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5 Stocks with Free Cash Flow

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Sometimes the best offense is a defense.  I’ve found some of my biggest winners by investing in the “safe” stocks during a downturn and watching them soar when the good times come.  It makes sense, because solid businesses are the ones nobody worries about during a downturn.  And they in turn have a voraciously loyal following when times get better.

This is particularly so in mining, where the business is really as simple as comparing two things:

  1. The yearly cost of operating a mine
  2. The revenue of metals sold.

The difference is simply the free cash flow, or the amount of money to spend on new projects per year.  Thanks to modern accounting practices, this is sometimes not the easiest thing to find in company reports and financials but the underlying business really is that simple.

So which mining companies have the strongest free cash flow.  We at Junior Gold decided to do a little research, and this is what we’ve found.

  • Alamos Gold (TSX:AGI) was one of my winners in the early days, and I wish I’d held on.  Their Mulatos mine in Mexico is one of the lowest cost operations in the world, and its no surprise that since production started in 2006 the free cash flow has resulted in the purchase of other properties which are likely to become mines.
  • Copper Mountain Mining (TSX:CUM) developed the Copper Mountain Mine from 2009 to 2011.  I remember how strange it was to make the decision to build a new mine at that time, with financial markets still somewhat in turmoil.  However, now Copper Mountain is at full production, having combined three former mines into one “superpit”, and the free cash flow is strong.  They will have to look for ways to spend all the money, so look for acquisitions, deposit growth, or some other string of good news that will propel this company into the ranks of mid-tier miners.
  • China Gold International Resources (TSX: CGG) is a Canadian company that owns one of China’s largest gold mines.  At 135,000 ounces/year, it’s not really an elephant, but the important thing is that the costs are low.  The free cash flow keeps everything running profitably during the downturn and allows them to expand when times get better.
  • Osisko Mining (TSX: OSK) had some big challenges in the development of the Canadian Malartic mine in northern Quebec, Canada (like moving a few hundred people within a town to make way for an open pit) but now mining has started and is ramping up to full production.  The low period between discovery and development is now over, and the growth period is just starting.  With strong free cash flow, this one is in a good investment spot now.
  • Silver Wheaton (TSX:SLW):  Although I’ve said alot about Silver Wheaton on this blog, this list wouldn’t be complete without it.  Silver Wheaton is the king of free cash flow and pays a dividend.   They invented the silver streaming business, which silver is particularly suited for.  Without operating any mines, they’ve kept their cost per ounce down to $3.90, which they resell into the market at spot (north of $25 at the time of writing).  Of course, there are no free lunches in the market, and the downside is SLW’s share price.  Be prepared to pay up.

 


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