Get Your Seat on the Gold Train… If It’s Getting Ready to Leave the Station (ANV, LSG)

I’ll be honest with you. I have no idea which way the price of gold is headed, and have always had difficulty discerning its trajectory through the years. That said, it’s possible that if the market’s woes continue at such a breakneck downhill pace, investors may once again turn to gold — commonly considered a “defensive” investment during down market times.

At the very least, chart-wise over the past 30-days, gold is showing some signs of life. After bottoming at the beginning of the month at around $1190 per ounce, its lowest level over the past year, the yellow ore began to regain some of its lost luster, quickly pushing back from multi-year lows through the $1200 level as market participants began to pull out of equities in a hurry. Currently, it looks like some short term resistance sits at the $1250 level, but who knows what might happen in the bottom continues to fall out of the bull market.

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If gold can continue to ascend — and I’m not saying I’m confident that it will — it should have a soporific effect on gold stocks. That’s why I want to bring your attention to two potentially good small cap plays in the sector.

Allied Nevada Gold (ANV)

Allied Nevada Gold is engaged in the mining, development, and exploration of precious metals properties in Nevada. The company’s principal products are unrefined gold and silver bars. The company operates the Hycroft Mine, an open pit heap leach operation located to the west of Winnemucca, Nevada. Its properties also include Maverick Springs, Mountain View, Wildcat, and Pony Creek/Elliot Dome. In addition, it has approximately 73 other exploration properties.

In mid-summer ANV shares took flight following the company’s second quarter earnings report, which obviously impressed market participants. For Q2, the company reported net income at $4.4 million, or $0.04 per share, similar to net income of $4.2 million, or $0.04 per share, in Q2 2013.

The company also achieved its 2014 production expectations with gold production of 56,864 ounces and silver production of 481,151 ounces, increases of 45% and 262%, respectively, compared with Q2 2013. Gold sales of 57,050 ounces and silver sales of 474,832 ounces were a 37% and 225% increase over the same 2013 period sales, respectively. In addition, the company backed its previous production targets for FY 2014.

For many companies flat earnings might be harbinger of a lower stock price, but the opposite was true with ANV. In the wake of that report, ANV shares said farewell to the high $2 level and pushed all the way up to challenge the $4 mark — still well of their 52-week high of $6.70 per share.

Profit-taking kicked in after that, and appears to have been exacerbated by the company’s release of a feasibility study from its holdings — coinciding with the big candlestick move south — as well as a briefly resurgent bull market and the ongoing fall in the price of gold.

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ANV shares ultimately established a fresh 52-week bottom of $2.29 on October 8th, but have risen a bit since then — perhaps with defensive buyers helping usher the company’s share price modestly higher. I’m speculating that if the open market price of gold can regain its northerly momentum, ANV shareholders will ultimately benefit.

Lake Shore Gold (LSG)

Lake Shore Gold is engaged in the acquisition, exploration, and development of gold. It also explores for silver ores. The company’s principal properties include Timmins West Complex, which covers an area of approximately 130 square kilometers located in Timmins, Ontario; Bell Creek Complex that covers an area of approximately 32 square kilometers situated in Timmins, Ontario; and Fenn-Gib, which consists of 171 mining claims, patents, and leases covering approximately an area of 29 square kilometers.

Like its American counterpart, this Canadian company’s shares managed to advance impressively even during the bull market, and despite gold’s declining price.

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After plunging to a new 52-week bottom of $0.30 last August, during the beginning of the bull market’s giant run, LSG shares rebounded sharply — initially finding support in the $0.60 channel, and earlier this year breaking through the $1 level to top out at about $1.20 before pulling back slightly to their current $0.95 level.

Again, similar to ANV, Lake Shore reported solid Q2 results at the end of July that attracted some healthy buying enthusiasm. For the period, the company reported record gold production of 52,300 ounces, a 70% increase from Q2 2013. They also recorded record sales of 53,500 ounces, about double the amount from the corresponding period.

Across several other metrics the company seems to be clicking on all cylinders. During Q2 Lake Shore reduced its cash operating costs per ounce sold from $908 to $556. In addition, cash and bullion holdings increased from $14.3 million to $53.4 million. Net earnings in Q2 2014 were $13.1 million, or $0.03 per common share, versus a net loss of $5.4 million, or $0.01 per common share, in Q2 2013.

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Encouragingly, just last week Lake Shore positive metrics for Q3, including significant quarter-over-quarter cash operating costs per ounce of gold produced. Full operating results are expected to be released on October 29, and I would take a long hard look at those — along with the state of the precious metals and equity markets — to determine if LSG may make another run to new 52s.
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As always, trade these and all stocks with extreme caution, especially in these hyper-volatile market times.

Warren Gates, Senior Analyst, Normandy Research

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