The rise in gold prices above US$350 per oz. in 2003 set in motion a wave of mine development projects around the world. However, in a recent report, gold analysts Barry Allen and Sheldon Yip of Toronto-based Research Capital warn that investors in junior and emerging gold producers must be wary if they hope to meet with success.
The analysts argue that in prior years, when gold prices were below US$350 per oz., it was easier to pick the next successful gold producer. That’s because “tough market conditions and reduced profitability screened out ill-conceived development plans and restricted the development of unprofitable and poor-quality resources.”
In the current climate of booming gold-equity markets and robust bullion prices, the analysts are watching with skepticism as the mining industry “dusts off old projects that were on hold and launches development plans for new gold resources that had questionable economic potential at lower gold prices.”
They caution investors by invoking the old adage, “Every mine that failed had a positive feasibility study.”
Allen and Yip expect more mine failures and development disappointments as marginal projects are brought into production, “primarily due to a comparatively fixed talent pool being distributed over a greater number of projects.”
The analysts examined 11 junior Canadian gold companies and assessed their plans to develop mines over the next three years. Of these, they found four that “offered good investment merit”:
Glencairn, which operates the Limon underground mine in Nicaragua and is building the Bellavista open-pit operation in Costa Rica, was on the analysts’ “buy” list because of its “very low” risk profile and the fact that it trades below its net present value.
Limon, say the analysts, is “operational and has an excellent track record of maintaining production,” whereas Bellavista is a “straightforward project.”
The analysts like St Andrew’s “cheap share price” and the “above-average exploration potential” at its Stock complex in Kirkland Lake, Ont., as well as its Nixon Fork project in Alaska. These plusses help offset St Andrew’s geological and development risks.
While Richmont has two aging gold mines, Hammerdown in Newfoundland and Beaufor in Quebec, Allen and Yip express interest in two of the company’s projects with near-term production potential: East Amphi in Quebec and Island in Ontario.
“We see Richmont as having low development and operating risk,” write the analysts. “The challenge is geological — proving up reserves.”
Cumberland owns the Meadowbank project and has a 22% interest in the Meliadine project, both of which are in Nunavut. And with Cumberland’s share price plummeting from above $4 to around $2 in recent months, Allen and Yip see an opportunity to pick up shares on the cheap.
The share weakness is attributable to the final feasibility study for Meadowbank, recently tabled, which projects high capital costs of C$350 million and suggests production will be delayed a year, to 2008.
Allen and Yip believe the issues for this remote project are “primarily logistics and capability.”
The analysts found that two stocks —
In Research Capital’s doghouse are the remaining five companies that either had risks that were “too significant” or relatively expensive share prices owing to “too-high expectations for success.” These are:
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