CEOs aren't known as an overly optimistic bunch.
After all, it doesn't do the leader of a company any good to set
the bar incredibly high only to disappoint with mediocre results.
Managing expectations isn't just a way to beat earnings . It's
an exercise in self-preservation.
So when I hear a CEO boasting of new highs and record
sales, it gets my attention.
And that's what the CEO of the world's largest gold company was
doing in September in an
interview
on CNBC's "Squawk on the Street."
"Gold could definitely surpass previous highs and go above
$2,000 and even higher in the next year," said Jamie Sokalsky, CEO
of
Barrick Gold (
ABX
)
, the world's largest gold miner, valued at more than $35 billion.
His optimistic outlook was based on familiar criteria:
Expectations of more monetary stimulation from the Federal Reserve
and demand from global central banks. Sokalsky also commented on
Barrick Gold's strong leverage to gold prices, noting
that a $100 increase in gold would add an additional $500 million
to earnings and cash flow .
But even though Barrick Gold would benefit from gold surging
above $2,000 in the next year, the real winners would be the junior
gold and silver miners. These are mining firms with market
caps less than $100 million and are generally more volatile
than larger, senior miners. Not only would they see tremendous
earnings upside, but the bullish forces
of consolidation would support higher valuations as
larger miners look to grow by acquisition .
In this scenario here are my three favorite junior gold and
silver miners...
1. Coeur d' Alene (
CDE
)
Coeur d' Alene just took a 23% tumble on a big overreaction to
slightly lower production guidance. The company lowered its
full-year production target for gold from 210,000-230,000 ounces to
215,000-225,000 and silver from 18.5-20 million to 18.5-19
million. This stock already looked undervalued before the big
drop, but with analysts still looking for earnings above $3 per
share in 2013, and with a forwardprice-to-earnings ratio (P/E ) of
just 8,shares could more than double if Coeur d' Alene traded in
line with its peers, which have a P/E ratio of 17.
2. Hecla Mining (
HL
)
Hecla is one of many gold miners that have been weak in the past
few years in spite of rising gold prices. But despite of weakness,
Hecla still produces a healthy profit , with analysts looking
for full-year earnings of 46 cents per share in 2013. The company
has struggled with slow production in one of its key mines in the
most recent quarter, which has weighed on shares. But longer term,
with strong leverage to gold and silver, a junior miner such as
Hecla with a market cap of just $1.7 billion could be an
excellent takeover target .
3. AuRico Gold (
AUQ
)
AuRico is a junior gold and silver miner valued at $2.2 billion.
One thing I like about AuRico is that its mines are located in
politically stable countries like Canada, Australia and Mexico.
Mining operations in less developed areas of the world are
subjected to political and social risk due to labor strikes or
potential nationalization. That's always something to consider when
investing in gold and silver miners of any size. AuRico also looks
solid on the earnings front, with analysts projecting full-year
earnings of 57 cents per share in 2013. If gold prices jump above
$2,000 in the next year, then AuRico could easily jump back to its
high from July above $14, a 75% increase from current levels.
Risks to Consider:
Investing in junior gold and silver miners exposes investors to
company-specific risks related to mining production and
costs. Owning gold and silver miners in less developed areas
of the world also carriespolitical risk , although these miners
operate in more developed regions. Although these miners
operate in more developed regions, political risk is an inherent
part of investing in gold and silver miners.
Action to Take -->
If the CEO of Barrik Gold is right and gold starts to trend
toward the $2,000 an ounce mark, then these three junior gold and
silver miners could see big gains in the next few months. Investors
would be wise to track the yellow metal's price and be ready to act
in case they see prices approaching that level.