De-risking gold producers

One can group the various risks of gold producers into two main categories: operational and developmental (for a detailed list see my previous article:http://morettooninvesting.blogspot.com/2010/06/evaluating-gold-producer.html) There are a few producers today that exhibit quite a bit of development risk although they are expected to have a relatively limited amount of operating risk when their projects eventually do come online. I will focus on two poster boys of the industry Detour Gold Corp. and Osisko Mining Corp. Both companies share many similarities, both have a single mine, both are located in Canada, both expect to produce 500,000 ounces of gold per year or more, and both will produce very minimal amounts of by-product metals. The main differences between the two companies are the following. First, Osisko’s mine has 8.4 million ounces of proven and probable gold reserves whereas Detour has over 11 million ounces in proven and probable reserves. The second main difference is that Osisko is expected to start producing gold in 2011 where Detour is expected to start production in 2013.

There are obviously pluses and minuses that one should consider before investing in a development stage gold producer. First and foremost is the risk of having any possible difficulties in the actual construction and setup of the mine. Failing to meet expected completion and gold production dates can show up negatively on share price. The market applies an even larger discount to companies such as Osisko and Detour who are undertaking their very first mine development project. The one thing that makes these companies very attractive is that once they de-risk (start actually producing gold) the discount disappears. The thing that makes these two producers more appealing than the average development stage gold producer is that aside from development risk, both companies will have very low operating risk. The fact that both companies have resources with very high gold concentration also helps increase their respective stock’s leverage to gold. Both companies also benefit from having low cash costs in the $400 range, helping to ensure that they will be able to generate positive cash flows even if gold prices turn south. Ultimately if an investor has patience and tolerance of mine development risk, these two gold developers can provide a very appealing alternative to a traditional large gold producer.