PSB Monthly Issue September 2012

At the time, it looked like gold was on a slide from 52-week highs set last September.

Remember, gold hit an intra-day high of $1,922.50 on September 6th last year.  In sharp contrast, you could have picked up an ounce of this precious metal for just $1,534.30 this past May.

The very same trade catalysts that were allowing the bears to rule the tape this past year are now in jeopardy of a reversal.

You see, earlier this year we had increasing signs that the US economy was dramatically improving.  Unemployment was falling and reached a low of 8.1% in April. That was a notable improvement from the 9.0% unemployment in April of 2011.

Why is employment an issue for gold?

Simply put, the Federal Reserve has a dual mandate for full employment and price stability.  Full employment, for all intents and purposes, is reached when the national unemployment rate is down near 5% to 6%.

And the fact we’re seeing unemployment rise over the past few months from 8.1% to 8.3% is a sign we’re heading in the wrong direction.

This may prompt the Fed to roll out another round of quantitative easing (QE3) in an attempt to stimulate economic growth.  The theory is monetary stimulus will prompt an increase in bank lending and in the process create cheaper money which allows businesses to grow and hire more workers.

The problem is this cheap money tends to devalue the dollar which in turn causes commodities to rally.  The main commodity that rallies when central banks add monetary stimulus is gold.

So why gold?

Without getting too complex, it’s seen as the go-to inflation hedge and safe haven asset.

Think about it… if money is getting cheaper, that means items become more expensive relative to the Dollar.  In essence, if you buy gold, you’re holding a hard asset versus paper money – which is losing value as goods and services become more expensive.

When you convert gold back to cash to spend… you’ll get more dollars back than if it were simply held as cash the whole time.

Fast forward to this exact moment and there’s mounting evidence we’ll see another round of monetary stimulus from the Fed in the form of QE3…

With a virtually zero percent interest rate set to continue into 2014 or 2015, Federal Reserve policy makers need yet another tool in order to try and kick start this sluggish economy into gear.  Traders believe that tool is QE3.

Let me show you the power that just the anticipation of QE3 is having…

“many members judged that additional monetary accommodation would likely be warranted fairly soon”

Those are very powerful words in terms of “Fed speak.”  But what’s been more amazing is we’re seeing a follow through on the rally due to hopes for stimulus from the ECB.

ECB President Mario Draghi almost declared that the European Central Bank may start buying bonds in an effort to save the Eurozone countries from unmanageable interest rates on their sovereign debt.  As a result, we’re seeing European stocks, US stocks, gold, and the Euro all rally as the US Dollar falls.

The bottom line…

If we see central banks around the globe follow through on their big statements of monetary stimulus, we could see gold back up at last year’s highs… if not even higher!

To get in position to profit, we’re going to want to own shares of a company set to benefit from the rising price of gold.  And for penny stock investors, there’s no better place than in shares of a junior gold mining company.

Introducing Golden Star Resources (AMEX: GSS)…

THE GOLD MINING BUSINESS

Golden Star Resources is an international junior mining company with two operating mines in Ghana, West Africa.  The company has been around since 1984, so we’re not dealing with a flash-in-the-pan startup here.

In addition, the company is also conducting exploration in other countries in West Africa, such as Sierra Leone, Niger, and Cote d’Ivorie.  In addition, Golden Star holds and manages exploration properties in the South American country of Brazil.

THE BOGOSO/PRESTA GOLD MINE

In addition to operating two open pit mines, GSS runs a gold ore processing facility with a capacity of up to nearly 3.5 million tons of ore a year.  Interestingly, the company uses both bio-oxidation technology and carbon-in-leach (CIL) processing to maximize gold production.

In the most recent quarter, the Bogoso/Presta saw gold sales of 44,115 ounces.  This was an increase of 7% over the first quarter of 2012, and a 24% increase from the last quarter of 2011.

In total, this site’s revenue is up 37% year-over-year on increase production and higher gold prices.

THE WASSA GOLD MINE

Located just 35 km east of the Bogoso/Presta mine, Golden Star runs several open pit mines at this property.  The Wassa mine also has a processing plant with crushing and grinding circuits, a fleet of mining equipment, and a tailings storage facility… all in addition to ancillary facilities. This is also the location of administration buildings, warehousing, and an employee residential complex.

In the second quarter of 2012, gold sales reached 41,068 ounces.  This represents a jump of 13% over the first quarter of the year and 16% over the last quarter of 2011.

