Checking In on the Juniors

10/02/2012 10:30 am EST


Khoa Nguyen

Investment Analyst, Investing Daily

Gold is looking like it's back in rally mode, so it's a good time to check in on some promising junior gold and precious metals miners we've explored in the past, writes Khoa Nguyen of Personal Finance.

In October 2011, gold was coming off its all-time high of roughly $1,900 per ounce just a month earlier. An ostensibly recovering US economy and continued worry over the debt crisis in Europe meant gold prices were bound to remain at high levels.

It was in this context that we recommended three junior gold miners that stood to greatly benefit from a projected gold run.

Juniors are small-cap miners, usually at the beginning stages of their production. As such, they offer great­er potential for growth. Historically, they can produce outsized gains if they successfully execute their development plans.

Be forewarned, junior miners are highly volatile stocks and their price fluctuations sometimes don’t parallel how they actually manage their mining projects. The miners highlighted already enjoyed existing production and ample funds for future projects. However, these juniors were also viable acquisition targets by larger miners seeking to expand output.

Joining the Seniors
Minefinders, which owned the Delores mine in northern Mexico, exceeded its 2011 output estimate of 65,000 to 70,000 ounces of gold by producing 74,000 ounces of the yellow metal.

The miner racked up a stellar 2011, as revenue grew 160% to $241 million and earnings in­creased almost 15-fold, to $96.6 million. The company’s balance sheet was also healthy, with $240 million in cash and equivalents on hand and only $30 million in debt.

However, the strength of this company and its productive mine made it an attractive acquisition target. Pan American Silver Corp (PAAS) bought the company this year in a deal worth $1.2 billion. The deal created a combined company valued at $4 billion, and doubled Pan American’s silver production to 50 million ounces by 2015, with eight mines across Latin America.

Minefinders’ shareholders re­ceived options in cash and shares of Pan American amounting to $13.90 a share—roughly equal to the value of the company in January when the deal was announced. Tender your shares of Minefinders.

Senior gold miner Eldorado Gold (EGO) acquired European Goldfields for $2.4 billion in shares. Under the deal, European Goldfields’ shareholders received 0.85 of a share of Eldorado common stock. The acquisition was completed in February 2012. Tender your shares of Euro­pean Goldfields.

Good as Gold
Aurizon Mines’ (AZK) production in the first half of the year has been hampered by a planned operations change at the company’s Casa Berardi mine in Quebec, as a lack of shotcrete capacity required ground remediation. This forced the company to change its min­ing sequence in the first quarter.

These issues have been resolved and the company reported improved second-quarter figures, producing 37,345 ounces of gold in August, an increase of 12% from the same quarter a year ago. However, the miner has not recovered completely. Management lowered its production estimates for all of 2012 to 150,000 ounces of gold, down from 155,000 to 160,000 ounces.

The company also incurred ex­tra costs in the second quarter, which pushed its gold production costs from $600 per ounce to $645 per ounce.

Despite higher costs and a 4,000-ounce drop in gold production, the ris­ing price of gold in the second quar­ter helped earnings surge 29% to $8.6 million, while revenue rose 3% to $60.9 million year over year.

The company’s balance sheet remains solid, with $290 million on hand at the end of the second quarter and zero debt.

Aurizon has sufficient funds to finance future projects. In mid-August, the miner announced that it completed phase 2 drilling of its Marban deposit in Quebec and has identified a new high-grade zone. The Marban mine is a joint project with NioGold Mining Corp (NOXGF), of which Aurizon has a 65% interest.

Aurizon’s highly anticipated two-year Joanna mine project is currently concluding feasibility studies on the open pit mine. Located east of Quebec, Joanna has potential gold reserves of up to 2.2 million ounces. Once completed, it’s estimated to almost double the company’s annual gold output to 260,000 ounces. Buy Aurizon Mines up to $6.50.

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