Gold Stock Bull

Vista Gold (VGZ) shrugged off the overall gold market decline yesterday and advanced 4.5% on heavy volume. There was no news and Vista was one of the only gold miners to advance amidst a sea of red. Again today, Vista is up 8% on higher-than-average volume, while the GDX is up only 1%. The stock is selling at just under $5 and looks cheap compared to a high of over $12 just 18 months ago. However, it is worth noting that they spun off their large Nevada property portfolio in May of 2007 and have recently completed the acquisition of various mineral properties adjacent to their Guadalupe de los Reyes Project in Sinaloa, Mexico.

There has been some speculation of a buyout coming and certainly there are investors accumulating shares with some belief in a breakout. With 9.7 million measured and indicated ounces and a market cap of just $166 million, the company appears to be undervalued. A quick calculation (market cap/M&I ounces) gives Vista an “Enterprise Value per Ounce” of just $17, while most advanced explorers are well over $50. Plus, most of Vista’s properties are located in low-risk areas such as the Paredones Amarillos and Guadalupe de los Reyes in Mexico, Mt Todd in Australia, Yellow Pine in Idaho, Awak Mas in Indonesia, Long Valley in California and Amayapampa in Bolivia.

Vista Gold has recently changed their company strategy with a new focus on moving to production. With gold prices nearing $1,000 per ounce, it is becoming economically viable for smaller companies to consider producing. Vista Gold’s CEO Michael Richings stated:

“In the past we acquired properties with proven mineralization and added value through exploration to build our resource and reserve base. Now we are focused on moving our properties to feasibility and positive production decisions.”

I am not sure what is moving Vista’s share price higher, but quiet accumulation of this type often precedes a breakout. Risk-tolerant investors might consider taking a position at these levels in anticipation of an acquisition or significant news. With high quality properties, nearly 10 million M&I ounces and such a small market cap, I would not be surprised to see a resource-hungry major swoop in and buy the company. Higher metals prices are here to stay and with BHP aggressively going after Rio, I expect the industry’s consolidation to pick up pace in 2008.

Disclosure: I do not currently own shares of Vista, but will be keeping a close eye on the stock and am considering taking a position in the coming days.

I recently had the pleasure to travel to Montreal and meet with SEMAFO President and CEO, Benoit La Salle. SEMAFO (SMF.TO) is a junior mining company that produced over 100,000 ounces of gold in 2007 and plans to double this number during 2008 by moving their third mine into production. Their stock took a beating in 2007, falling all the way from a high of C$2.50 to just $0.73. The market punished SEMAFO for missing production estimates and the stock declined 70% in a few months time. The junior mining sector can be very unforgiving.

SEMAFO’s production shortfall was more of a technicality than any serious issue with their properties or crew. Operations were put on hold for 6 months due to the company being unable to procure a replacement part at one of their mines. The situation has since been rectified, an inventory of spare parts is now on hand and their Mana gold project is about the come online. Their stock price has recently recovered to $1.30 - a 78% gain in the last month alone. Add in the fact that SEMAFO recently discovered two new gold zones at its Samira Hill gold project and made significant extensions at their West Baland structure and you are left with a very undervalued gold company that should easily push above the $3 mark before the end of 2008.

SEMAFO has measured and indicated gold resources of 4.2 million ounces. Their three main assets are their Kiniero mine in Guinea, the Samira Hill mine in Niger and their latest project, the Mana mine in Burkina Faso. They have been producing since 2002 and plan to double 2007 production and reach as much as 200,000 ounces of gold during 2008. These are impressive statistics for a company with a market cap under $300 million. In this light, SEMAFO could become a takeover target for larger mining companies looking to shore up resources.

Looking at comparative valuations as a measure of Enterprise Value per Ounce (M&I) is a good way to determine if a mining company is over or under-valued by the market. This calculation simply looks at the company’s market cap and divides it by their measured and indicated resources. The chart belows shows that the average is around $150. SEMAFO looks very undervalued at just $62 or less than half the average of other Canadian junior producers.

SEMAFO has a long history in West Africa and has helped to build and improve communities throughout the region. They have good relations with the local governments, were one of the first miners to the region and have created thousands of jobs and tax revenues for the economy. This leaves the company in a good position to quickly receive all of their necessary permits and avoid delays experienced by miners in more politically-sensitive areas. Management is top-notch, with proven success moving mines into production, the ability to raise capital, resistance to hedging and aggressive plans for ramping up production and increasing shareholder value. The only downside I can see to the company is that they aren’t heavily promoted and are only listed on the Toronto exchange. They fly under the radar of many gold investors, which is really a gift for anyone reading this article and taking a position while their stock price is still dirt cheap.

Disclosure: I own a position in SEMAFO and believe their stock will outperform other miners.

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Happy New Year! And there is plenty of reason to be happy with gold posting a 31% gain in 2007 and an explosive start to 2008. While many analysts were calling $800 gold overbought or even an end to the gold bull market, we correctly forecasted that gold would pause momentarily and continue higher. On December 5th, I wrote “there is a strong likelihood that gold will find support at $800 over the next few weeks and enter into the second phase of this upleg.” Gold proceeded to reach new highs, adding $65 or 8% in the following weeks. Hopefully you added to positions and enjoyed the ride. I will be posting a detailed 2008 Gold Forecast in the coming days, but wanted to alert my readers to news from one of my favorite exploration companies - Fronteer Development.

Fronteer Development Group (FRG), who we first profiled back in January of 2007, has announced that they have intersected high-grade gold mineralization at their Long Canyon property in Nevada. The company reported 0.88 ounces per ton gold (30.10 grams per tonne) over a true thickness of 23 feet (7.0 metres), within a broader zone that returned 0.39 ounces per ton gold (13.40 grams per tonne) over a true thickness of 75 feet (22.9 metres). These drill results are a significant improvement over initial results that were closer to 3 grams per tonne.

“Long Canyon defines a totally new gold trend in Nevada and ranks as one of the most significant greenfield discoveries made in the state in the last several years,” says Fronteer President and CEO Mark O’Dea. “This emerging deposit shows encouraging grade and tonnage potential and remains open for expansion in all directions.”

Investors responded by driving up the price of Fronteer stock by nearly 7% on more than double the average trading volume. What is more impressive is that the gain occurred on a day when most mining stocks were down 2-5%. At $10 per share, Fronteer could gain 50% on a run back to its 2007 high of $15.

We are very bullish on both gold and uranium for 2008 and think Fronteer, with an impressive portfolio of exploration projects, could be a takeover target for one of the majors. While their net loss has increased as a result of an aggressive exploration program, they still have $100 million in cash on hand and recently acquired Newwest Gold Corporation and 19 new precious metals exploration properties in Nevada.

I have traded in and out of Fronteer over the past few years, buying on dips below $10. I took a new position today just under $10 and expect Fronteer to make new highs this year. As always, perform your own due diligence on Fronteer as you are solely responsible for your investment decisions. Best of luck in 2008!