“If you buy one gold stock this year… make it this one”

Sniffing out some favored gold and silver miners from a Diggers and Drillers teaser

By Travis Johnson, Stock Gumshoe, November 10, 2011

There are going to be a few folks who are frustrated with the navigator of the good ship Gumshoe today, because we’re again looking at an Australian newsletter teaser — and I’m guessing the stock will be tough to trade for US investors, if our past reveals of Diggers and Drillers picks are any indication. But we’ve got a lot of beloved readers Down Under, so bear with me if you’re sick of hearing about stocks from the lucky country.

Today we’re following up on the other picks teased by Alex Cowie in his recent ad for Diggers and Drillers — the first one was a potash explorer that’s Australia-listed but is actually trying to develop a resource in Utah, but he also teased a gold company and a silver company. So what are they?

The headline of this article comes from Cowie’s tease, saying that this is the one to buy if you buy only one gold stock this year — and he thinks it will at least double in 2012. Here are the clues:

“Firstly, its deposit has a very high grade at 12.5 grams per tonne. It’s unusual for any company to get gold deposits with grades in the double figures. Most gold miners are very happy to be looking at 3 grams per tonne.

“But this stock’s high grade means it can get away with mining and processing less ore. And that massively reduces its operating costs making its profit margins bigger.

“Secondly, as well as the gold, it also has 161 grams of silver per tonne. This silver grade would give most silver producers a run for their money on its own! But to have this high-grade silver ALONGSIDE the high-grade gold is a real bonus.

“The result? This stock’s production costs are 75% less than the average gold mine, making it the lowest operating cost gold producer on the Aussie market right now.”

Hoodat? Well, we toss it into the ol’ Thinkolator, turn it upside down to make sure we can get the right Aussie spin on things, and our result comes tumbling out the other end: This is Kingsrose Mining (KRM in Australia, no US pink sheets listing).

Kingsose is a small, profitable, producing gold and silver miner — they have two projects, a tailings pile in Sardinia and a high-grade gold and silver mine in Sumatra called Way Linggo. Way Linggo is producing now, and they’re targeting 45,000 ounces of gold and 500,000 ounces of silver per year and believe they can significantly ramp that up with processing improvements to handle the newest high-grade discoveries they’ve made. This is an underground high-grade mine, they’re targeting pretty narrow seams of very high gold concentration (that’s where the 12.5 grams/ton number comes in), and they have a high silver production so their effective net operating cost for gold production is very low if you include those silver byproduct “credits” (ie, you pretend you’re a gold miner, not a silver miner, so you net out silver sales before calculating the production cost per ounce of gold).

Interesting company, to be sure — they’re small but have a few analysts covering the stock in addition to Cowie’s coverage, you can see some of the (positive, of course) analyst reports on Kingsrose’s website. According to Yahoo Finance the forward PE on these shares is under eight, which is quite cheap — they started producing recently, so the trailing PE is quite a bit higher in the low-30s, but obviously all those estimates rely on whatever gold and silver prices are going to be over the next year.

I don’t know anything about this particular part of Indonesia in terms of political or mining risk (they’re in South Sumatra, which I think has historically been more of an agricultural area, but Indonesia overall certainly has its share of large mining projects). They seem to have a joint venture there (they own 85% of the project) and the project has been under long-term development with renewing permits, so I don’t imagine it’s particularly a concern. They don’t have any debt to worry about, and they don’t seem to be hedged, so this looks like a pretty pure play on low-cost gold and silver.

(Do note that low cost gold and silver producers enjoy some additional stability, but they also don’t get the same boost from rising prices that a high-cost producer does because their profit margins don’t increase as dramatically with higher gold prices — there are a few newsletter touts out there now promoting this idea of investing in high-cost producers because they’re the ones who get the most dramatic immediate benefit from rising prices. I’d still prefer low cost producers who have more stable profitability, but I’m sometimes a bit of a fuddy-duddy.)

I’ve personally been avoiding individual gold stocks because I’m more comfortable having my gold mining asset allocation directed to financiers, but my lack of interest in this specific name doesn’t mean there’s anything wrong with them. They

And there was one other stock teased — let’s see if we can identify that … and if it’s tradeable outside of Australia.

Here are Cowie’s clues:

“Few mainstream analysts realise this silver start-up is already producing

“I’m very bullish on silver right now, and this Brisbane outfit is the first Aussie stock to start producing silver.

“But none of this is reflected in this little stock’s share price… yet.

“A few months ago it started pouring giant silver bars. In fact, I was at the mine recently watching them do just that.

“But there’s some urgency in this opportunity too.

“You see, before the end of this year they will be in full flow, producing 1.5 million ounces of silver a year.

“I actually saw them pouring molten silver into giant moulds. This one could be a real winner!

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“If you think silver is going up, this could be a great way to accelerate those silver profits.”

So … Thinkolator sez, this is: Alcyone Resources (AYN in Australia, ALCYF on the pink sheets). And yes, it is technically possible to buy the stock on the pinks, but be careful — it doesn’t necessarily trade every day, and even when it does trade it’s sometimes only $1,000 or so worth of shares in a given day. It’s a small company, market cap in the neighborhood of $100 million, but it does trade reasonably well in Australia.

And yes, it is a silver producer — but it’s more of a “restart” than a “start-up” … this is the rebirth of a company, Macmin Silver, that effectively went bankrupt building a silver mine that had operational problems at the same time that the global financial crisis hit three years ago. They were recapitalized as Alcyone The mine is the Twin Hills silver mine near Texas, Australia (in Queensland), and it is only about 150 miles from Brisbane and they are “on their way” to an annual production rate of at least 1.5 million ounces of silver with a fairly recent startup of operations. They’re also exploring pretty actively in the area of the Twin Hills mine, hoping to boost the mine life to at least a decade with additional resources, and they seem to have quite a few targets in the Texas area for additional exploration. The stock has been trading up and down in line with silver as that metal has bounced around a bit, and

Oh, and the picture of pouring molten silver that Cowie used in his ad is also exactly the same pic that Alcyone uses in one of its presentations … just in case you need a little more confirmation. There’s a quick article about the recommissioning of the mine here from the West Australian, sounds like they still have some work to do to create a sustainable mining operation but they are producing nicely from the tailings stockpiles and they do have a plan. And no debt, thanks to the recapitalization, so hopefully they can fund their ongoing operations from cash flow from this point. Beyond that, I don’t know much about them.

So there you have it — a couple gold and silver stocks that Alex Cowie is excited about, and they do sound like they’ve got some good production and solid financial positions assuming that gold and silver prices remain lofty, but I’ve only just learned of both of them. What do you think, is either of these worth your hard-earned cash? Let us know with a comment below.

And don’t worry, next time I write it will be about stocks that are traded while most of us here in the US are awake …



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