by Travis Johnson, Stock Gumshoe | August 23, 2011 11:56 am
That sounds like an enticing headline, right? It’s getting to the point where, with gold at $1,900 an ounce, I’m going to have to start writing about gold mining stocks again — the teasers are piling up, and the querulous villagers are storming Gumshoe Castle and demanding answers.
And since so many folks have not been invested in gold for the recent incredible performance the shiny metal has shown, the interest is high for gold mining stocks — there’s almost always a disconnect between the metal and the miners, gold has gone up in a flight to safety, with folks seeking a save haven for a cash, and is simply seen by many as a way to protect yourself from declining paper currencies. Gold mining stocks, on the other hand, mean you’re not just getting gold, you’re getting a business — and there have been so many terrible mining businesses, and so many challenges for even the best miners, that investors are usually cautious, which means that the mining stocks react far more slowly than the metal. Gold may be a safe haven, but gold mining stocks aren’t — sure, they should go up in value if gold is going to stay at high prices, but it doesn’t usually happen fast. Over the last six months, gold has been up about 35% and the large cap gold miners, as represented by the GDX ETF, are up about 10%.
So they’re due, right? That’s certainly the speculation of many investors, who reason that if gold stays in this “almost $2,000” range for a while the gold miners, particularly those who are pretty big and producing already, are going to be making ridiculous profits. Hard to argue with that — costs are going up so it’s getting more expensive to find and produce gold (new deposits may be more remote or deeper, and mining is heavily dependent on diesel fuel and/or electricity), but costs are not going up as fast as the price of gold has climbed this year, which means margins ought to be increasing.
That’s reason enough to look to some of the big miners, probably — folks like Goldcorp (GG), which I think is still the large cap name with the most dramatic growth potential in the next few years, and it’s easy to call these stocks “cheap” even if they trade at a premium to the market. But that’s not what Michael Lombardi is pitching today — anyone can tell you to buy Goldcorp, which is a well-known $40 billion company … if you want to shake someone’s credit card loose and get them to sign up to subscribe to your newsletter, you need an idea that sounds a bit sexier.
He’s trying to sell his newish Penny Stock Reporter newsletter, by the way, which will run you $89 (“on sale,” naturally).
And FYI, the last small gold stock that one of Lombardi’s newsletters teased — that I wrote about, at least — was Gold Resource Corp. (GORO), which has done extremely well in the year since I covered the teaser, but which is also under some pressure due to a negative report from the folks at the StreetSweeper website today. For what it’s worth, the stock he’s pitching today is much more of a mainstream gold company than GORO.
So let’s see what he’s teasing now, shall we? Here’s the intro:
“Right Now, One Gold Mining Penny Stock Company Is Giving Away Silver with Every Share of Gold….
“I believe we have found one more way to help you get the financial protection you need with the profit potential you deserve.
“In short, we have uncovered a compelling situation within one gold mining penny stock—a situation that has the potential for BOTH the protection of your financial assets and profits for your future.Are you getting our free Daily Update
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“Best of all, thanks to their mining techniques, this company is prepared to give you FREE silver right along with your gold investment.”
And the ad tries to make this sound like an unusual and exciting and unique situation:
“… how would like you like to own a piece of a company that is pulling two million ounces of silver out of the ground… as a by-product?
“In other words, they have two million ounces of silver to sell on the open market and it costs them virtually zero to do so.
“At the current spot price of $38 for silver, that’s a very real value of $76 Million…from a stock that is trading for less than $10.00 per share.”
IF you pay much attention to mining, you probably know that there aren’t all that many gold mines that find only gold, to the exclusion of everything else. There aren’t many “pure” mines, period, gold, silver, copper, zinc … the odds are that if you find big deposits of one, it’s going to be mixed in with at least one of the others (or something else).
That’s why we often see miners use terms like cash cost, byproduct credits, or “gold equivalent” — that way they can call themselves a “gold mine” and sell their copper as a way to cut production costs, or translate their silver reserves into “gold equivalent” reserves to better make the case to investors. There’s nothing intrinsically wrong with this, just pointing out that Lombardi is selling the idea of “getting silver for free” as if it’s unusual — it isn’t.
