by Tim Melvin | December 20, 2013 10:11 am
At this time of year, it’s instructive to sit down and look at what hasn’t worked in the stock market in the past year.
Often I find that the underperforming sector in one year becomes one of the top performing groups in the next year. The search for underperforming sectors this year didn’t take every long considering almost all of the Dow Jones market sectors are up solidly this year. The only out-of-favor stocks are the ones that dig stuff out of the ground. Miners of all stripes were down on the year, with gold and silver miners leading the way lower. Gold and precious metals miners took the brunt of the selling as ETFs dumped the metals and traders exited metals positions en masse during 2013.
I have not traded metals in either physical or futures markets in decades now, after figuring out early on that I had no clue how those markets worked and I was merely donating my money to the pit traders. However, I am pretty good at looking at the value of a business, and the steep selloff is pricing some miners at far less than conservative calculation of the business would warrant.
Sandstrom Gold (SAND) is in an interesting business. It provides capital to gold miners for development and receives a claim on a percentage of production at a fixed price in exchange. For example, SAND has a claim on production from Brigus Gold (BRD) for 8% of its Black Fox mining operation at just $504 per ounce. SAND then sells the metal to the global gold markets and pockets the difference as a profit.
The balance sheet is rock solid with no longer-term debt and more than $90 million in cash. SAND is in an excellent position to buy additional gold streams at very advantageous prices while gold is out of favor, and that should lead to very healthy earnings and cash flow growth. The stock has dropped more than 65% this year and currently trades at about 1.1 times book value. If gold stages a rally at any point in the next few years, this stock could easily double or more.
I’ve been a fan of the silver miners for several months now. Silver is not as much of a hostage to the trading activities of gold bugs and doom-and-gloomers and there are more industrial users for the metal. I have ben nibbling at several of these and will try to a build a full position in them as they continue to work lower. Pan American Silver (PAAS) is down 38% this year and trades at 69% of book value. Coeur Mines (CDE) has fallen by almost 60% in 2013 and trades at just 45% of book value, while Hecla Mines (HL) is also off by 50% and is trading at 70% of book value.
At the current stock prices, I am highly confident that I will earn a very high return if the silver markets rally at any time over the next 5 to 10 years. The value of the mining business is much higher than the current stock prices, and all three stocks have huge upside potential.
Mining stocks have been horrible performers this year but that doesn’t mean they always be laggards. As the poet Horace once said, “Sometimes the fallen are restored.”
As of this writing, Tim Melvin was long CDE, PAAS and HL.
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