Three bombed out gold stocks set to soar

At current gold prices, these three could be throwing off cash for years to come

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

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.


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.


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.

Oil, copper, and gold continue to be in high-demand — and their popularity doesn’t look to be slowing. We’ve uncovered three companies poised to benefit from the rising prices of these commodities. Get our brand-new report — “3 High-Risk/High-Reward Resources Stocks” — FREE!

More reading

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.

More on ⏸️ Investing

Close up of baby looking puzzled
Retail Shares

What has happened to the Baby Bunting (ASX:BBN) share price this year?

It's been a volatile year so far for the Aussie nursery retailer. We take a closer look

Read more »

woman holds sign saying 'we need change' at climate change protest

3 ASX ETFs that invest in companies fighting climate change

If you want to shift some of your investments into more ethical companies, exchange-traded funds can offer a good option

Read more »

a jewellery store attendant stands at a cabinet displaying opulent necklaces and earrings featuring diamonds and precious stones.
⏸️ Investing

The Michael Hill (ASX: MHJ) share price poised for growth

Investors will be keeping an eye on the Michael Hill International Limited (ASX: MHJ) share price today. The keen interest…

Read more »

ASX shares buy unstoppable asx share price represented by man in superman cape pointing skyward
⏸️ Investing

The Atomos (ASX:AMS) share price is up 15% in a week

The Atomos (ASX: AMS) share price has surged 15% this week. Let's look at what's ahead as the company build…

Read more »

asx share price competitions represented by businessmen arm wrestling
Retail Shares

How does the Temple & Webster (ASX:TPW) share price stack up against Nick Scali (ASX:NCK)?

How does the Temple & Webster (ASX: TPW) share price stack up against rival furniture retailer Nick Scali Limited (ASX:…

Read more »

A medical researcher works on a bichip, indicating share price movement in ASX tech companies
Healthcare Shares

The Aroa (ASX:ARX) share price has surged 60% since its IPO

The Aroa (ASX:ARX) share price has surged 60% since the Polynovo (ASX: PNV) competitor listed on the ASX in July.…

Read more »

asx investor daydreaming about US shares
⏸️ How to Invest

How to buy US shares from Australia right now

If you have been wondering how to buy US shares from Australia to gain exposure from the highly topical market,…

Read more »

person reading news on mobile phone
⏸️ Investing

Why Fox (NASDAQ:FOX) might hurt News Corp (ASX:NWS) shareholders

News Corporation (ASX: NWS) might be facing some existential threats from its American cousins over the riots on 6 January

Read more »