Sector Watch: Gold Rush stock picks
The sector with the Midas touch these days is gold, the price of which on Tuesday climbed to a 28-year peak of around $825 an ounce for December delivery on the New York Mercantile Exchange.
Gold prices are cyclical and typically rise during periods when the dollar is weak, inflation fears are high and geopolitical tensions are escalating.
Gold’s ascent in 2007 reflects the current economic and political climate, characterized by a declining U.S. dollar, heightened Iran and Iraq tensions, skyrocketing crude oil prices and financial institutions eager to increase their gold stockpiles on any price weakness.
With gold prices nearing record highs, junior gold mining companies such as Great Basin Gold Ltd. (AMEX: GBN) and Aurizon Mines, Ltd. (AMEX: AZK) are becoming increasingly attractive. Both are Canadian mining companies that trade on the Toronto and American Stock Exchanges. Their operating results are reported in Canadian rather than U.S. dollars.
Great Basin Gold has mining assets in two of the world’s richest gold regions—the Witwatersrand Basin in South Africa and the Carlin Trend in Nevada. The company’s Hollister property in Nevada has an indicated resource of two million gold equivalent ounces, with production expected to commence in 2008 at 150,000 ounces per year and continue for six years. Gold resources associated with the company’s Burnstone mine in South Africa are estimated to exceed seven million ounces. Feasibility studies indicate that the Burnstone mine is capable of producing 254,000 ounces of gold annually for 19 years. Production from the Burnstone mine is slated to begin in 2009.
While not currently generating revenues, Great Basin Gold has a strong balance sheet, with cash and equivalents of approximately $100 million and no debt to support its development activities. The company recorded a net loss of $17.7 million, or $0.13 per share, in the first six months of 2007, up from $1.1 million, or $0.01 per share, in the same period last year, as a result of increased spending on exploration activities.
With production from the Hollister mine expected to commence shortly, this company could generate meaningful revenues and cash flow in 2008. Great Basin Gold expects to produce 150,000 ounces of gold in 2008, representing a potential value of $97.5 million (conservatively assuming $650 per ounce gold prices). Mining costs are estimated at less than $300 per ounce, suggesting 2008 mining profits potentially exceeding $50 million. These shares have risen more than 100% in the past 52 weeks but still offer appreciation potential. On Tuesday, shares of GBN closed at $3.56. Over the last 52 weeks, shares have ranged between $1.58 and $3.66. My $6 price target for Great Basin Gold shares is 70% above the current share price.
Another company that’s found its pot of gold is Aurizon Mines, which owns gold mining assets in the Abitibi region of Northwestern Quebec, one of the world’s most prolific gold-producing regions.
Aurizon Mines is increasing its asset base through acquisitions. While the company’s 100%-owned Casa Berardi Mine near Quebec is expected to produce 1.2 million ounces of gold over its initial six-year life, Aurizon Mines has already begun producing gold from the mine; gold production rose 32% in the June quarter to 42,143 ounces from 28,657 in the March quarter. The company estimates it will produce 170,000 to 180,000 ounces of gold from the Casa Berardi mine this year at production costs of less than $320 per ounce.
During the first six months of 2007, Aurizon Mines generated revenues of $31.1 million from the sale of 40,600 ounces of gold at an average price of US$659 per ounce. The company’s operating costs totaled $25.4 million. Aurizon Mine’s first-half 2007 earnings at $7.6 million, or $0.05 per share, benefited from a $9.1 million non-cash gain on a marked-to-market derivative instrument adjustment, which was partially offset by a $2 million non-cash charge for stock-based compensation. During the first six months of 2006, net losses totaled $17.7 million, or $0.12 per share.
The company announced two significant developments in September. The first is a joint venture agreement with Lake Shore Gold Corp. (TSE: LSG) to accelerate exploration and development of promising areas surrounding the Casa Berardi mine. In addition, the company announced an increase in the indicated mineral resource estimate for its Joanna mining property, also located in northwestern Quebec, to 630,000 ounces of gold and signed a letter of intent to acquire a 75% interest in the adjacent Heva property. Three drill rigs are currently active on the Joanna property and Aurizon Mines has committed an additional $2 million to the drill program.
Aurizon Mines shares have risen more than 60% in the last 52 weeks. With shares of AZK closing at $4.57 on Tuesday, the stock has ranged between $2.59 and $4.59 over the last 52 weeks. My $5.50 price target is 30% above the current price.
Given the auriferous environment, gold mining should remain one of the best-performing industry sectors over the short-term.
