Thursday, March 31, 2011

Jim Cramer Recommends A Gold Exploration Stock

Although he's been recommending gold stocks for some time, Mr. Cramer has confined himself to senior producers. Although he qualified his recommendation of this stock with the proviso that it's speculative and should only be bought by dedicated gold fans who can be expected to know what they're getting into, he did have some bullish words to say about International Tower Hill Mines.
International Tower Hill Mines (THM) is a future gold mining company located in Canada. MIne construction is expected to start in 2014 and actual production will begin in 2016. While this mine is not large, the company's stock is only $9 and its market cap is $800 million. Once the mine operates, it is expected to generate 600,000 ounces of gold a year.

Jeff Pontius discussed the rigorous approval process for the mine, but he understands that the government wants to ensure that the environment is protected. He sees a significant upside for the company, especially since barriers to entry in the industry are high and finding new gold assets is increasingly difficult. When Cramer asked about partnerships with Chinese companies, Pontius responded that the company has had significant interest in partnerships from China and he will consider an attractive proposal of a partnership....

In terms of market cap, THM is worth about US$865 million. It's not yet at the pre-feasibility stage, and its Preliminary Economic Assessment projects a Net Present Value (NPV) of only $579 million with gold at $950/oz. Initial capital costs are estimated at $631 million.

Yes, this stock is one for speculators who expect the price of gold to rise substantially in the future. The metal doing so would ramp the NPV up to well above a billion. Given its deposit, it'd be a fine stock should gold get kayoed like in '08. Sadly, if gold gets pummeled, so will THM. Its 2008 low was a little below a dollar per share - a tenth of where it is now.

On the other hand, it's a more plausible buy for a gold mania that tops out after the mine goes into production. By that time, not only will the NPV be much higher but also the capital will be easier to secure. Banks and others tend to lend eagerly at the top of the market. As a speculative third stage bull market gold stock, THM has got a fair bit going for it.

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