OTHER PROJECTS & EXPLORATION

While the Bogoso/Presta and Wassa mines make up the bulk of production for GSS, the company does have other projects under exploration, and or joint venture status. In fact, the company just increased their exploration budget to $14 million from the previous $10 million commitment.

Here is a list of Golden Star’s major expansion and exploration projects:

• Further expansion of the Wassa/Hwini-Butre and Benso Mines
• Phase I auger drilling completed at Cote d’Ivoire
• 90% completion of regional stream sediment sampling in Brazil
• Restart of the Arkropong Trend Property Mines
• 90% ownership of the Prestea South Properties, an underground mine with shafts and underground workings. 10% Ownership by the Ghana government
• Two prospecting licenses at the Dunkwa Properties near the Bogoso Mine
• Joint venture with Aureus Mining in Sierra Leone at the Sonfon project

It’s easy to see Golden Star has plenty of great things happening and in the works. But as investors, we really want to know how well they can turn gold into cash.  Let’s take a closer look…

THE NUMBERS

For the first six months of 2012, gold sales at GSS rose by 4% over the first half of 2011 reaching 162,908 ounces.  In addition, Golden Star’s average realized gold price was $1,641 per ounce in Q1 and Q2.  That represents a 13% year over year increase.

Breaking it down in the most recent quarter, gold sales were up 10% over the first quarter of the year at 83,183 ounces.  And even as gold prices fell, GSS was able to realize $1,600 per ounce… a 6% increase year over year.

All this translates into revenue growth of 24% from the second quarter last year, reaching $136.3 million.  That’s great revenue growth for a junior gold miner.  But what’s really impressive is the drop in cash operating costs down to $921 per ounce from $1,118 per ounce in the first quarter of the year.

While revenue growth has been strong, it’s the earnings per share growth where GSS is really seeing improvements…

For the first half of 2012, Golden Star saw net income rise to $11.6 million, up from $900,000 in the same period of 2011.  This translates into diluted earnings per share growth to $0.045 per share versus 2011’s $0.01.

And forecasts are looking even better for GSS.

Analysts are estimating earnings per share in the third quarter to reach $0.04 alone… with a jump to $0.06 in the last quarter of this year.

Looking further out, next year’s earnings are forecast to come in around $0.22 in 2013. That’s a jump of nearly 85% over this year’s estimated $0.12 per share! And revenue is estimated to climb in 2013, reaching $641.7 million.  That’s impressive growth for a stock trading down near $1.50!

What’s even more impressive about GSS is their balance sheet.

With over $105.7 million in cash on hand, Golden Star can easily finance exploration for quite some time.  Better still, GSS has a long-term debt to equity ratio of just 0.19… less than the industry average of 0.22.  What’s more, the company was just able to refinance $74.5 million in convertible debentures which will help them improve profitability in the future.

INVESTMENT RISKS

As with any investment, GSS does have a few risks.

Golden Resources operates mines in second and third world countries.  Changes in government may cause a number of unfavorable impacts on revenue and profitability.

Being a gold mining company, the price of gold has a direct impact on profitability.  If gold prices decline, margins may be impacted.

Finally, the company will need to see exploration projects turn into producing mines to continue growing revenue.  Failure to convert exploration into production would negatively impact the company long-term.

POTENTIAL RETURN OF 165% OR MORE

The market has dramatically undervalued shares of GSS.  For starters, their forward price to earnings ratio is just 6.9x.  As a comparison, the industry average P/E is 16.3x.  If shares of GSS were to trade in line with the industry P/E, we could see a gain of 135%.

What’s more, Golden Star has a price to book ratio of just 0.82x.  That means if you buy shares of GSS now, you’d be buying Golden Star for less than what it’s worth if it were sold off in pieces.

Finally, if gold continues to climb back near $2,000 an ounce, shares of GSS would simply skyrocket.  Given the prospect for gold to continue higher from here, now’s a great time to buy shares of GSS.

Based on our analysis, we see the stock trading up to at least $2.50.  Grab your shares of GSS now for potential gains of 165% or more!


ACTION RECOMMENDATION

BUY Golden Star Resources (AMEX: GSS) up to $1.65 per share.

In 2011, the precious metal silver made headlines as it both made an amazing new high and almost immediately saw its price instantly implode.  A quick look at the chart will show you the amazing ride this precious metal has been on…

As you can see, silver prices nearly doubled in just a few months time.  However, the rally quickly came to an end bringing silver down to retest the $27.50 level throughout 2012.

