Part of the reason for the lagging performance in the mining shares can be explained by the hedge fund community that is going long physical metals and short the shares. This trade has been working as a hedge for now, but both John Hathaway of the Tocqueville Funds, and John Embry at Sprott Gold & Precious Minerals Fund thinks that this trade is eventually going to turn on them.
Higher gold and silver prices lead to improving fundamentals for the mining companies, and may eventually lead to a short squeeze among the hedge funds. That would force them to cover their positions, which would lead to sharply higher share prices among the gold mining shares.
Although the entire gold mining sector is benefiting from the rise in gold and silver prices, I have found two stars that offer a lot of value and upside potential. Both New Gold Inc. (NGD) and U.S. Gold Corporation (UXG) according to my analysis have the potential of giving investors generous rewards on their investments.
U.S. Gold (UXG) is a gold exploration company engaged in exploration of gold and silver, primarily in Nevada and Mexico. It is the only gold exploration company that is listed on the NYSE. Right from the beginning I was impressed with this company’s strong leadership headed by Rob McEwen, who also has a 22% ownership in the company. In an interview at King World News Mr. McEwen stated that he does not take a salary as the CEO, and plans to make all his money in stock appreciation just like all other investors.
McEwen has a long and impressive track record in the industry, and he is perhaps most known as the former Chairman and CEO of Goldcorp, which he grew from a penny stock into a major mining company that it is today. While leading Goldcorp, McEwen averaged a 31% annual return for shareholders, and grew the company’s market cap from $50 million to $8 billion.
U.S. Gold does not yet have a revenue stream but they have two advanced projects in Mexico and Nevada. They have 3.4 million ounces of proven or probable gold reserves, and well over 5 million ounces in silver reserves. The company has no debt, and a large cash reserve of $110 million that it will use to fund operations until it is ready for production.
The company currently has 12 drills operating in its properties. They are estimating that production will start year 2014 with a target of 60,000 ounces of gold, and 50,000 ounces of silver per year, which would add to $92 million per year in revenues at today’s metals prices.
U.S. Gold has proven or probably reserves in the ground valued at around $7 billion, and with a market cap close to $1.29 billion, the company offers a lot of value and upside potential, especially as they move closer to production.
New Gold (NGD) is an intermediate gold producer with cash flow positive operations in the United States, Mexico and Australia and development projects in Canada and Chile. The company has a solid revenue stream with a 26% profit margin and little debt.
New Gold has 11 million ounces of proven or probable gold reserves, and 69 million ounces of silver reserves that are valued close to $20 billion. With a market cap around $4 billion, this company offers a lot of value for investors.
New gold produced 382,900 ounces of gold in 2010 and made $530 million in revenues. It estimates that production for 2011 could be up to 400 thousand ounces of gold, up to 2.2 million ounces of silver, and 14 million ounces of copper. With these production estimates at current price levels the company should expect to earn close to three quarters of a billion dollar, which would be a 40% increase in revenues.
Market Vectors Gold Miners ETF
For investors that do not want the risk and volatility associated with gold mining exploration and production companies, the Market Vectors Gold Miners ETF (GDX) is a good alternative. It holds some the larger gold production companies including Barrick Gold Corp, Goldcorp Inc., and Newmont Mining. MMarket Vectors Gold Miners ETF has a 13.4% short interest which could give it a lot of upside potential if the shorts are forced to cover their positions.
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With increasing gold and silver prices, gold mining shares will become very profitable as costs remain stable and revenues and margins improve. However, in such a volatile industry as the gold mining sector one should expect plenty of rallies and corrections. Despite a bumpy road ahead the gold mining shares certainly have the potential of producing several fold returns for ambitious investors.