It's a great opportunity to buy into strategic metals now that they're trading down, because it's only a matter of time before they head north again, writes Gregory Dorsey of The Complete Investor.
Our mining stocks have struggled this year despite reaching a number of important milestones. Indeed, miners in general and junior miners in particular not only have underperformed the market, they’ve trailed the performance of the underlying metals by eye-popping margins.
The junior miners, for instance, are trading as if gold is at $1,000 an ounce. This makes them rare bargains in our eyes. And our stocks in the sector are among the very best.
New Gold (NGD)
A prime example of a mining company that is executing well even if its stock is not. Its output this year should exceed 400,000 ounces of gold, along with nearly 2 million ounces of silver and 35 million pounds of copper.
Ultimately, this low-cost mid-tier miner could be producing 1 million ounces of gold per year. Its New Afton project in British Columbia is slated to come on stream this month, while the world-class El Morro project in Chile, in which it owns a 30% stake, is targeting a 2017 start. New Gold’s Canadian Blackwater project also could become a strong contributor in the years ahead.
Recently, the stock sold off sharply after Chile’s highest court temporarily suspended El Morro’s environmental permit and ordered the mining companies involved to consult with the region’s indigenous people.
We view this as a modest hurdle that is more than discounted in the current share price. The stock trades at very reasonable levels relative to assets, earnings, and cash flow. We would peg fair value to be at least in the mid-teens.
Endeavour Silver (EXK)
Down Mexico way, Endeavour continues to grow its asset base via the shovel as well as the boardroom.
In this latter category, the company recently acquired the El Cubo silver and gold mine and the Guadalupe y Calvo exploration project from AuRico Goldfor $200 million in cash and stock and an additional $50 million pending achievement of certain milestones in the three years after closing.
The acquisition should increase Endeavour’s 2012 silver production by 12% to 4.8 million ounces and add to earnings right out of the gate. Management is confident that with additional exploration, the new properties could add substantially to the company’s reserves.
NovaGold (NG)
Now double the fun, having recently spun off its Ambler copper property as NovaCopper (NCQ). We think the spinoff is a smart idea, enabling investors to better value the companies’ underlying assets.
Ambler, you’ll recall, is a high-grade copper-zinc-gold-silver property with the potential for considerable reserve additions. While still several years from production, the mine is expected to eventually produce around 67 million pounds of copper a year at a cost of less than a dollar per pound, net of byproducts.
NovaGold will now focus on developing the Donlin Gold project (50% owned by Barrick Gold (ABX)). Donlin is one of the world’s largest undeveloped gold deposits, with proven and probable gold reserves approaching 34 million ounces.
NovaGold has put up for sale its 50% stake in the world-class Galore Creek copper project, which was not part of the NovaCopper spinoff. It should garner a hefty price, leaving the company well financed to develop Donlin.
We recommend holding onto both NovaGold and NovaCopper.
Subscribe to The Complete Investor here...
Related Reading:
Commodity ETFs That May Float Your Boat
