5 Gold Stocks to Watch in 2011 – Part 1

Old gold mine.

Canadian listed gold mining and exploration companies are enjoying an unprecedented funding environment. Investors, consequently, are anticipating that a number of discoveries will hit the street in 2011 as exploration and mining companies deliver results from substantial drill programs.

A booming market also offers challenges; many companies are now managing the consequences of their past achievements and dealing with a bevy of complications spawned from what has undoubtedly been the biggest gold rush in recent history. The MiningFeeds.com examines, in no particular order, ten Canadian listed gold stocks that are poised to have very interesting years in 2011.

1. Gold Reserve Inc. (TSX: GRZ)

Political risk. Investors in Gold Reserve knew what they were getting into in Venezuela, or they should have. Gold Reserve’s Brisas deposit is directly adjacent to Crystallex’s Las Cristinas deposit, which, after suffering through years of stonewalling, had its mines operating contract “officially canceled” by the Venezuelan government. Crystallex now claims it is owed $3.8 billion and is appealing to the World Bank’s International Settlement of Investment Disputes (ICSID). Shares of Crystallex were near $6 in 2006, but have plummeted to pennies as many investors determined that doing business with Venezuela’s socialist leader Hugo Chavez, who recently called foreign miners “crazy people”, was no business they wanted to be in. Gold Reserve’s story may be less well know to investors in the area, but the company is no neophyte in Venezuela. Gold Reserve began developing the site in 1992 and has invested close to $300 million in the gold and copper project, which is located in the historic Km 88 mining district of the State of Bolivar in the southeastern part of the country.

Gold Reserve, at this point, may be a play better suited to those with legal backgrounds as opposed to geology, but the reward for either could be staggering. When the Bolivarian Republic of Venezuela arbitrarily and, almost predictably, revoked their previous authorization to proceed with construction of the Brisas Project, Gold Reserve filed a claim against the country, valuing its damages at a minimum in the amount of $1.92-billion, equivalent to approximately $30 a share. The Company’s market cap, as of February 25, 2011, was a less than $100 million. The stock has been exchanging hands of late on the TSX for around $1.75.

The Brisas deposit, which is one of the largest undeveloped gold/copper deposits in the world, contains proven and probable ore reserves of 10.2 million ounces of gold and 1.4 billion pounds of copper.

So is Gold Reserve doomed to suffer the same fate as Crystallex? Maybe not. There is increasing economic pressure on Venezuala spearheaded from multinationals like Exxon to cooperate on a worldwide scale. The Venezuelan government has previously settled a number of ICSID claims against them with various oil companies from Norway, France and Italy by voluntarily paying compensation in the billions of dollars.

All this adds up to an interesting year for Gold Reserve – written submissions on the Brisas case are scheduled to be made throughout 2011 and the Tribunal has currently scheduled the Merits Hearing for February 6th, 2012.

2. Osisko Mining Corp. (TSX: OSK)

Perhaps one of the most interesting mining stories from 2010 was the man who literally lived on top of a gold mine and refused to leave. Ken Massé was the lone holdout from a relocation project that saw Osisko buyout 204 of 205 homeowners in his neighbourhood, which happened to sit right on top of Osisko’s Malarctic mine in Quebec. Massé reportedly turned down a $350,000 offer from Osisko for his house, which was valued at $14,000. According to court documents, the family had been seeking $1 million from the mining company when a judge awarded Osisko possession of Massé’s home after the company requested an emergency court decision. As for compensation, Massé received market-level value for the old house, as determined by a provincial tribunal, and moving costs.

Ken Masse, who reportedly turned down a $350,000 offer from Osisko Mining for his $14,000 house.

Displacing residents may have been the most exciting aspect of Osisko’s 2010 from the media’s perspective but the company delivered much more compelling news for shareholders including the acquisition of Brett Resources, solid drill results for the company’s Duparquet project and great results from the drill program targeting the Barnat extension from the company’s Malartic property.

Chris Beer, a fund manager with RBC sees value in Osisko. He notes that while the company is only trading at “about 10 times cash flow “, the company will see its Canadian Malarctic gold project come on stream by mid-2011. A time when Beer believes the Malarctic project is “going to hit the sweet spot at these high gold prices”. He says the company also has another project called Hammond Reef in Ontario that the market is not currently pricing in.

For 5 Gold Stocks to Watch in 2011 – Part 2: Click Here

Mike Luft

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