Gold mining stock moves from explorer to producer

Looking out for bargain gold mining stocks? The mining industry as a whole has worked diligently to keep costs minimal and valuations high. Even so, more than a few gold miners are only priced at "bear market extremes". Contributor Mike Kachanovsky shares one of his undervalued Canadian gold stocks.

In a perfect world, a junior mining company starts off a promising exploration project with ambitious objectives. After successfully discovering a large gold deposit, navigating through planning and permitting, then eventually securing capital funding, mine development may ultimately get underway.

With each stage the company completes, all the way through to production, the project advances along the value curve.

As the certainty of a viable, profitable mining operation rises, investors are willing to pay more to own a small piece of this business. But there are times when even a successful producer with attractive fundamentals may drift below fair value. More than a few gold miners are currently priced at bear market extremes.

One of my favorite undervalued gold stocks is Guyana Goldfields Inc. (TSX-GUY). This company was able to navigate the difficult process of transitioning from an exploration focus to become an emerging gold producer, operating a large-scale mine at its flagship project, Aurora in South America.

The stock surged and the company traded at a premium valuation; its market cap reached well above a billion dollars.

However, mining is a challenging business and there are many variables that can create turbulence on the way to prosperity. Any disruption to efficient mining operations is going to create an immediate impact on the bottom line, even if it is only temporary.

Short-term issues have taken a toll on Guyana Goldfields and the stock is currently bumping along at 52-week lows.

In July, the company presented its second-quarter earnings report, which documented lower net gold output and increasing costs during the period. The performance issues were related to the lower-grade stockpiled material that the company processed in the quarter.

Going forward, Guyana Goldfields' mining sequence at Aurora should begin to access higher-grade zones of the open pit mine and gold output will recover, but investors often focus on short-term numbers, so they sold their stock.

An unfortunate turn of events followed shortly thereafter in August. A fire damaged equipment at the company's recovery plant, temporarily halting gold recovery operations.

While the overall cost of this disruption is relatively minimal, the resulting delay in gold production has put investors in a sour mood.

Mining operations continued but the delay of a few weeks to repair the equipment will push back the net production output to the fourth quarter.

Bargain stock hunters have an opportunity

My opinion is that these non-recurring production issues represent an opportunity to buy shares at an extreme value range, i.e. it is a gold stock to invest in right now.

Management has maintained earlier guidance and expects full-year production to fall within the range it had originally reported, amounting to at least 160,000 ounces of gold.

If so, then the company shall be reporting improved numbers in the second half of this year and lower unit costs going forward. The market may not be thrilled with uncertainty, but for risk-tolerant investors, this is a window for a positive rebound for an undervalued gold stock that may revalue the company higher in a matter of months.

The real kicker for me is that gold itself has been rebounding strongly in the second half of 2017. This means that every ounce of gold that Guyana Goldfields produces will contribute to higher realized revenues. Combined with recovering quarterly gold production and lower unit costs, this revenue growth should generate growing earnings and cash flow outlook by the year's end.

The fall and winter months also tend to be the best performing time for mining stocks overall. That too may contribute to a nice rebound in the share price.

I think there is more than a swing trade at hand. Guyana Goldfields is in the midst of expanding its processing plant capacity. The company expects to finish the first phase early in 2018.

This will generate production growth and improve unit costs, which in turn grows earnings and cash flow. The company has already demonstrated it is capable of delivering mine and infrastructure development on time and on budget.

Further production growth will come in 2019, when the company commissions a new recovery circuit, the second phase of expansion at the processing plant. The objective is to improve efficiency and capture even more of the gold contained in every tonne of ore processed.

Thereafter, Guyana Goldfields will be solidly positioned as a low-cost, mid-tier gold producer with a large deposit that can sustain full operations for 15 years, at an average gold production of 220,000 ounces per year.

But wait, there's more . . .

Meanwhile, the company continues to follow up on exploration at the Aurora site, beyond the established deposit of more than 8 million ounces of gold.

The program has moved on to other targets on the 1,200-square-kilometre land package controlled by Guyana Goldfields, with the potential to uncover another large deposit that may be developed into a second gold mine.

Considering the large property area controlled by the company, the multiple gold showings outlined there, and extensive historical small-scale gold mining activity throughout the district, the potential for further gold discovery is attractive to those who want to buy gold stocks today.

Regional soil sampling and trenching work is currently underway at two nearby deposits. A drilling program will follow up on any high-priority targets that are identified.

Any further success at the end of the drill bit will represent yet another catalyst for a higher share price. Ideally, the company will achieve a discovery that may be developed into a second producing gold mine, and perhaps satellite deposits will be outlined to extend the mine life at Aurora.

Suffice to say that ideal conditions are in place for value buyers to step up here, for gains in the next few months and also for a longer-term hold.

As it stands today, Guyana Goldfields is positioned as a significant, low-cost gold producer, and an attractive growth and value stock. The company has done well to establish a very successful mine during the worst bear market for gold in living memory.

When this cycle eventually transitions to more bullish conditions-and it will-then I expect the shares of this stock to trade at a multiple of its current price range.

Mike Kachanovsky is a freelance writer who specializes in junior mining stocks and also covers technology companies.

This is an edited version of an article that was originally published for subscribers in the October 20, 2017, issue of Investor's Digest of Canada. You can profit from the award-winning advice subscribers receive regularly in Investor's Digest of Canada.

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