On the back of pending central bank stimulus, silver is setting up to rally yet again…

You can clearly see, silver has moved back up to trade over $32 since early July.  It’s virtually the same pattern we’re seeing in gold.  Remember, gold rallied from $1,550 to $1,700 in the same time frame.

There’s no question that a breakout above $35 per share is quite possible in the coming weeks, as the Federal Reserve and ECB are both expected to comment on potential stimulus plans.

The case is pretty clear as to why we want to get into silver right now.  But there’s much more to the story…

Silver’s big brother, gold, is often first to make headlines when it comes to precious metals.  But there’s no dispute that silver is in much higher demand for multiple reasons.

First off, silver is used in a number of industrial and commercial applications.  For example, in 2011, 486.5 million ounces of silver were used for industrial applications.  This is part of the reason silver production has increased steadily for nine years straight!

Here are just a few of the applications silver has other than as an investment:

• Green technologies such as solar energy, water purification, and glass
• Medical applications such as anti-bacterial applications and x-rays
• Nanotechnology
• Conductivity, catalysts, and biocides
• Batteries, bearings, electronic contacts
• Automotive industry needs, brazing and soldering, and silver-ceramic lines

Of course, silver is also used in dentistry for fillings, as well as in semi-precious applications such as silverware production and medals & awards.

Finally, outside of owning pure silver bullion as an investment, the metal has a rich and detailed history when stamped into money… or coinage.

The case for silver is strong, and the best way to get into the metal as a penny stock investor is through a silver mining stock.

Introducing Great Panther Silver (AMEX: GPL).

Key Investment Data Name:  Great Panther Silver Ticker Symbol:  GPL Market Cap:  $273.8 million Recent Price:  $1.99 PSB Rating System 4.8 Stars Raging Revenue:  (4.8 stars) GPL had revenue growth of 70% quarter over quarter from June 2011 to June 2012.  Increased production is also estimated for 2012 and 2013. Beautiful Books:  (5.0 stars) With plenty of cash on hand and zero long term debt, Great Panther has some of the best books in the business. Stellar Structure:  (4.5 stars) We’d like to see more institutional and insider ownership here.  Just 15.05% of shares are currently owned by institutions. Valuation Verification:  (4.7 stars) Based on a price to sales ratio that’s well below industry average, GPL shares are a steal.  If the price of silver climbs as we’re anticipating, their share price should simply skyrocket higher. Meaningful Milestones:  (4.9 stars) Once again, Great Panther is consistently showing they’re all about growth.  In addition to signing a deal for 100% of the surface rights at San Ignacio, the company just purchased the El Horcon Silver-Gold project for $1.6 million in cash.  The company is demonstrating their commitment to grow the top line through aggressive growth.

THE SILVER MINING BUSINESS

Great Panther Silver Limited is a silver mining and exploration company founded back in 1965.  The company is focused on mining silver primarily, but also mines other metals at their properties throughout Mexico.  In addition, Great Panther is working on two other mines in Mexico… and pursuing a fifth location in Latin America via acquisition.

At the moment, the company has two 100% owned mining properties… the Guanajuato Mine and the Topia Mine.  In addition, Great Panther has four claims they’ve purchased from Minera Blanca Alicia, S.A. de C.V. in what’s known as the Santa Rosa Project.

Let’s take a closer look at each of GPL’s mines…

THE GUANAJUATO MINE

This property is a silver & gold mine complex located in Guanajuato, Mexico.  The property is made up of four primary mining areas.  In addition to mines, there is a processing plant capable of 13,000 tons a month.

During 2011, GPL made a number of high-grade vein discoveries here which will add to the total tonnage production.  This site makes up roughly 30% of the total metal production for Great Panther.

THE TOPIA MINE

The Topia mine is a 100% ownership mine located in the Northwest Durango State and is made up of four major mining concessions. These concessions cover a total of 6,399 hectares engulfing the Topia Mining District.

Most of the mineralization consists of silver, gold, lead, and zinc veins found in volcanic rocks.  In addition, the plant at Topia has a 220 ton daily capacity and was nearing this level as of late 2011.  Last year, Topia produced over 535,881 silver ounces, 500 gold ounces, 2 million pounds of lead, and more than 2.8 million pounds of zinc.

THE SANTA ROSA PROJECT

As I mentioned above, GPL has purchased mining claims totaling 1,514 hectares just outside Guanajuato.  These agreements, among other things, entail a royalty of 1.3% is payable from ore produced from the four claims.  A 2,000 meter drill program was commenced at Santa Rosa in January 2012.

