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2 gold miners up 130% and 20% in 2016: Is it time to buy?

Since the Victorian gold rush, Australians have had a close affinity with gold, and in modern times, that affinity has extended to gold stocks.

The two stocks on this list are up over 20% and 130% in 2016, and are exposed to the rising gold price.

In addition, they possess some company-specific advantages that mean they could outperform their peers if the gold price continues to rise.

Gold Road Resources Ltd (ASX: GOR) is an Australia-focussed exploration and mining company. Its differentiating factor is a range of exploration and mining tenements covering a swathe of the Yarmana Belt in Western Australia.

The area has substantial tonnage of measured and indicated resources. In addition, Gold Road has begun pre-testing another highly prospective region in WA, with initial indications of an ore body in excess of 80 million tonnes, which would translate to a mine life of over a decade, underpinning future earnings and projects.

Gold Road has also shown an innovative approach to reducing the huge capital costs that come from establishing and operating a mine. In one example, it has entered into a partnership with Japanese giant Sumitomo. Sumitomo is granted the right to exploit part of the mining tenement owned by Gold Road, in exchange for a royalty stream.

As mines become operational, Gold Road will be able to achieve a strong annuity-style revenue stream, with far fewer risks and operational headaches than a 100% owner-operator would have. It will also benefit from the industry knowledge and expertise of its larger partner, with the potential to apply that knowledge to future projects.

Resolute Mining Limited (ASX: RSG) has been one of the best-performing stocks on the ASX this year, jumping by over 130% since January.

Resolute was able to achieve this result because of two company specific factors: a higher total output of gold, and a lower cost to produce that gold.

Total production rose by over 10% in the first half of the financial year, while the cost of that production fell marginally at the same time. Mining companies operating at scale are able to lower their total costs as volumes rise as each additional ounce or tonne produced lowers the total average cost of production.

Powerful operating leverage can be created for companies that can achieve all three factors: higher production, lower costs and a rising commodity price.

Resolute’s results demonstrate this, with gross profit doubling compared to the prior comparative period, while revenue grew by almost 20%. This enabled the company to pay back a substantial chunk of debt to its lenders, which will have the beneficial impact of lowering its interest bill in future periods, which in turn, will mean more revenue flows to the profit line.

Foolish takeaway

Resources and mining companies are not for everyone, but if you can identify a company that is exposed to a rising commodity price, is raising its output and is also able to lower its costs,  it is possible to make substantial profits.

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Motley Fool contributor Ry Padarath has no position in any stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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