Gold.....Ready to Rumble! Part Three, Producer Picks
2008 was one of the worst years for suffering the market has ever thrown investors. Will 2009 be any better? Well I'm not optimistic but I don't rule out the occasional mini rally that sucks investors into believing everything is back on track. I do not think the market crash that started last year is over. Unemployment numbers are horrible, earnings for almost all sectors are in the red and looking to get worse. Obama's stimulus plan stinks to high heaven of rotten pork with very little of the total package actually going to where he promised during his election campaign.
Our economic ship hit an ice burg last year and it was devastating, the borrowing bubble met the credit crunch safety pin. Credit markets locked up, corporations showed massive losses and everybody who overbought a house, or two or three, using the greater fool theory to justify, are now looking at values cut by a third or more and with refinancing being almost impossible, they must surely be wondering "what in hell were we thinking?"
Our new fearless leaders, who are cut from the same cloth as the ones who caused the mess, are desperately trying to plug the hemorrhaging and sinking economy with huge chunks of pork, held in place by duct tape, bubble gum and a whole lot of prayer.
Whether things continue on their present deflationary course or down the road six months to a year when massive inflation leading to hyperinflation becomes the overriding theme gold is the one common denominator between the two situations that should do well.
Thankfully, using history as our guide we know all about the benefits of owning gold. Gold will act as the go to safe haven and it will preserve our purchasing power throughout whatever wickedness comes our way. The US dollar has been strong recently because of the safe haven flight into US Treasuries, but soon enough the dollar will be sold off and when that happens gold moves up in that currency like it recently has in most all others.
The thought that really intrigues me about a dollar sell-off is what are the Chinese going to do with there almost $2 trillion of foreign reserves. By far the majority is US dollar's and they own just 600 tons of the yellow metal, a very small amount compared to how much other countries hold as a percentage to foreign reserves.
Gold's rise in purchasing power compared to the price drop in other commodities is lowering the cost of energy and other capital and material costs for gold producers. These companies have been hugely profitable lately.
All the coming M&A activity, plus the increasing attention being paid the majors trickling down to the juniors with production and close to production stories will set off huge interest into the exploration side of things. From major producer, to junior producer, post discovery resource definition to Greenfield explorer, all these different stage companies will benefit from a flood of capital into all things golden. But the ones who will attract attention from investors first are the intermediate to larger producers and those companies are what this article is about.
The first article in the series "Gold.....ready to rumble!" was about why gold/silver now, the second article "Gold.....ready to rumble! Part Two, Buying gold" was about buying physical gold/silver, both articles can be viewed at www.aheadoftheherd.com and in this, the third article of the series, "Gold.....ready to rumble! Part Three, Producers Picks" I've listed seven larger gold/silver producers.
Warning: I'm not a licensed financial planner, a broker, an analyst, a geologist, an economist nor an English professor. And believe it or not I'm neither a doom and gloomer or a gold bug. I'm a Boy Scout "Be Prepared" kind of investor who believes precious metals are a good investment and safety net to get into right now.
Intermediate and larger stage gold producers are quickly becoming market darlings. This is happening right now because dropping prices makes mining, milling and G&A costs a lot cheaper (ie: fuel and chemicals have both dropped substantially in price recently, both are huge costs for any mining operation). It directly affects their bottom line making them suddenly attractive to mainstream investors whose normal stocks with their pathetic earnings are a whole lot less attractive.
The greatest leverage to gold is gold mining stocks, mainstream investors are catching on to the fact they need to own gold and to own gold shares. I believe "the herd" will come thundering into this sector and drive share prices much much higher then today's undervalued prices.
There is no magic formula for investing in mining stocks. The common-sense rules of investing are as written in stone for mining investments as they are for investment in any other industry. Check out the balance sheet:
-cash in the companies treasury
-cash flow from operations
-free cash flows
Investing in large mining companies is very much like investing in sectors such as manufacturing, utilities and financials.
But remember mining is the story of depleting assets, that asset must be constantly replenished; miners that want to stay in business must replace every oz taken out of the ground and there isn't a lot of the larger size deposits left to buy that would really affect most of these larger companies bottom lines. Replacing what they've mined let alone finding more productivity/resources is getting harder and harder.
As an investor you really need to look for the companies with the best portfolio of projects in the developmental pipeline and who are aggressively trying to grow their reserves through M&A activities. Many of the intermediate and larger stage gold mining companies are cashing up their treasuries, what are their plans for using all that money? How much production and at what cost are they projecting to add next year, the year after. Are they aggressively seeking to grow the company?
Newmont raises $1.2 billion, Freeport is raising $750 million. Kinross raised $400 million two weeks ago. Also two weeks ago Red Back raised about $150 million. Yamana just raised $135 million and borrowed $200 million to stick $335 million in the treasury. Late last year Agnico-Eagle got $300 million from selling some stock after borrowing $300 million in the early fall. These gold mining companies are planning on raising production levels through organic growth and increasing their reserves by acquisition of other gold producing companies and post discovery resource definition juniors.
The seven companies listed below are all going to try and aggressively grow themselves. I have no doubt that with their excellent management teams and sound business plans in place they will be successful, and that should translate into a much higher share price for investors.
- Goldcorp G.tsx
- Yamana YRI.tsx
- Agnico-Eagle AEM.tsx
- Kinross K.tsx
- Red Back Mining RBI.tsx
- Barrick ABX.tsx
- Hecla Silver HL.nyse
There are many choices on where to put your money, many more then I've listed, but the seven stocks listed above are my favorites in this intermediate to senior producer category. For anybody starting or looking to add to a gold producers portfolio all of these companies would be, in my opinion, worth looking at.
From the seven, I like these three best - Kinross, Red Back and Hecla.
Kinross TSX $23.78 fully cashed up. I think Kinross is going to be one of the most, if not the most, aggressive gold miners out there in regards to M&A activity.
Red Back TSX $7.84 is an extremely low cost producer who is cashed up and has two more mines close to production. Could be a takeover target.
Hecla nyse $1.78us is a call on the price of silver and they own 100% of what will be the world's largest primary silver mine. Silver is mostly a by-product of mining for other metal's, a lot of mines have been shut down recently. The supply demand fundamentals for silver could exceed even those of gold shortly!
Until we see some signs of a turn around its very likely gold and silver will be the go to investments. Which means that these companies should continue to perform well and be worth holding as part of a precious metals portfolio for quite some time to come.
Always do your own research. You and you alone are responsible for your decisions.
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