2 Small Gold Stocks Looking Shinier

03/16/2012 7:00 am EST


Tyler Laundon

Editor, Cabot Small-Cap Confidential

Small-cap researcher Tyler Laundon tells MoneyShow.com’s Kate Stalter about some up-and-coming Canadian gold companies, and explains how he evaluates explorers, developers, and producers.

Kate Stalter: I am speaking today with Tyler Laundon, who is a small-cap analyst at Wyatt Investment Research.

Tyler, you were telling me earlier that you just got back from a metals and mining conference. Tell us about some of the ideas you heard there.

Tyler Laundon: It was very interesting. Last week I was up at the Prospectors and Developers Conference—or the PDAC as it is known in Toronto.

The PDAC is really one of the biggest conferences in the world for metals and mining, and there are literally thousands of companies, bankers, investors, and country delegates. Everybody convenes up there from around the world, and I was up there to check out new investment opportunities and see what the insiders have to say. It was a pretty interesting time this past year.

Kate Stalter: Now I understand that there were some specific names that you learned about, that you wanted to share with our audience.

Tyler Laundon: Yeah. You know, being up in Toronto and Canada, I was looking at Canadian-based companies, and one is Aurizon Mines (AZK). Aurizon trades on the American Stock Exchange.

Aurizon has a market cap of $820 million today. The share price is around $5. If folks check out the chart, they will see that Aurizon is about 35% off of its high, so it is in line with the retreat from the broad-based junior mining sector. But all of Aurizon’s assets are in Quebec, so it is in a very stable and mining-friendly location.

The big plus is that it is actually producing, and it is profitable. The company produced over 160,000 ounces of gold in 2011. I love producing companies, especially the emerging producers, and Aurizon is one that I think is worth a look.

Kate Stalter: Aren’t there some that you believe may be undervalued at this point?

Tyler Laundon: On the real small side, we’ve seen the entire industry retreat. If you look at the S&P, the Russell, the Nasdaq—all these indices are trading near multi-year highs.

But when you go back and you look at the junior mining sector—take a look at the Market Vectors Junior Gold Miners ETF (GDXJ), or the S&P/TSX Venture Index—you will see that both of these are off around 35% from their April 2011 highs. So they have retreated significantly.

When you look at the individual names like Aurizon, they have retreated. So there is definitely a lot of upside potential in the junior mining sector right now.

Kate Stalter: Now, why are some of these, do you believe, trading off their highs? What’s going on within the overall industry that is causing some of these discounts?

Tyler Laundon: Well, the rumors—and what I’m hearing the most about; they might not be rumors—but some people aren’t sure that high gold and silver prices are going to last. We’re looking at gold around $1,700 right now, and silver right around $34 an ounce. So some people aren’t sure that that’s going to last.

There has also been some inflation in the mining sector, and there is some concern that that will hurt growth, when you look at rising labor, equipment, and fuel prices. But really, I think that those costs can be controlled, and I think that higher gold and silver prices, the trend has been higher over the long term, so I think that’s going to continue.

I think it’s just that money hasn’t really found its way into this sector of the market yet, and when it does, there’s a lot of upside potential. A lot of these companies can generate rates of return of 20% to 30% based on gold at $1,200. So if you believe that gold is going to be around today’s prices or even higher, there is definitely a significant amount of upside potential.

Kate Stalter: For people at home who are listening to this and want to do a little of their own research, what are some of the factors they should be considering in their evaluations?

Tyler Laundon: Well, I’d start with the standard approach: Looking at management, the capital structure, the financials, and also the technicals—the chart patterns and things.

It’s a little bit difficult, I think, for the average investor to understand management history. But without a doubt, it is worth looking at that stuff first. If not in detail, at least at a high level.

But really, I would spend my time looking at the properties, the country risk, and the big one, the stage of growth of a company. In the mining sector at the very, very early stage, you have the explorers, which don’t really have any production. They need a lot of financing.

In the middle, we have the developers who are spending the money and committing that capital to build a mine, and they are projecting production one to two years out in the future.

And then we actually have profitable and producing companies. So it is really, really important that investors understand which of those three stages of growth the company that they are looking at fits into.

Kate Stalter: Tyler, you were talking about Aurizon from the producing area that you liked. Anything else? How about any explorers out there?

Tyler Laundon: Back on the exploration front, Rainy River (Toronto: RR) is a small company that is based in Canada. It trades on the Toronto Stock Exchange.

Rainy River has a market cap of about $540 million today, and the share price, I believe, is trending around $6.40. Most of its focus is in the southwestern corner of Ontario. It is very, very close to the Minnesota border, so again, we’re in a very mining-friendly area, and it’s looking at a mine project there.

It’s an interesting project, because at $1,200 gold, the proposed project has a present value of just about $800 million. But if you use today’s prices in gold of around $1,700, the value of the mine is over $2 billion. With a market cap of just $540 million, there is a significant of upside potential here.

Of course, there are the risks of getting the mine built and the permits and all of that. But there is a significant institutional ownership in the stock, and I think it is fairly compelling.

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