Gold Miners Update #7: Putting Second Quarter Earnings Season Into Perspective...
I think anyone who is putting their money in the precious metal miners know not to pay attention to the numbers being put up this year as this story will develop starting in 2010. It is , however, important to pay attention to the conference calls, whether or not companies met their objectives & ultimately to determine/ forecast how each will fare in the upcoming year. I wish to take a look at what I though were the best quarters put up Quality wise, not neccessarily numbers wise.
1) I'm not one to go into a detailed analysis of the Senior Miners but I will make a few comments. The winner this quarter obviously goes to Goldcorp will their advancement of the world class Penasquito Mine- which should ramp up to full capacity by 2011, or possibly 2010 if everything runs smoothly. The runner up is Newmont- Although they have been strategically brilliant in aquiring a 100% interest in Boddington, they have run into a few problems (as expected). This may have earned them the winning spot but Goldcorp has a great pipeline to actually grow production instead of replace it i.e Newmont, Barrick. Barrick comes in third, mainly because I do not think much of them and their notorious hedge book, which could get them into trouble unless they close it by the end of the year. Ok enough of them...
2) The Mid-Tier Group - Currently Consisting of Yamana, Agnico-Eagle & Lihir ( & several other but there is a lot to get to). I have once again substituted Agnico for Yamana, for the slightest of reasons, but ones that may implications down the road. First off , Agnico-Eagle - Still in the slower growth phase but executing their startegy to a T. They have made progess on their new mines/expansion projects, which will bear fruits in 2010, seen through a more than doubling of their current 2009 output. They also managed to keep cash costs extremely low, which is easier said than done so all in all things are more or less on schedule and do think they will be the first among this group to reach 2m oz per annum. Next comes Yamana, and although they put up a decent quarter, in my opinion , it has it pro's and con's. It Pro's include advancing parts of their pipeline along sooner than expected (Mercedes, Santa Luz), which will hopefully lead them to move up development on their next flagship mine in Peru. The production numbers from Gualcamayo ( probably not how you spell it) , were very medicore and both guided down this year and subsequently next year. Although they will still reach full production by 2011, execution of managements forecasts do say something about the company as a whole. Don't get me wrong this is still a Gem, I'm just saying it is prudent to keep your eye on further developments or lack their of on this key mine. Next up, Lihir Gold, "My Turnaround Story in the making" - posted earlier this year. I want to mention briefly 3 telling achievements with the company. Coming in number is the fact THEY FINALLY ARE LOOKING TO SELL BALLARAT! God I hate this mine, though I have yet to visit it. This thing has been nothing but a cash drain to the company and frustration to shareholders. Management has completely changed course from a year or two ago and now focusing on their bread and butter- Lihir Island. They also raised production guidance going out the next few years ( which I think is the first of several) as they showed increasing efficiency at Lihir, not to mention their plans in Africa. I still think lihir can become a 2m oz producer based soley on their current assets by 2015. Ok now for the group that impressed me the most.
Emerging Juniors - Jaguar (Jag), had another consecutive amazing quarter, showing just how good management really is. I means these quarters of increased production has been going on for several years now, and has become one of my largest positions in the miners. Cash Costs came a bit higher than expected, but I had a feeling it would as it often does when a new mine ( Sabara ) comes online. This is one of the best growth stories out there, but often overshadowed by that of Agnico and others. For the second quarter Jaguar doubled production from 20k oz to 40k oz, while also growing production 24% in Q2 relative to Q1. This is just the beginning as Jaguar will surpass 450-500k oz by 2012 and 600k by 2014 barring aquisitions or any breakthrough on their current pipeline. The next growth story, concerninig Red Back Mining also executed a brilliant quarter and now that they will not be buying Moto Mines, are debt free with substancial cash balances and access to plenty of credit, which I think they will likely draw upon to finance an aquisition which will help them meet their goal of prodcuing 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 substancial discount on all metrics and B) Unlike most miners their size with a rapid growth cycle starting, these two require ver 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. In other words, Jaguar and RedBack will spew enormous free cash flow off in the near future.
Silver Miners - I really like the Silver Standard Resources quarter despite the numerous star-up problems they encountered. They were fixed rather quickly and are now in the past. They also encountered weather related problems which will not play a factor as the equipment is now equipped to deal with such a problem in the future. The next few years will show amazing growth in production, proven reserves & their resource base. I expect their Santa Luis Mine to be their next focus after the piriquitas ramp up is complete but hopefully someone like Silver (who I will get to next) will help finance the development of their pipeline- so their principal projects can move ahead of schedule ( snowfield, Diabillos, Pitarella , etc). I believe this will become the largest silver producer in the world is management can execute their startegic vision efficiently. Silver Wheaton - although they only sold 3.85m oz in Q2, their was a rather large shipment that failed to make it in time before the books closed. This shipment en route contained 800-900k of silver, that will be recognized next quarter. In other words they more or less brought in 4.6-4.7 m SEO for the quarter. I think they will be at the mid-upper range for the year producing 18m oz or so ( more if the gold to silver ratio stays elevated- as high as 19.5m-20m). So it was business as usual for SLW. To put it into perspective, I think they will make 15 (give or take) cents a share in Q3, up from 6 cents in Q2.I would also like to mention Couer d'Alene Mines- Although they have a rather explosive move so far, they have little capital requitements to ramp back up to 40+m oz next year- so get ready for the ride, we haven't seen anything yet.
I will just give my opinion on a handful of various miners and critiques/criticisms/inputs are welcomed. 1- Accumulate 2- Buy 3- Hold 4- Sell
Jaguar - 1.0 - Favorite Miners right
Yamana - 1.5 - The Valuation makes up for a so/ so quarter
Agnico 1.5- After Today's Pullback - Most Definitely
Silver Wheaton - 1.5 - Fixed costs aren't subject to inflation >1% - A big + when oil makes a run past 100.
Silver Standard - 1.7 - Enormous Resource Base
Coeur d'Alene & First Majestic 1.7 - What Can I say
Redback - 2.0 It still is Africa
Lihir 2.0 - Trading at a discount
GoldCorp - 2.3 - Good leverage w/o as much risk
Newmont - 2.5 - Boddington could prove to be one of the best mines ever
El- Dorado, Randgold - 3.2 - Its all about oppostunity cost
Barrick - 4.0 - For the Timid - But should still have high ROI