Gold prices have been on a roller coaster. Initial euphoria as the yellow metal briefly touched $1,740 an ounce in late February has since been replaced by trepidation and even panic, as the price slid under $1,500 an ounce on global growth worries in May.

Gold mining stocks have fared worse. Metals and Mining Portfolio holding Newcrest Mining Ltd (ASX: NCM, OTC: NCMGF) began the year a bit over 30 a share, ran up to nearly 40 in late February, and then plunged to a low of barely 20 in mid-July. Other mining companies have more or less tracked that performance, leading some analysts to declare that investors should shun stocks and stick with bullion.

Less noticed is the recovery rally in gold seen since mid-summer. The metal has again pushed up above $1,600 an ounce and, with global monetary fears again on the rise, shows signs of making a run to a new high.
Mining stocks have been more impressive still. Newcrest has pushed up once again into the upper 20s; our bet is that’s just a start. Sometime in the next 12 months, we should see the miner back at its late 2010 price range in the 40s, before troubles at its Lihir mine began taking their toll on the share price.

The Lihir mine has dominated the news on Newcrest since management acquired Lihir Gold in 2010. The chief asset purchased was the immense copper and gold mine in New Guinea, which has since been plagued by cost concerns, as well as output interruptions because of either extreme weather or labor strife.

The best news in Newcrest’s very strong second-quarter 2012 earnings is that Lihir’s challenges are no longer disrupting the company’s ability to meet its guidance for production growth and costs. Profit overall rose 23 percent as the company stayed on track to boost gold production in the range of 2.3 million to 2.5 million ounces a year, up from 2.29 million last year. That also keeps Newcrest on a path to deliver its annual forecast growth rate of 5 percent to 10 percent over the next five years.

Ability to grow production and reserves over the long haul is what builds value at mining companies. In the case of volatile priced commodities, this ability to expand depends on selling prices, which should bode well for Newcrest because of gold’s bullish outlook. That’s balanced against the cost of mining. Newcrest saw its cost of sales rise 9 percent during the quarter, mainly on increased mining activity but also due to higher energy costs.

That’s a concern, but far less of a worry than what’s facing the typical gold mining company. South African companies, for example, expect a doubling of production costs the next five years as mines go deeper, ore grades weaken, energy costs rise and labor costs soar on a shortage of skilled workers.

Newcrest is exposed to resource nationalism at its Lihir mine. The company, however, is far from a one trick pony, demonstrated by plans to spend $5 billion over the next five years to lift global gold output by more than a million ounces. Meanwhile, as long as management can navigate New Guinean politics, the Lihir mine coupled with Cadia East in Australia give it some of the lowest-cost resources in the world.

As an affirmation of its good health, Newcrest lifted the “final” payment of its semi-annual dividend to 23 cents Australian per share, from 20 cents a year ago. That’s what we expect to see going forward, as the company ramps up production, controls costs and enjoys the next leg of an already-explosive bull market in gold. Buy Newcrest Mining Ltd up to AUD45.