Wednesday, June 9, 2010

Forbes Gets On Board Gold Stocks

The word must have spread that gold stocks are undervalued. Forbes Online has two articles on them, one pointing to stocks "Even Ben Graham Could Love." The author, Ned Douthat, highlights two producers; the first one's a major and the second's a junior. Newmont Mining is highlighted because its price-to-cash-earnings multiple is well below norms, in part because it's also a copper play and copper's been hit lately. The junior, Capital Gold, is recommended because it has a large Mexican deposit that has yet to be ramped up to full production levels; that leaves room for more earnings growth.

The other article, written by Nathan Vardi, highlights the travails of an exploration company that's been trying to get a Venezuelan project up off the ground (so to speak) since the late 1990s. Crystallex has found a large gold deposit, but permitting delays have impeded its development. Crystallex finally threw in the towel, in a way, by signing over about two-thirds of the project to state-owned biggie China Railway Resources Group. It's hoped that having CRRG in Crystallex's corner will finally end the roadblocks that the project has had to endure. Presumably, the PRC has the clout with Chavez et. al. to get it through.

The Crystallex story says something about political risk, but the fate of its stock on the day the deal was announced (down 15.15% from Friday's close, as of yesterday's, after leaping up 37% on Monday's open) also says something about the difficulty of getting funding for juniors except for those with spectacular deposits. A much lesser-known company, Abacus Mining and Exploration, saw its stock got slaughtered by about 50% after a deal was announced with Polish copper-silver giant KGHM. Although the deal means that a mine will almost certainly be made out of Abacus' flagship Afton project, KGHM managed to get 80% of the deal if they meet all their commitments. The terms, and shareholder reaction to them, pummeled Abacus' stock from 37 cents to 18.5 cents.

That's why exploration stocks with minable deposits, even ones with bankable feasibility studies, are selling at such huge discounts to their worth as mines: thanks to financing difficulties, the odds and terms are stacked against them. The only ones that have discounted a sure mine are those with easily minable multi-million ounce deposits that are almost sure to get either bank financing or an all-out takeover bid from a major producer. The others have to go down the joint-venture alley, where most of the project winds up being taken out of their hands - hence the large discounts. This chat board has a lot of complaints about the Abacus deal, and even serious attempts to rally shareholders to vote it down.


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