Tuesday, October 18, 2011

The Buyers of Junior Gold Companies are Cashed Up and Ready to Buy

Here's a clear indication that we need to be alert now or even start acquiring junior gold producers with solid assets in good jurisdictions.

We are forming the fuel for a continuation of the gold bull market now. The next rise in Gold will be seen in the juniors IMO.


Repost from Barron's:

Gold Miners With Mother Lodes of Cash

Dundee Capital Markets offers up a list of gold-mining stocks that are generating lots of free cash flow.

One of the golden rules of mining is to generate lots of cash and spend it wisely.

With volatility as the current theme in stock markets, we suspect investors are interested in seeking out stability in defensive names such as existing producers. This stability, we'd argue, can be achieved through established mines, which are already producing with little additional required capital expenditure to sustain or grow this rate of production.

Most would equate immediate safety with cash on hand today. But gold producers seem to always find a way to spend those hard-earned dollars on the latest exploration idea, recurring capital expenditures, not to mention those one-time acquisitions that CEOs can never seem to resist. So we've taken a look at each of the producers in our universe and estimated the free cash flow to have a look at who is generating the most, relative to their current market capitalization.

For an easy comparison across the space, we calculated the free cash flow yield, which takes 2012 estimated free cash flow per share divided by the current share price. Free cash flow yield demonstrates the cash generating abilities of the company relative to its share price.

While we recognize that this metric inherently disadvantages companies that are reinvesting cash flows to fund future growth (building and expanding mines), we also note that companies without major expenditures in the coming year are less likely to be exposed to significant financing risk.

Additionally, the analysis does not adjust for qualitative aspects of the individual companies including political, operational or currency risk which could impact these estimates.

From a defensive perspective, we believe relative safety lies in names with stabilized operations as opposed to those who expect to spend the next 12 months under construction or in commissioning.

Buy-rated companies we'd like to highlight include: Great Panther Silver (ticker: GPL), Osisko Mining, Aurizon Mines, and Kirkland Lake Gold [of Canada].

We would also highlight Aura Minerals [also of Canada], which despite its less defensive nature, offers significant torque on the upside should the company's plans materialize as expected.

Great Panther's strong free cash flow yield of 18% is largely due to recent share-price underperformance (as we have noted previously, the company's shares are strongly levered to the price of silver, not an overly advantageous situation of late), and our forecast of increased production from 1.6 million ounces of silver in 2011 to upward of 2.3 million ounces in 2012.

While declining silver prices have recently been the main driver of the share price, we note that recent financial results have been impacted by a temporary increase in onsite metal inventory.

With Osisko Mining's flagship Canadian Malartic mine commencing production in the second-quarter of 2011 and the only remaining major capital expenditure at Canadian Malartic being the additional pregrinding circuit (estimated at $32 million), we estimate that the company will generate free cash flows in the order of about $510 million dollars in 2012.

One could make the argument that Aurizon Mines is a victim of a market overreaction to some less-than-positive news. While the delay of the Joanna feasibility study does impact our valuation of the company, we consider the 22% decline (over the last three weeks) to be overdone -- in our opinion, more has come out of the stock than Joanna ever put in.

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