Aug 26, 2009

Precious Metal Miners: Post Earnings Outlook

Senior Miners

It was business as usual for the most part excluding non-recurring/extra-ordinary charges or gains. I would have to say the best news came from Goldcorp (GG), and their success thus far with Penasquito and lack of start up issues as seen through Newmont (NEM) and the world class Boddington Mine. This, however, is immaterial in the big scheme of things as Boddington is basically just a replacement for the production that will be lost by some of Newmont's soon-to-be depleted mines. I've always liked Kinross (KGC) but that little voice in my head has convinced me to stay away, barring a multitude of small acquisitions or one sizable enough to make the Russian operations far less significant relative to their total output. Barrick (ABX): not much to say here as I believe they will face an even bigger hurdle replacing depleted reserves in the near future.

Goldcorp - 2.5

Newmont- 3.0

Kinross- 3.5

Barrick - 4 or 5

(Key: 1- Accumulate 2- Buy 3- Buy On Pullbacks 4- Hold 5 - Sell)

Mid-Tier Producers

I would came out very disappointed with my top pick, Yamana Gold (AUY) as they failed to meet expectations again and guided a bit lower. They also made an idiotic mistake with their currency hedges, one that I would have caught much earlier on, especially given the exponential increases in the US monetary base, deficit spending, trillions of unfunded liabilities, trillions in bailouts and an enormous debt burden, i.e money printing should have been an obvious clue. But enough with that, they still are trading at a discount to their peers and have a great pipeline (AGUA RICA anyone?). Agnico-Eagle (AEM): Although I was worried after their 1st quarter delay, they executed efficiently but the current valuation takes this into account, at least with gold at these levels. Newcrest Mining (NCMGY.PK): The best quarter of the class as far as I'm concerned - 84% increase in profits, production beat expectations and they raised 2010 guidance. Lihir Gold (LIHR): Another great quarter for this turnaround story and brilliant execution for Australia's largest two gold miners. Franco-Nevada (FNNVF.PK) and Royal Gold (RGLD) had no big surprises except with Royal Gold's apparent delay with the Andacollo Mine.

Yamana Gold- 2.2

Agnico Eagle- 2.8

Newcrest- 3.5

Lihir - 3.5

Royal Gold- 3.0

Franco-Nevada - 2.5

Emerging juniors

Being rather heavily invested in the precious metal miners, my focus is on the Juniors now as some of them are trading at bargain base prices. My favorite, Jaguar Mining (JAG), which I have written about extensively, had another solid quarter and sees 600k+ oz. by 2014 up from their expected 165-175k in 2009. They beat expectations with 12 cents/share over the 8 that was expected, along with doubling production year over year to 40k from 20k oz. Next comes Kirkland Lake Gold (KGILF.PK) - which had another ugly quarter which will continue in Q3 as well their cash costs. I have briefly mentioned this company in the past but here is a refresher:

Kirkland Lake Gold - Although it only trades on TSX and Pink sheets, I think those who believe in the precious metal mining story should definitely take a look at this gem. First off, they have had some operational and legal hurdles over the past couple of years, which are now behind them (reminiscent of Coeur d'Alene ey?). They have also already incurred the high cash costs as is typical when beginning a new operation (Cash Costs as seen in the valuation at the bottom will decline substantially). They are in perhaps the most mining friendly country in the world with the possible exception of Australia, but why compare apples to apples? Perhaps most importantly, especially during a time where credit is granted to a select few, Kirkland is debt free with 28m in cash excluding the 25m private placement they recently engaged in. This solid financial position is augmented by the fact they have minimal capital requirements for PPE and their effective tax rate will be significantly below the marginal rate = FREE CASH FLOW MACHINE. A brief overview of their operations:

The entire Kirkland portfolio is composed of what previously was thought to be a consortium of run down mines for decades. Kirkland has proven this is not the case at all as they are growing proven reserves and their total resource base at a furious pace. I know the first thought that comes to mind is that this will be short lived - but kirkland's managment has demonstrated their knowledge of mining. Their vice president and head of operations has over 25 years in the field and has worked in operations for such companies as GoldCorp and their Redlake mine and expansion.

Macassa Mine:

The Macassa Mine, an underground gold mine with limited surface mining operations, is located in Kirkland Lake, Ontario. The mineral extraction in the mine is from underground stopes and processing is done on the property. The company discovered the D zones and other significant zones to the south of the historically productive regions on the Kirkland Lake camp. These zones are collectively known as the South Mine Complex (SMC). Some of the veins within the complex have larger width and superior grades than the main zones. Under the exploration program on the SMC, three of the five holes intersect considerable gold mineralization. Proven and probable reserves for the SMC are 695,000 tons at a grade of 0.78 oz./t. The measured and indicated reserves 360,000 tons at a grade of 0.66 oz./t, while inferred reserves are 707,000 tons at a grade of 0.79 oz. At the Macassa Mine gold is generally found along breaks or faults, in veins, as quartz-filled fractures, as breccias and as sulphide zones. Exploration off the break has been limited in the past but new work by Kirkland Lake Gold shows that there are excellent targets.

Lake Shore Mine:

The Lake Shore Mine is located in the center of the Kirkland Lake Camp. Recent diamond drilling on the bottom level indicates that the ore continues and that the main break is not weakening. The most productive areas in the mine are the Main Break, the North or the No. 2 vein, the South or the No. 1 vein, and the Narrows Break or the No. 3 vein.

Tech Hughes and Wright Hargreaves make up the rest of entire Kirkland property in addition to their 50% interest in a joint venture on 5 properties with Queenston mining.


Red Back Mining (RBIFF.PK) also executed a brilliant quarter and now that they will not be buying Moto Mines, are debt free with substanial cash balances and access to plenty of credit, which I think they will likely draw upon to finance an acquisition which will help them meet their goal of producing 1m oz. + per annum. Their current flagship mines, although located in Africa, are in geo-politically safe areas (Ghana & Mauritana) which is misunderstood by the majority. These mines will see production grow from 120k oz. ounces in 2008 to 600k + by 2012. These two juniors, aside from their excellent track record of operations, stand out from the like of El-Dorado, randgold, etc. for two reasons: A) They are both trading at a substantial discount on all metrics and B) Unlike most miners their size with a rapid growth cycle starting, these two require very little capital expenditures, i.e about 85m or less on average for the next 5 years - as opposed to those needing an average capital expenditure of 150-200m over the same time period. Other mentionables are Aurizon Mines and El-Dorado (EGO) and RandGold (GOLD)

Jaguar - 1.5

Kirkland Lake 1.5

RedBack - 3

Aurizon - 2.8

El-Dorado - 3.5

RandGold - 4

Silver Miners

For the most part the quarters came out as expected with Coeur D'Alene (CDE) being the exception. Silver Wheaton (SLW) actually beat expectations if you account for the 800k+ oz. of silver that did not make it in time to be recorded in Q2 (this is expected and will likely happen every year as the Yukon is closed), so I expect a nice beat when Q3 results are announced. Silver Standard (SSRI) had some weather issues with their machinery but have taken the necessary actions to prevent this from happening in the future. First Majestic (FRMSF.PK) was business as usual and Couer d'Alene had a nice quarter.

Coeur d'Alene Mines - 2

Silver Wheaton - 2.5

Silver Standard - 2.5

First Majestic - 1.5

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