This gold miner has risen by 88% in 3 months

Medusa Mining has low production costs and is expanding while others are contracting.

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Gold miners have been hit hard in the last 12 months as the price of the precious metal continued to drop from an all-time high of US$1920 in 2011 to a multi-year low of US$1190 in June this year.

It has resulted in severe drops in profitability and share price of some of Australia's largest listed gold miners, such as Newcrest Mining (ASX: NCM) and Kingsgate Consolidated (ASX: KCN). Newcrest at one stage in June had lost 72% of its market cap in less than nine months, while Kingsgate lost 80% in a similar time frame.

Newcrest and Kingsgate weren't the only gold miners affected however. Miners big and small suffered share price falls over a similar time frame. As lower-cost producers, the share prices of Kingsgate and Newcrest have recovered to some degree in recent months and they are still profitable at the current gold price around US$1300.

The outlook for the two is far from certain and recent events have shown that even investing in large-cap miners is a risky proposition. For investors searching for exposure to gold through similarly high risk companies, there are a number of smaller cap, much lower cost producers on the ASX, which could have a big share price upside in the next few years.

Medusa Mining (ASX: MML) is one such company with big upside potential. Medusa operates a small mine in the Philippines and last financial year produced over 62,000 ounces of gold at a cash cost of US$313/oz. This compares favourably with the reported US$1000/oz-plus cash cost of Newcrest.

In the last financial year, Medusa increased revenue by 22% and profit by 9% as the majority of gold miners downgraded both or reported losses. Medusa also wisely decided to forego a dividend payout in the year to undertake a $70 million expansion of its mine to double annual output at an estimated cash cost of $220/oz.

Its market capitalisation dropped by over 80% in the nine months to June while the company remained extremely profitable. The share price has nearly doubled since dropping to $1.26 in June but may have further to rise if it can continue to generate growing profits as many around it downgrade earnings and provide dire outlooks.

Foolish takeaway

Gold miners are not for the faint-hearted and recent volatility in the share price of Australia's largest listed miners has shown that even large cap companies aren't immune. Medusa Mining is growing profits and capacity at a time when the majority of other gold miners are suffering losses and writing down assets. The low cost of production for Medusa should shield its profits if the gold price retreats further, however key risks include political risks in the Philippines and any number of random events which affect all miners from time to time.

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Motley Fool contributor Andrew Mudie owns shares in Kingsgate.

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