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Are gold stocks worth their weight?

Gold stocks are back in the spotlight and bullish commodities investors should be ready to act and have the best producers on their watchlist. Names like Newcrest Mining Limited (ASX: NCM), Kingsgate Consolidated Limited (ASX: KCN), Medusa Mining Limited (ASX: MML) and Regis Resources Limited (ASX: RRL) are just some you should be aware of.

When analysing potential gold investments you must consider important information specific to the gold miner itself. This includes the balance sheet position (how much debt, cash, equity etc.), costs (what are the ‘all-in-sustaining-costs’ (AISC) of its operations), production profile and reserves.

For example, Northern Star Resources Ltd (ASX: NST) is unique amongst many of the local miners because it boasts robust balance sheets which it recently used to buy two new mines, thus increasing reserves and production. It is estimated to have an AISC of $1,048 per once in 2014 – likely to remain steady into 2015.

With the value accretive acquisitions of the two Barrick Gold Corporation Inc (NYSE:ABX) mines in Western Australia, Northern Star’s production is expected to reach 350,000 ounces in 2015. Although the stock has rallied 82% in three months, there could be further upside potential in the long-term.

At the opposite end of investor sentiment is Silver Lake Resources Limited (ASX: SLR). It’s an even longer-term play on rising gold prices. Although it has minimal debt it has been steadily issuing more shares to pay for operations and, as Motley Fool analyst Mike King noted, hasn’t given retail shareholders the same opportunities to purchase additional shares as institutional investors.

Despite being more risky than Northern Star, Silver Lake plans to ramp-up production to between 160,000 and 170,000 ounces in 2014 (up from 2013’s production of 150,000) at an AISC of $1,016 per ounce. Perhaps in a sign of things to come, the company recently entered into a hedging programme for 50,000 ounces evenly spread until March 2015 for an average forward price of $1,536 per ounce.

Foolish takeaway

Gold stocks are risky. Even more so when they aren’t yet making a profit. However, like any stock or commodity, the best time to buy them is when they’re out of favour with the rest of the market. Silver Lake Resources could well be a major producer in coming years with bullish forecasts estimating production to reach as high as 400,000 ounces by 2017.

Despite the forecasts, investors should expect a bumpy ride in the next couple of years as the company battles to break even and tackles a lower commodity price. Northern Star Resources however continues to push on despite its rapid share price rise in recent months. It looks likely to remain at the top of this investors’ watchlist, although a slightly lower entry point would be ideal.

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Motley Fool Contributor Owen Raszkiewicz does not have a financial interest in any of the mentioned companies. 

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