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« The HUI: Don’t Sell Now! | Main | GOLD: May 2006 verses May 2007 »
Friday
May112007

High River Gold Mines: BUY

High River Gold Mines Chart

We are going to take a look at a junior gold company called High River Gold, which trades as HRG on the TSX.

Taking a look at the technical position of the stock, we can see that its Relative Strength Index has fallen from above 70 to below 50 before rebounding to its current level of 55.35. It seems to have found some support around 50 but it still could fall lower to the 30 area.

From about May 2006 to April of this year, High River Gold has been stuck in a trading channel with $2.00 as a floor and a ceiling at about $2.60. However in April of this year the stock shot up to $3.00 possible on the string of good news that they had been releasing about their gold projects.

On March 26 High River Gold announced that it had extended its High-Grade Zone in Bissa and on March 2006 High River Gold released their 2006 Year End results on their gold projects. And then on April 16 HRG announced that their Taparko-Bouroum Gold project was nearering production and on April 17 they issued a press release saying they had found a New Gold Zone at Bissa. On April 20 High River Gold announced that it had arranged a $10 million Revolving Credit Facility with Standard Bank Plc.

So recently it has all been good news for High River and for their projects. Let us look at their projects in more detail.

High River Gold Mines Project

Looking back to 2006 there was some bad news for HRG. Their two mining development projects suffered construction delays and a large increase in their capital cost, but this is not unheard of in the mining sector, although as it affected two projects, it was a double whammy! It of course increased the risk in these projects and the focus was shifted to fixing these problems instead of exploration for more resources, such as their Bissa project in Burkina Faso which already had a resource of 1.3MMoz (inferred).

By the end of this year, we should be looking at High River Gold Mines operation a total of four mines across the world with three of them being in Russia and one in Burkina Faso, West Africa. This company has the potential to produce 350,000 oz per year in 2008 and this should lead to a large upward movement in the stock price.

Production of gold from High River is set to almost treble during 2007 as two new mines come on line at High River's Taparko and Berezitovy projects. Taparko should get up to producing 110,000 oz per year capacity this year and 140,000 oz in 2008. Only a few months behind is Berezitovy set to produce 100,000 per year.

Their gold exploration portfolio is also looking good, with Bissa and Prognoz looking to add to High River's production by 2009 to 2011. Their production could grow from 120,000 oz/yr today to 350,000 oz in 2008, and over 500,000 oz/yr with Bissa and Prognoz coming online in the future.

High River Gold Map

High River Gold has a market cap of about C$650million and it has proven reserves of 1,855,000 oz of gold and 5,243,000 oz of silver. This equates to about US$1,272,530,00 worth of gold and US$70,361,060 worth of silver a total reserve worth US$1.342 billion at current prices. So the market cap is $650 million, less than half the value of their proven reserves, this does not account for other non-proven resources such as the measured and indicated ounces in the ground. However, it costs HRG $250-$270 per oz of gold mined so this takes account of about 40% of the value, taking the comany to be worth $805 million, still $155 million above the market market cap, so there is still a lot of value left to be built into the stock price and even more value if gold prices continue to rise.

Almost everything looks good at High River Gold Mines, but the only thing that is troubling us is the location of the projects, Russia and West Africa. Russia has been know for nationalising assets such as Shell's Sakhalin 2 project and so this is a risk of investing in Russia. Burkina Faso has few natural resources and it is one of the poorest countries in the world, so they should be encouraging investment in their country but there is the danger that they may impose impossible taxes or nationalise mines in order to get access to the cash. At present, Burkina Faso is a democracy, but swift changes in government are common in Africa, after all Burkina Faso does border the Cote d'Ivoire which has internal problems that are hampering trade in the region.

Whether one decides to invest in this company does depend a lot on ones personal instincts and feelings about the geopolitical risks involved. If one is okay with the risk then this would appear to be a good investment, but if one has concerns then there are other gold opportunities in “safer” regions of the world.

We have decided however to buy and have made a small purchase today at $2.49 today.

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