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Time to Look at Gold Miners Now That Bottom Is In

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Here are a couple of potential candidates for investors to consider.

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The miscalculation by the Troika in Cyprus has finally put the last nail in the medium term short gold (NYSEARCA:GLD) investment thesis. For just over a year and a half the central banks have coordinated, very effectively, to build an edifice of confidence in the global financial system that would allow the idea that quantitative easing would no longer be needed to finish the job of cleaning up the mess post-Lehman Bros. The Troika, and most explicitly, the IMF, overplayed their hand last weekend with their demands for explicit looting of savers in order to go forward with a rescue plan for Cyprus' over-leveraged banking system.

This act and the subsequent chaos it has spawned has now firmly put in place a bottom in the price of gold. Regardless of the final outcome in Cyprus – exit from the eurozone, acceptance of the bail-in, civil unrest, etc. – the net effect will be a steady loss of confidence in the banking system, capital flight from both the US and the EU and grater movement into gold as a vehicle for savings and wealth preservation. While I would have preferred a close above $1620 per ounce this week, closing above $1600 as we approach the end of the month is strength enough given the current sentiment.



At this point both the mining sector and the junior exploration sector are trading at or near discounts to the assets they have in the ground or will prove to have with just a modicum of investment capital. Between rising energy costs, poor management of resources by the major miners, and a moribund underlying commodity price, there has simply been no demand for these high-risk -- and up until the events in Cyprus, low-return -- stocks.

That, in my opinion, is about to change and the opportunity is ripe for a value investor to make a perfectly-timed entry into a market that has been, frankly, beaten with an ugly stick.

Here are a couple of potential candidates for you to consider, one mid-level producer and an exploration play that I find intriguing.

First up is New Gold (NYSEAMEX:NGD), the latest project for former Franco-Nevada chairman Pierre Lassonde. New Gold operates a number of high-yield properties in California, British Columbia, Australia, and Chile. 2012 gold production rose 3.5% at cash costs that dropped more than 10% year over year while copper production was up more than 230% on the spinning up of the New Afton property in British Columbia which is expected to double again in 2013 to between 78 and 88 million pounds produced. The increase in copper production alone will raise top line revenue by 18% over 2012.

The company has a mix of young mines and promising new properties being bought on line and will do so with an effective cost structure that is admirable. In 2012 New Gold increase shareholder equity as a multiple of company assets by 21%, so while it was a tough year of the stock price it was a good year operationally as Assets climbed 27.2% while shareholder dilution was just 6%. Gold production has been guided to rise to 460,000 oz in 2013. Management also rightly held back inventory from the market in anticipation of higher prices, a strategy that will pay shareholders well on a rally in the gold price.

Next is Valor Gold which is a spin-off of Pershing Gold (PINK:PGLC), specifically the North Battle Mountain and Red Rock (11,900 acres) properties in the Battle Mountain-Eureka gold belt in Nevada. This is a pure exploration play on the strength of its properties alone. Situated between four major producing gold mines, the Red Rock property alone makes this an exploration play worth investigating. Nevada is currently responsible for more than 11% of the world's gold production and the area in which Valor is located is the primary source of that production. The area is rich in Carlin-like deposits that are widespread in this region and capable of producing millions of ounces of gold.

Valor's management is betting on there being significant Carlin-like deposits at Red Rock which lies at the intersection of the three most prolific gold trends in the area. When buying an exploration company you are looking at the quality of the management and the geology team. Historical drilling has been done on the site and it's been fully mapped and recent drill holes intercepted Carlin-type rocks containing gold.

But with exploration companies you are buying first and foremost the management and geology team. Valor is primarily still owned by Pershing and the companies share management teams. Its geologic advisory board is made up of Odin Christensen, former chief geologist at Newmont Mining (NYSE:NEM) and Win Rowe who has discovered in a number of places around the world for Freeport-McMoRan (NYSE:FCX), Pegasus Metals (ASX:PUN) and others.

Buying exploration stocks is a little like buying a raffle ticket, but with the majors struggling to replenish reserves and extraction costs beginning to rise close to the selling price for many properties, the demand for finding new strikes exists and will rise with the price. The more confident the market is of a bottom, the more speculative capital will flow out of overbought sectors like technology and into cheap assets like mining stocks. Thanks to the mistakes of the IMF and the rest of the Troika we should see a new wave of investment into exploration take place now that the future will likely consist of a mix of quantitative easing and debt write downs rather than direct looting of savers.
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