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30 Dec

My Top 3 Junior Mining Stocks For 2014

by

As we move into 2014 and end the tax-selling pressure baring down on the precious metals mining sector, I expect the January Effect to buoy junior mining stocks as the kickoff to an extraordinary year in gold and silver.

With the Market Vectors Junior Gold Minors (NYSE: GDXJ) index down a whopping 65.6% from its opening high in Jan. 2013 of $83, the risk to reward of purchasing GDXJ mining companies below $30 strikes me as a gimme no-brainer for those looking to deploy capital in an otherwise stock market riddled with expensive valuations.

We’re seeing “gold and silver even further, both structurally and fundamentally, oversold,” London Bullion Management Association (LBMA) trader Andrew Maguire told King World News last week—more oversold than when gold reached $1,250 in Oct. 2013.

Maguire, the famous ‘whistle blower’ who testified at a CFTC hearing in Mar. 2010 to his witness of market manipulation in the gold market, added that the leveraged ‘paper sellers’ are now backed into an “untenable” position during the massive physical off-takes at the COMEX and LBMA warehouses at gold below $1,200.

“We’re stretched so far that the unwind and rebound higher is going to be disorderly,” predicted Maguire.  The disconnect between enormous physical buying in Asia as prices of the PMs drop “can’t last much longer,” he said.

In fact, bullion banks are net longs, according to him, a situation not often seen in the gold market.

And confirming Maguire’s bird’s-eye view, Bloomberg’s Ken Goldman said, Thursday, “[Y]ou could walk into a vault in London and they were packed to the rafter with gold, and the gold would trade from me to you to somebody else. You could walk into these vaults today and they are virtually empty. All that gold has been transferred out of London, 26 million ounces….”

The 27-month decline in junior mining stocks appears to be over (or very close to being over), and my top picks for the rebound include Coeur Mining (NYSE: CDE), Sandstorm Gold (AMEX: SAND) and Endeavour Silver (NYSE: EXK).

Coeur Mining (NYSE: CDE) 

  • Market Cap: $1.01 billion
  • Forward P/E (fye Dec. 31, 2014): N/A
  • PEG (5-year expected): 0.31
  • Price/Book: 0.44
  • Quarterly Revenue Growth (y-o-y): -12.90%
  • Quarterly Earnings Growth (y-o-y): N/A
  • Current Ratio: 3.03
  • Institutional Holdings: 67.5%
  • Short Interest as a Percent of Float: 4.60%

Coeur’s guidance includes production of between 18 million and 19.1 million ounces of silver, as well as 250,000 to 258,000 ounces of gold, with mining costs per ounce reaching between $9.50 to $10.50 and $950 to $1,000 per once of silver and gold, respectively.

With $211 million of cash, Coeur’s positioned to continue its stock buyback program and further its completion of the La Preciosa project in Mexico.

Though the production costs of Preciosa is expected to be higher than its Joaquin Argentina project, silver prices won’t last at $20 per ounce either.

According to the Preliminary Economic Assessment (PEA), Coeur expects operating cash flow to increase by $93 million for the first 14 years of the 17-year life of the open pit operation.

According to my analysis, Coeur trades at a 37% to 50% discount from its usual trading range of $16 and $20 at a $20 per ounce silver price (see chart, below).  On the flip side, going forward, as a component of the GDXJ, Coeur’s valuation will also have a tendency to meander into the overvaluation zone as interest in junior PM miners and the GDXJ come back in vogue in 2014.

Sandstorm Gold (AMEX: SAND)

  • Market Cap: $399.54 million
  • Forward P/E (fye Dec. 31, 2014): 44.4
  • PEG (5-year expected): N/A
  • Price/Book: 1.07
  • Quarterly Revenue Growth (y-o-y): 1.7%
  • Quarterly Earnings Growth (y-o-y): N/A
  • Current Ratio: 26.65
  • Institutional Holdings: N/A
  • Short Interest as a Percent of Float: N/A

Sandstorm interests me because of the investment banker role the company has in the PM mining space.  It provides capital to mining companies in return for a percentage of future profits, called ‘streaming’.

As a newcomer to the streaming business, Sandstorm investors have become too concerned (wrongly, in my opinion) with the costs overruns associated with the Collossus Mining (OTCOX:COLUF) project.

The bottom line regarding Clossus is: Collossus will most likely refinance with Sandstorm, maybe providing a nice ‘surprise’ to investors who’ve slammed this stock by 74.2%.

But, as I expect in 2014, the rise in gold and silver prices will overrule deficiencies in earnings expectations for a while, as many mining stocks get swept-up as a wholesale trade.

The chart of SAND shows a deeply oversold condition.

Endeavor Silver (NYSE: EXK)

  • Market Cap: $316.18 million
  • Forward P/E (fye Dec. 31, 2014): 22.64
  • PEG (5-year expected): N/A
  • Price/Book: 0.87
  • Quarterly Revenue Growth (y-o-y): 30.7%
  • Quarterly Earnings Growth (y-o-y): 76,756%
  • Current Ratio: 1.42
  • Institutional Holdings: 18.6%
  • Short Interest as a Percent of Float: N/A

For the third quarter, Endeavor reported a $0.12 profit, up from no profit for the third quarter last year. Revenue rose 31% to $67.8 million, up from $51.76 million last year.

Costs of mining silver dropped sharply by 43% during the third quarter when compared with the third quarter last year.

With $316 million in the bank, Endeavor’s production reached 1,855,846 ounces of silver and 22,947 ounce of gold.

As silver prices recover next year, Endeavor’s stock price should recover as well, as the correlation between EXK and the GDXJ is nearly 1-to-1.  In other words, Endeavor’s driving force has been technically driven since last year from legions of algo traders gaining exposure to the miners through the GDXJ ETF.

As with CDE and SAND, Endeavor presently trades at a deeply oversold price to its historical range.

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2 Comments

  1. Toua. Chang

    Like to joint or become now!!

    Reply
    • Jason Bond

      Should be open for sales again this evening. Thank you for your interest.

      Reply

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