do your own digging and see what you think. The company may perform spectacularly in the coming years, but remember that there are plenty of compelling stocks out there.