In addition to these mines, Great Panther completed drilling projects at another site in Guanajuato.  This area is known as the San Ignacio Project.  Last month, GPL purchased a 100% interest in surface rights on this project and should have the title as this is being written.  The next step will be for GPL to apply for underground permits.

Now that you know about Great Panther’s properties and projects, let’s examine the company’s financials…

THE NUMBERS

Before we get into the financial numbers, it’s important to take a look at production numbers.  In 2011, Great Panther mined 1.4 million ounces of silver, 8,016 ounces of gold, 941 tons of lead, and 1,314 tons of zinc.

In 2012, the company is projecting the following production:

• 1.7-1.9 million ounces of silver
• 10,000-11,000 ounces of gold
• 1,130-1,270 tons of lead
• 1,500-1,630 tons of zinc

As you can see, production in every category is on the rise.  The most important increase is in silver and gold production this year – that’s going to add to top line growth.

Speaking of top line growth…

For the quarter ending June 2012, Great Panther saw revenues of $14.5 million, which is a 70% increase over the $8.5 million in the same quarter of 2011.

Unfortunately, increased production and exploration costs drove diluted earnings per share to breakeven in this past quarter.  That’s compared with $0.02 per share in the same quarter of 2011.

What’s important to note is the price of silver started dropping fast at the beginning of the past quarter, and barely rebounded toward the end of it.  Since then, silver has jumped much higher as we mentioned earlier… now trading over $32 per ounce.

Keep in mind, GPL is highly leveraged to the price of silver.  If we expect silver prices to move significantly higher, past earnings performance isn’t nearly as important as overall annual production of silver.  As prices rise, the value of their saleable product rises with it… instantly adding to the bottom line.

Now, as far as balance sheets go, Great Panther has managed their books quite well. In fact, GPL has zero long term debt!  What’s more, the company is sitting on more than $28 million in cash.  That gives GPL an impressive 8x quick ratio, which simply means they have no problem covering short-term cash obligations.

Moving on, let’s take a look at some risks…

INVESTMENT RISKS

GPL is a silver miner and is highly leveraged to the price of silver.  If silver prices plummet, GPL shares are very likely to lose value.

As a miner, any number of challenges may arise in production.  Costs may increase in mining equipment or labor, thereby hurting the bottom line.  Also, delays in production may reduce total annual output, which can impact revenue growth.

Lastly, regulatory changes or unrest in Mexico may interrupt production impacting Great Panther’s profitability.  In addition, increases in taxes by the Mexican government may also hurt the company’s performance.

POTENTIAL RETURNS OF 100% OR MORE

Right now, shares of GPL are undervalued by the market.  There’s a big disconnect between the growth in properties GPL is developing, the company’s increase in silver production, and the current share price.

When valuing a growth company, revenue is what counts.  And by looking at the price to sales ratio for Great Panther, we can see shares are trading at 4.8x sales.  If GPL were to trade in line with the industry price to sales ratio of 8.25x, we could see GPL up by 70% alone.

The real gains, however, will come from the rise in silver prices due to central bank stimulus.  And considering GPL will be adding more production in 2013, shares look to be a steal right now at $2.02.

Based on our analysis, we could see shares trade well over their 52-week high of $3.52 for gains of at least 100%.

Buy shares of GPL for gains of 100% or more!

ACTION RECOMMENDATION

BUY Great Panther Silver (AMEX: GPL) up to $2.10 per share.

Recent price is $2.02.

Use a stop-loss of $1.50 on this position.

Don’t forget your position sizing and stop-loss rules.

Portfolio Update

The overall stock markets have continued their holding pattern since our last update. As such, we’ve seen some gains in a handful of positions, and some setbacks in others. The best news is CULP, CSV, SUNH, and USCR have all hit new highs since we’ve purchased them.

Overall, the world is waiting on the central banks to act or not.  And until then, stocks should remain in this holding pattern with some movement based on fundamental company-specific data.

With that said, there is one stock in our portfolio that we’re going to sell… US Concrete(USCR).

While the company just made a new high yesterday, they were recently downgraded due to a decrease in net income of 112.1%.  That’s based on the same quarter last year as of their most recent earnings report.

In addition, The Street highlighted low gross profit margins at just 14.2% and a steep decline in earnings per share versus a year ago.

With the stock hitting new highs for us just yesterday, let’s go ahead and book a sweet 44% gain on our investment.  Sell shares of USCR.

Category: PSB Monthly Issues