These three gold companies have seen their share prices hammered in the past 12 months, while the ASX 200 index (Index: ^AXJO) (ASX: XJO) has risen 12.7% since late January 2012.
You might think that the falls have just followed the price of gold, but the spot gold price is trading around the same level it was a year ago.
Source: www.kitco.com
So what has caused these stocks to plunge and more importantly, can they recover?
Let's take a look below.
Silver Lake Resources (ASX: SLR)
Over the past 12 months, Silver Lake's share price has bombed by more than 17%. In financial year 2012, Silver Lake produced 83,000 ounces of gold, and reported a net profit of $31.2m, close to double its 2011 result. In 2013, the company has forecast to produce more than three times that, with production estimated at between 255,000 to 295,000 ounces. Production in the 2014 financial year is forecast to rise to around 400,000 ounces as Silver Lake brings its 85% complete Murchison project into operation.
The company has now completed its takeover of Integra Mining, but surprisingly is trading at levels not seen since before the takeover was announced. At current prices, investors are either valuing Integra's assets at zero, or marking down Silver Lake on the back of fears of massive falls in the price of gold.
Silver Lake is trading on a prospective P/E ratio of around 7.2, based on current production forecasts and assuming similar gold prices to 2012. With no debt, plenty of cash in the bank, a potentially massive copper deposit, rising production, relatively low cash costs, three operating mines, with another to enter operation in March this year, Silver Lake looks like it has substantial upside potential.
Kingsgate Consolidated (ASX: KCN)
The highest yielding gold stock on the ASX, Kingsgate has seen its share price tumble by 27% since January 2012, and a massive 58% since October 2010. Gold production in financial year 2013 is expected to be between 200,000 ounces and 220,000 ounces, from its Chatree gold project in Thailand and the Challenger gold mine in Australia.
The company produced 209,000 ounces of gold in financial year 2012, and reported a net profit of $75m – and operating cash flow of over $165m.
Chatree is a world class gold mine, with very low cash costs, and according to the company, significant near mine potential and a long mine life, with further expansion. Although at one stage, the company came within weeks of having to shut the mine, because of government delays to approval for mining leases.
Challenger was acquired in February 2011, and Kingsgate is attempting to turn-around the mine. Early results suggest it's on track, with cash costs falling, and production rising. Kingsgate also has two projects in the pipeline, the Nueva Esperanza silver/gold project in Chile, and the Bowdens silver project, near Mudgee in NSW.
At the current price of around $5, Kingsgate is trading on a forecast P/E of 8, and is expected to pay a dividend yield of around 4%, un-franked.
Red 5 Limited (ASX: RED)
If you want to know what can go wrong with a gold mining company, Red 5 could be the perfect example. With a single mining asset, in a somewhat unpredictable country, and with significant natural obstacles, Red 5 has pretty much seen it all, and it's reflected in the company's share price – it's down over 25% since a year ago.
After commercial production began at its Siana gold mine in the Philippines in April 2012, extreme wet weather forced the company to spend four months removing silt, it then suffered plant equipment failure, had issues with its mining contractor, lost its managing director and finally, has ongoing issues with a consistent power supply.
As a result, the company's forecast of producing 75,000 ounces of gold in the 2013 calendar year has been scaled back, and the company is forecasting to produce 36,000 ounces for the six months to June 2013. Production over the last 6 months is probably negligible, which will result in disappointing results for the 2013 financial year.
However, with a predicted cash cost of under US$350 an ounce, a minimum 10 year mine life, and (hopefully) with the worst of its issues behind it, Red 5 could see its shares take off once it starts producing gold at a consistent rate.
Summary
Overly optimistic production forecasts and exploration expectations, blowouts in mining and operating costs, a lack of trust in management, concerns over the future direction of the gold price and a lack of return to shareholders by way of dividends could all be blamed for the falls. In fact, it's probably a combination of these plus other company specific risks that have seen these three fall so far and so hard.
However, if – and that's a big if, these companies can meet their production forecasts, at current gold prices they will likely be throwing off wads of cash, and we could see a maiden dividend from Silver Lake in 2013 and an increase in the dividend from Kingsgate, along with potential capital gains.
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Motley Fool writer/analyst Mike King owns shares in Silver Lake, Kingsgate and Red 5. The Motley Fool's purpose is to help the world invest, better. Take Stock is The Motley Fool's free investing newsletter. Packed with stock ideas and investing advice, it is essential reading for anyone looking to build and grow their wealth in the years ahead. Click here now to request your free subscription, whilst it's still available. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.
