3 Gold Stocks That Could Suffer a Meltdown in 2017

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It was a great year for precious metal mining stocks...until it wasn't. After putting in the best quarterly gain in 30 years during Q1 2016, physical gold wound up giving back more than $200 per ounce since its election night high. Silver has delivered a similar story, falling some 25% since July.And caught in the middle of this wild swing are the precious-metal miners themselves.

The upcoming year has the potential to prove challenging to physical metals. To begin with, the consensus estimate from the Federal Reserve is that the central bank will boost interest rates three times (by 25 basis points each) in 2017. When the Fed raises rates, bank CDs and other interest-based asset yields move higher in accord. Assets like CDs and Treasury bonds provide near-guaranteed returns, albeit they have nominally low yields at the moment. As rates rise, these interest-bearing assets become more attractive and could easily sway investors out of gold and/or silver, which have no dividend.

There's also the prospect of what President-elect Donald Trump's policies could bring to the table. The possibility of cutting individual and corporate income tax rates, providing a corporate tax repatriation holiday, spending $1 trillion on infrastructure over the next decade, and deregulating the energy and banking sectors -- Wall Street sees all of it as a sign that inflation and growth could pick up. Since gold and silver generally rely on uncertainty, among other factors, to drive their price higher, a stronger-than-expected U.S. economy wouldn't be great news.

Three at-risk gold miners in 2017

Despite these challenges, there are gold stocks that are well-positioned to succeed. But on the other end of the spectrum are a group of gold miners that appear closer to a meltdown than success in 2017 -- especially if gold prices remain in a funk. Here are three gold miners that I'd strongly suggest avoiding in the upcoming year.

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IAMGOLD

Generally speaking, IAMGOLD (NYSE: IAG) isn't a terrible company -- it's just in the wrong place at the wrong time with gold prices well off their highs.

On one hand, IAMGOLD's shareholders have a lot to be proud of given the company's performance in 2016. Shares are up about 150% year to date on the heels of another solid quarter of production growth. During the third quarter, IAMGOLD, which operates mines in Canada, Suriname, and Burkina Faso, reported 7% gold production growth and affirmed it would be near the high end of its full-year gold production target. Much of its success can be attributed to the rapidly growing Essakane mine in Burkina Faso.

But there's one big issue: all-in sustaining costs (AISC). Of the large gold miners ($1 billion market value and up), IAMGOLD has the highest AISC of them all. After narrowing its AISC during the third quarter, IAMGOLD is on track to produce its gold at $1,075 per ounce at the midpoint, providing less than a $70 margin buffer to gold's current spot price per ounce. It's not uncommon for gold-mining companies to struggle with higher costs in Africa due to higher labor expenses, or deal with unexpected production disruptions due to political instability. Even if Essakane continues to deliver double-digit growth, it may already be priced into IAMGOLD's 150% move higher in 2016. If there's so much as the slightest production hiccup at Essakane, IAMGOLD could quickly deflate.

Personally, it seems like a lot of risk for the prospect of a modest reward. I'd suggest staying on the sidelines in 2017 until IAMGOLD's AISC dips safely below $1,000 per ounce.

Image source: Getty Images.

Northern Dynasty Minerals

Another gold stock that I'd strongly suggest keeping your distance from -- and which could arguably be the most dangerous precious-metal stock period-- is Northern Dynasty Minerals (NYSEMKT: NAK).

If you had bet against Northern Dynasty Minerals at the beginning of the year, you'd be crying under your pillow right about now. Shares of the company have rallied about 700% year to date, making this small cap one of the market's top performers in 2016. Higher gold prices for the year, along with strong momentum and a healthy helping of speculation, have likely pushed its share price into the stratosphere.

But there's one major issue with Northern Dynasty Minerals that its current investors are overlooking -- namely, that it doesn't even have a viable mine as of yet.

Nearly all of the company's valuation is tied to the future of the Pebble Project in Alaska. According to Northern Dynasty, the Pebble deposit contains measured and indicated resources of 70 million ounces of gold, 57 billion pounds of copper, 3.4 billion pounds of molybdenum, and 344 million ounces of silver. Yet, according to the company's third-quarter earnings report, "The Group's continuing operations and the underlying value and recoverability of the amounts shown for the Group's mineral property interests, is entirely dependent upon the existence of economically recoverable mineral reserves." In layman's terms, the company is still exploring Pebble to determine if there's an economically viable way to even recover some of these deposits. And, even if there is, Northern Dynasty has nowhere near enough capital to build out or develop a mine to make it happen.

This stock looks like pure fool's gold -- with a lowercase f -- and I would suggest keeping your distance.

Image source: Getty Images.

Seabridge Gold

While I'm not purposely trying to pick on developmental-stage gold miners, Seabridge Gold (NYSE: SA) is another gold stock that could be vulnerable in 2017.

Like Northern Dynasty, Seabridge does have a cream-of-the-crop asset that could put it on the map. In Seabridge's case, it's the Kerr-Sulphurets-Mitchell (KSM) Project located in British Columbia. A preliminary feasibility study of the KSM Project estimated proven and probable reserves of 38.8 million ounces of gold and 10.2 billion pounds of copper. The good news is exploration has suggested that recovery would, in some cases, make economic sense.

The issue, though, is simple. Seabridge is still years and tens upon tens of millions of dollars away from developing KSM. While I would contend that KSM is in much better shape in terms of mining feasibility than the Pebble Project, Seabridge is a long ways away from commercial production. This would imply years of ongoing losses and essentially no way to curb its costs compared to its commercially producing peers which have levers they can pull. If gold were to struggle in 2017, Seabridge wouldn't be able to do much about it, and it would only further pressure a company whose valuation lies entirely with what's beneath the ground.

My suggestion would be to pick a healthfully profitable and producing gold miner instead of crossing your fingers and hoping for the best with developmental-stage miners like Seabridge Gold.

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Sean Williamshas no material interest in any companies mentioned in this article. You can follow him on CAPS under the screen nameTMFUltraLong, and check him out on Twitter, where he goes by the handle@TMFUltraLong.

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