Opportunity Knox: Distressed Gold Miners Present Good Entry Point

The market is giving you a rare chance to buy gold mining shares.  While gold, the metal, is flat for 2008, leading gold mining shares are down 40%.  I point to Barrick Gold (ABX), currently down 40% year to date and Newmont Mining (NEM) also down 40% year to date.

Earnings estimates for Barrick are $2.14 for 2008 and $2.40 for 2009.  ABX is currently trading at 25 giving you a chance to buy the stock at a price earnings ratio of 12x the 2008 estimate.

In the last 10 years the lowest PE on ABX was 16x, and that was in 1998. Why is this?  The reason is that shares of gold mining companies are being sold by equity investors who are liquidating portfolios.  This includes both individuals and hedge funds being forced to liquidate.  Meanwhile,  gold the metal is viewed as a store of value in the current financial distress.

As we move forward, the scale should tip to favor the mining shares over the metal itself.  One of the reasons the metal was favored over the miners earlier this year was that the mining companies faced higher operating costs from expenses like energy.  Now those costs have substantially moderated.

Disclosure: author is short ABX puts.

Comments

[CLH:]

Gold mining stocks are down because gold has not bottomed yet. A strong dollar means little no upside in gold.

2008 Oct 17 06:45 PM

[ritr54:]

The bigs are going to start buying the small and mids to add to their reserves. These are firesale prices now... .

2008 Oct 18 12:39 PM

[blue see:]

So far I m loosing a lot on Barrick, ABX is big disapointment so far. It was better to invest in WFC shares.

2008 Oct 23 06:38 AM