With the price of gold rocketing upwards the last couple of months, first on the rumors of central bank monetary policy action and then on the actual announcement, some gold junior mining companies have also seen massive gains. As more investors look to gold junior mining companies as investments over such a short period of time, this has the net effect of driving up prices quite quickly.
A stock I discussed back in the beginning of July when it was trading $2.72 a share is Primero Mining Corp. (NYSE/PPP, TSX/P). The price has since then shot up to a recent high of approximately $5.75. Many people are asking me if I think there’s still more room left in this stock or other gold junior mining companies. Let’s take a closer look at Primero and see if we can come up with some conclusion.
There are many potential risks and rewards for gold junior mining companies. As many are active in the exploration phase, investing in gold junior mining companies can be quite risky if the drill results are less than expected. Primero Mining is based in Canada with gold production facilities in Mexico. With a producing property and another property that the firm is exploring, if significant gold bullion reserves are found, the stock has potential for appreciation. The cash from the existing gold bullion production could be used toward financing its exploration and development work.
The company recently updated its estimated mineral resources and mineral reserves for its San Dimas mine. As of June 30, 2012, the company added 126,593 ounces of probable gold to its mineral reserve, prior to depleting 47,749 ounces since the end of 2011. This means that the firm was able to replace the depleted gold by 265% during the first six months of 2012. The company still has extensive areas of exploration left, and the CEO is confident that additional gold reserves will be found.
For the second quarter, which ended June 30, 2012, the company reported revenue of $57.1 million, compared with revenue in the same prior-year period of only $40.8 million. The company sold 24,880 ounces of gold and 1.4 million ounces of silver in the second quarter of 2012, as compared to 18,840 ounces of gold and one million ounces of silver in the same period in 2011.
I also like to see gold junior mining companies having solid levels of cash. Primero had a cash balance of nearly $126 million on June 30, 2012, as compared to $86.3 million on March 31, 2012.
Another good sign, along with the price increase for gold and silver, is that the company has increased its guidance for production estimates by 10%. The company now expects to produce 110,000–120,000 gold equivalent ounces this year.
Chart courtesy of www.StockCharts.com
Many gold junior mining companies have gone up over the last couple of months. While I do like some of the fundamentals and potential for growth in reserves, Primero has gone up exceedingly quickly. Note that the Relative Strength Index is now in an extremely overbought condition. While that does not mean the stock has to sell off, it is likely that some consolidation is in order. I would be cautious; such a quick move has a high probability of having a slight pullback. Be opportunistic, as further drill results do take several months to be completed.
