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This Small-Cap Gold Miner Could Triple in Value Over the Next 3 Years

Miner With Gold Nugget Getty
Miner With Gold Nugget Getty

Every year the stock market offers a number of surprises, and this year it's been the utter domination of precious-metal miners. Whereas all of the major U.S. indexes are near the flat line for the year, the VanEck Vector Gold Miners ETF is up 78% year to date through May 10. Similarly, the Global X Silver Miners ETF has exploded higher by 84% in 2016.

Why gold and silver are on fire

The fundamental reasons behind the rally in physical gold and silver could have legs, too. Precious metals tend to thrive in low-interest-rate environments because physical metals have no dividends attached. If investors see little wealth-creating opportunity in bonds yielding 1% or less, they're more liable to turn to a safe-haven investment like gold or silver. Japan's negative-interest-rate policy, and the Federal Reserve's wait-and-see stance in the U.S. on interest rates, have fanned the fire for gold and silver.


Production growth at San Dimas. Image source: Primero Mining.

If we pull back and look at the history or production growth at San Dimas, Primero has been clearly doing something right. Between 2011 and 2015, gold and GEO production rose in each and every year, and sans the production slowdown caused by safety enhancements, San Dimas would be on pace for a sixth straight year of record production. More importantly, San Dimas is consistently a low-cost mine based on AISC. It wouldn't surprise me one bit to see AISC dip below $750 an ounce beyond 2016.

San Dimas also offers numerous ways to boost existing production. In addition to ongoing exploration in an effort to boost mill grades, a secondary crusher should soon be completed that could allow San Dimas to boost its total milling capacity. Assuming mill grades are high enough, Primero could quickly boost profits at its flagship mine -- especially if physical gold and silver prices continue to rise.


Black Fox Mine AISC. Image source: Primero Mining.

Primero's other active mine, Black Fox, which is located in Ontario, has also shown steady improvements, even if its current cost basis is a bit high to merit aggressive expansion.

After reporting AISC of $1,428 at Black Fox in 2014, Primero is forecasting a drop in AISC of more than 10% in 2016 to $1,025. This is noteworthy since drilling efforts in the Froome Zone of Black Fox have demonstrated strong gold concentrations (6.2 g/t gold over 37.9 meters being the most impressive drill), and Primero has stated that it anticipates deciding on whether or not to develop this region in the second quarter. Proven and probable reserve at Black Fox total 237,000 gold ounces, although measured and indicated mineral resources suggest up to 521,000 ounces.


Cerro del Gallo. Image source: Primero Mining.

Also, Cerro del Gallo in Guanajuato, Mexico offers Primero the opportunity to pack on up to an additional 95,000 ounces of GEO production each year (Cerro del Gallo contains gold, silver, and copper). Guanajuato is an active mining district, so the infrastructure within the region is already in place, and Primero anticipates that cash costs for the mine would average about $700 an ounce. While development of the mine is still being hashed out, it has proven and probable reserves working out to 712,000 ounces.

Laslty, there's a major disconnect between Primero's current valuation and its estimated cash flow per share in 2017. Once we get past Primero's recent woes, the company could generate around $0.73 in cash flow per share (CFPS) next year. Based on its current share price of $1.75, Wall Street is giving Primero a valuation that's only 2.4 times higher than its 2017 estimated CFPS. Comparatively, miners of its size are trading at around 8.5 times their estimated 2017 CFPS. Even accounting for the uncertainties tied to its APA dispute, this disconnect seems overdone.


Image source: Primero Mining.

Add all of these catalysts together, and you have a gold miner that could be very profitable at $1,250 an ounce beginning in 2017, with rapidly growing production capacity and reasonably low costs. Even a tripling in its share price could have it trading below its peers in terms of CFPS. This certainly isn't a miner for the faint of heart, given its recent volatility. However, for more risk-tolerating investors looking for an opportunity to potentially triple their money over the long-term, I'd suggest Primero Mining is worth serious consideration.

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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