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Thursday, November 8, 2012 - 10:00
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Thursday, November 8, 2012 - 17:01
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Thursday, November 8, 2012 - 10:00

Gold Above $2,000? 3 Junior Gold Miners That Could Profit

Thursday, November 08, 2012 10:00 AM

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 (NYSE: 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 (NYSE: 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 forward price-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 (NYSE: 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 (NYSE: 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 carries political 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.

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Michael Vodicka does not personally hold positions in any securities mentioned in this article.
StreetAuthority LLC does not hold positions in any securities mentioned in this article.