Though he also does make the case that you should care about this because silver might “leave gold in the dust” — which it has, in spurts, during this multi-year bull market. There are plenty of other folks who also believe that silver will outpace gold, either because it’s generally been more volatile, or because supplies are tighter due to silver’s industrial uses, or because of market manipulation in the silver markets over the years, or whatever other reason. So if you think silver will dramatically outperform gold, buying a gold miner who also produces a fair amount of silver might make sense — just remember that there are a lot of gold mines that also produce silver (Goldcorp’s new flagship Penasquito mine, for example, is a major gold and silver mine — Silver Wheaton (SLW) has bought 25% of their silver stream — and also produces zinc and lead).
But anyway, we’re again getting off track — which miner is it that Lombardi is pitching? We get some more clues …
“If gold does nothing more this year, this penny stock should produce around $560 million worth of gold this year alone.
It’s important to understand that, because this company has real working gold mines, they don’t have to rely on gold prices moving higher to continue to make real money.
“You see, in 2010, this gold mining penny stock had an out-of-the ground production cost for their gold of just $428.00/oz….
“If gold moves higher to $2,000/oz as we expect, current forecasts for this company would jump from $560 million in 2011 to $800 million—a 30% jump in real production value.”
Lombardi tells us that this pick he’s touting has two “safety nets” — here’s how he puts it (and tosses out a few more enticing clues):
“Their first safety net is the fact that they are globally diversified in their gold mining operations.
“They have active, gold-producing projects in the United States, Canada, Australia, Chile, and Mexico.
“What this means for them as a company—and for you as a potential investor—is that all their resources and income are not tied up in any one location….
“Safety Net #2: Multiple, In-Demand Product Diversification” ….
” this gold mining penny stock has both silver and gold. So you can rest assured that, even if gold stays flat and silver takes off as some experts predict, you are still going to reap the rewards.
“But here’s a bonus for you…
“This gold mining penny stock has ANOTHER income stream that is red-hot right now!
“In fact, this third revenue stream is so hot and in-demand right now that some people call it “red gold” ….
“copper … adds a layer of diversification and safety not normally found in small gold mining penny stocks.
“You see, according to the numbers we researched in this company’s financials…
“For every $0.25 increase in the cost per pound of copper, the cost of gold production drops by $35.00.”
OK, so it’s a mining stock, they own stuff in those five countries named, they have silver and copper as byproducts, and at some point recently the shares were below $10. And they reported their cash cost per ounce at $428 for 2010. Toss that and all of our other little details into the Thinkolator, and we find that this must be …
New Gold (NGD in both NY and Toronto)
New Gold does indeed have projects in those five countries, though they’re only producing gold so far in Canada, the US, Mexico and Australia — the project in Chile is still in development. They claim 8.4 million ounces in reserves, and another four million or so ounces in resources, and they’ve been growing production pretty swiftly, and at low reported cost — $428 per ounce was indeed their cost last year, according to corporate presentations. Last year they were able to cut costs below their projections, and to produce more ounces than predicted, so the stock has done well.
And it’s not at $10 a share anymore, though that’s typical Lombardi — the ad came in today, but it could easily have been written several months ago, their teaser ads don’t usually have up-to-date numbers. The shares are now just under $13, and analysts must be projecting some cost increases next year because they’re trading at a trailing PE of just 17 but a forward PE that’s more typical of a growing midcap gold producer, around 22.
The stock has a market capitalization of almost $6 billion, so it’s in the top 20 or so gold companies worldwide but is certainly far smaller than giants like Goldcorp or Newmont (NEM). Like most of the gold miners who are worth over a billion dollars, New Gold is represented in the GDX gold mining ETF but isn’t one of the top ten holdings. Unlike the huge players they don’t pay a dividend, but most big miners pay dividends that are only in the 1% range anyway — you’re not missing much.
Should New Gold stand out for you? Well, that’s your call — I can’t claim to be an expert on which of the “midsize majors” in the mining space are the best bets, I’ll agree with Lombardi that having several different producing mines, and having both silver and copper byproducts, are positives, and would add that I also like that they have a big new mine (the Afton copper/gold mine in Canada) coming online next year that will provide near-term revenue growth, and that they’ve operationally done very well at reducing cash costs for most of their mines. I haven’t done the same comparison for other similar miners so I don’t know if this is unique, but they look pretty decent on paper.
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