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Three Promising Gold Mining Plays

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When catastrophic prophecies abound, gold miners shine.

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MINYANVILLE ORIGINAL With no end in sight to unstable global currencies, the US debt crisis, and cheap money, the driving forces supporting higher gold prices are not going away. Market seers say that it's not a matter of 'if' there's a market crash, but rather 'when' there's a market crash:
  • Also weighing in with another catastrophic outlook is Robert Wiedemer, economist and best-selling author of Aftershock. In 2006, Wiedemer accurately predicted the collapse of the US housing and equity markets, and he says, "The 'New Crash' will be worse than 2008."
  • Gold sector analyst Alf Field warns about the consequences of massive money printing: "This is the first time in history that fiat or government issued currency has been in use in every country around the world at the same time. Secondly, we have an electronic money system which is very efficient. It enables new money to be created at a faster rate than ever before." [Editor's Note: Alf Field's commentaries can be found here.]
One sector that consistently performs well in bear markets is gold. After its long-term climb that climaxed with a lifetime high last August, gold has settled back into a consolidation phase to where gold pundit Jim Sinclair now sees any potential downside as "throwing up a major buying opportunity."

Weeden strategist Michael Purves predicts a post-summer rally: "After several months of range-bound trading and ugly price charts, we believe gold will begin to establish a more consistent trend upwards and are specifically targeting $1,700/oz by the end of September."

A gold breakout will positively impact gold ETFs like iShares Gold Trust (IAU) and SPDR Gold Shares (GLD) most directly. However, gold mining stocks could stand to benefit even more than gold bullion. In that sector, large-cap miners like Couer d'Alene (CDE), Canadian-based, gold royalty company Franco-Nevada (FNV), and a small cap like Pershing Gold Corporation (PGL.C) could offer upside potential.

Couer d'Alene Trades Below Book Value

When gold (and silver) prices rise, the earnings of highly productive miners like Couer d'Alene benefit as the operating leverage inherent to their business model drives earnings to rise faster.

At $17.08, Couer d'Alene currently trades below book value, a measure that indicates strong fundamentals based on subtracting the company's liabilities from its total assets. The miner reached an all-time high of $30.99 in March 2011 when metal sales nearly doubled in the year to over $1 billion and operating cash flow ballooned by about 150%. Its properties include the Rochester Mine in Pershing County, Nev., which is widely regarded as one of the most successful silver mines in the world.

Last year Couer d'Alene generated $300-400 million of cash and recently it announced a debt issuance of $350 million. With $100 million slated for buyback, and plenty of cash on hand, it could be positioning to make further acquisitions.

Pershing Gold Wins New Investors

Recently Couer d'Alene purchased over 10 million shares of Pershing Gold Corporation in a private placement. Pershing owns two properties which are located in North Central Nevada, where 80% of all the gold mined in the state is sourced.

Pershing (formerly called Sagebrush Gold) owns the Relief Canyon mine, a 1,000-acre silver and gold property in the same geologic formation as Couer d'Alene's highly successful Rochester operation. A prolonged slump in gold prices would eat into the start-up and development costs of its new mining operations. However, billionaire investor Phillip Frost, who made his fortune in the pharmaceutical field, recently invested $9.3 million in Pershing Gold.

Franco-Nevada Has Meaningful Insider Support

Franco-Nevada Corporation, a Canadian-based gold royalty and stream company, has assets and interests in some of the largest new gold development and exploration projects in the world. Directors and management own more than $300 million of Franco-Nevada shares, so the company is shareholder-friendly.

CEO Pierre Lassonde, a visionary who has been compared to Steve Jobs, counts China and India's demand as important when talking about gold. "If China and India are slowing down meaningfully, this could put downward pressure on gold prices for the short term. I anticipate this scenario happening in the fall or early 2013." He then predicts gold breaking $2,000 once "we get through this bump in the road. The only question is when will this happen."

Adjusted net income for Franco-Nevada almost doubled in the year from 22.1 million, $0.19 per share in 2011 (1Q), to $43.6 million, $0.31 per share in 1Q 2012.

Franco-Nevada's solid fundamentals stem from a high margin business with $300 million plus of yearly cash flow, a monthly dividend, and meaningful insider ownership. The company recently announced its fifth consecutive monthly dividend share increase -- 25% to $0.05 effective July 2012.

Another Gold Price Game-Changer on the Table

The overall picture for gold investors looks brighter in part due to continued buying support by the central banks where gold stores have more than doubled in the past 12 months, according to data from the World Gold Council.

Gold prices will also be very favorably affected if, in response to the global banking crisis, the Basel Committee for Bank Supervision (or BCBS) tightens rules in terms of the assets that banks must hold.
No positions in stocks mentioned.
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