Each week, a professional investor tells MoneyWeek where he'd put his money now. This week: Angelos Damaskos, CEO of Sector Investment Managers, and fund adviser for Junior Mining Fund.
Record levels of government debt, historically high unemployment rates and creeping inflation are all factors that support the case for investing in junior gold-mining shares. And as metal prices continue to exceed historical long-term averages, new mining projects will be developed and producer profitability enhanced.
Corporate activity in the mining sector also remains strong. Low-interest rates are helping with capital raising and the funding of development projects. Whether by monetising debt, quantitative easing, or printing money, the developed economies are likely to continue devaluing their currencies. All of these factors strengthen gold's continued appeal as an alternative store of value.
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Junior gold firms can significantly outperform their larger peers as they tend to be more focused, concentrating on select mining assets in smaller regions. Even if gold prices remain at current levels, there are many opportunities among junior gold mining companies' shares.
This is especially the case among those with significant reserves in the ground, growth in cash flow, little or no debt, and competent management teams. Nevertheless, stock selection is very important in this risky business. Here are the three stocks we currently favour.
Spanish Mountain Gold (CVE: SPA) has resources located in central British Columbia, Canada, one of the most politically safe, mining-friendly jurisdictions. The firm reports to have a Canadian resource of around four million ounces of gold. It expects this deposit to support a mine with annual production in the range of 200,000 ounces and a mine life in excess of ten years. The firm believes that with a market capitalisation of C$50m, including C$9m cash, its resource is now worth about C$13 per ounce. This compares to C$26/oz for Brett Resources, which operates in neighbouring locations, before its acquisition by Osisko Mining (announced on 22 March 2010). This gap between the value of gold resources at a similar development stage, location, and with similar technical characteristics can be a good pointer to investment potential. The firm aims to progress to production within two to three years. That could further improve its valuation.
Norseman Gold (LSE: NGL) runs Australia's longest operating mine, with 19 million ounces produced so far. It is also debt free with very strong cash flow. Its mill is currently working at 60% of capacity. However, with the company planning to bring two new mines into production, there is a strong possibility of a reduction in cash costs. Norseman Gold currently trades at about 7.5 times 2010-2011 cash flow, against 20 times for its peer group. As the company has no hedge in place for its gold sales prices, it would benefit significantly if operating costs come down and gold prices move up. It is also a potential takeover target.
Medusa Mining (LSE: MML) focuses its operations in the southern Philippines. It has a rapidly growing production of high-grade gold ore, recovering more than 10g per tonne. There is potential to increase production and a good chance of significant resource upgrades. It benefits from very low average operating costs and is debt free, with $40m of cash flow for the year to date. Like Norseman Gold, it does not hedge and could be a potential takeover target.
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