Attention Gold Bulls: These Small Cap Miners Are Skyrocketing

Source: Thinkstock

Source: Thinkstock

The price of gold has steadily been rising this year, with the yellow metal generating gains of 10 percent for the year. There are many reasons for this such as the fact that gold was very oversold toward the beginning of the year, the money supply continues to rise despite “tapering,” and economic data has come in mixed, and ultimately worse than many analysts expected.

But while you could have made decent returns in gold, you could have made significantly more had you purchased shares in some of the junior mining companies. Junior mining companies are small companies that may not even have revenue yet. When the gold price rises the best junior gold mining companies can make you incredible profits. So it is understandable that as an investor looking to maximize his gains I look to the junior mining sector for ideas.

I look for companies that have the following qualities:

  • They must have very little or no debt.
  • They must have a long-term plan of action.
  • They must have competent management.

By selecting for these qualities, I think you can do very well if you have the courage to buy junior gold mining stocks when the market is out of favor.

While the stocks I’m about to mention have already soared this year, there is reason to believe that that can continue to march higher, and in fact they have a long way to go before they reach their peak valuations from 2010 and 2011.

Source: Thinkstock

Source: Thinkstock

1. McEwen Mining (NYSE:MUX)

McEwen Mining  has risen nearly 60 percent for the year. The company operates gold and silver mines in the United States and Latin America. Its primary selling point is that its CEO is Rob McEwen, who became famous for growing Goldcorp (NYSE:GG) into one of the world’s largest gold mining companies. Can he do the same with McEwen Mining? I think a lot of investors are betting that he can, and he himself owns more than 20 percent of the company so you know he wants it to succeed.

When gold and silver prices fell in 2011-2013 the stock fell from nearly $10/share to under $2/share. But now it is beginning to recover. Shares sit at $3.10 each, and they appear to have formed a bottom. Going forward the company expects to grow its production significantly while continuing to explore its properties. Long term it hopes to develop its massive Los Azules copper and silver project in Argentina which contains an incredible 20 billion pounds of copper.

Source: Thinkstock

Source: Thinkstock

 

2. Asanko Gold (NYSEMKT:AKG)

Asanko Gold might be my favorite junior gold mining company. Shares are up 60 percent for the year but they still have to quadruple in order to reach their peak so there could be considerable upside. The company recently merged with PMI Gold, which owned a neighboring gold mine. The new company is planning on developing the combined project called the Asanko Gold Mine in Ghana. It has enough cash on hand to develop it, and if for some reason it needs more it has a line of credit.

By the end of next year, the company should be producing 200,000 ounces, and this will double by 2017. Despite this the company is valued at just $450 million, and it has more than half of this in cash! The mine will have a 13 year life at least, although the company recently announced that it found more gold nearby, which means that the mine’s life could easily be extended. Thus despite the significant gains we have seen I think there is more upside, especially if the gold price continues to appreciate.

Source: Thinkstock

Source: Thinkstock

3. Sandstorm Gold (NYSEMKT:SAND)

Sandstorm Gold is a streaming and royalty company. This means that it gives money to gold miners in exchange for the right to buy or receive an agreed upon amount of gold that is produced at an agreed upon mine. Shares are up 77 percent for the year as the company is recovering from a failed streaming deal with a now bankrupt company. Royalty companies have been in favor given that they, unlike mining companies, have fixed input costs.

Sandstorm Gold sees revenue from several properties throughout the western hemisphere including in Canada and Mexico—two of the world’s best places to mine. Going forward, the company will have a lot of cash to buy additional royalty and streaming deals, and furthermore, since many small mining companies need capital and are willing to give up a lot for it. This should prove to be profitable for the company.

One thing to note is that the company recently merged with its sister company—Sandstorm Metals and Energy, and so it now owns a high risk/high reward royalty on a Mongolian mine called Lookout Mountain. It could provide significant cash-flow, but it could also become worthless and that can hurt the stock.

Disclosure: Ben Kramer-Miller is long McEwen Mining and Asanko Gold.

More From Wall St. Cheat Sheet: