Gold, Growth And Yield: These Companies Offer All 3

by: Christopher F. Davis

In a climate of endless currency debasement as central banks race to ease the money supply, I believe that gold and precious metals will benefit long term. Since late summer, gold and silver mining stocks have been outperforming the physical metals themselves as I suggested they might do back in July. The Market Vectors Gold Miners ETF (NYSEARCA:GDX), the Market Vectors Junior Gold Miners ETF (NYSEARCA:GDXJ) and the Global X Silver Miners ETF (NYSEARCA:SIL) are up 11.8%, 15.5%, and 22.3% respectively in the last three months. In contrast, the ETFs that track physical gold and silver, the SPDR Gold Trust (NYSEARCA:GLD) and the iShares Silver Trust (NYSEARCA:SLV), are only up 7.1% and 16.6% in the last three months. As all of these ETFs are off of their highs, I think they are still good buys at current levels. However, more money can often be made in individual companies relative to the ETFs. Further, companies offering a yield offer downside protection. In this article, I highlight four gold stocks that investors should consider going forward as they will offer not only long-term growth, but substantial dividends for the precious metals sector. These dividends offer some downside protection from market sell-offs. In the event of a market sell-off that hits gold and gold stocks, you will be paid to wait for a rebound, unlike some of the more speculative names in the space I have recommended, which offer no dividend. The four stocks that offer a good yield and growth potential are discussed below.

Gold Fields Limited (GFI)

GFI is engaged in gold mining and related activities, including exploration, extraction, processing and smelting. GFI is a producer of gold and a holder of gold reserves in South Africa, Ghana, Australia and Peru. In Peru, Gold Fields also produces copper. It is primarily involved in underground and surface gold and copper mining and related activities. It also has an interest in a platinum group metal exploration project in Finland. Gold bullion is its principal product, which is produced in South Africa, Ghana and Australia. GFI then sells the bullion primarily in South Africa as well as internationally. GFI holds interests in eight operating mines in South Africa, Peru, Ghana, and Australia. As of February 27, 2012, the company had total attributable precious metal and gold equivalent mineral resources of 217.0 million ounces and mineral reserves of 80.6 million ounces.

GFI currently trades at $12.43 a share and attempts to pay a dividend that is roughly 25-35% of its cash earnings depending on investment opportunities. The yield on the stock based on the most recent payout is 3.9%. It offers a fantastic return, although the dividend fluctuates based on earnings. One issue that could impact earnings on the company is the recent set of strikes that have been occurring in the South African mines over the last few weeks. Earnings for last quarter, scheduled to be released November 26, could be hit as the strikes have undoubtedly impacted production. The stock has a current p/e ratio of 9.1 and a forward p/e ratio of 7.2. The stock trades on average daily volume of 4.1 million and has a 52-week range of $11.71 to $17.67.

Gold Resource Corporation (GORO)

GORO is another strong company for growth and yield. It is an exploration stage company that engages in the exploration and production of gold and silver in Mexico. It also explores copper, lead and zinc ores. During the year ending December 31, 2011, GORO produced a total of 66,159 gold equivalent ounces from the El Aguila Project. During 2011, GORO's exploration was focused primarily on developing the El Aguila Project. GORO classifies its mineral properties into two categories: operating properties and exploration properties. Operating properties are properties on which GORO currently operates a producing mine. As of December 31, 2011, GORO had a total interest in six properties, one operating property and five exploration properties in the southern state of Oaxaca, Mexico. In June 2011, GORO acquired an additional property between the El Rey property and Alta Gracia property referred to as the El Chamizo property.

According to the property site descriptions, GORO has more exploration properties than operating properties, which could mean the company can continue to grow as it explores and develops the properties. The operating properties El Aguila and El Aire concessions are part of the El Aguila Project and the La Tehuana concession consists of the Las Margaritas property. The El Aguila Project is located in the Sierra Madre del Sur mountains of southern Mexico, in the central part of the State of Oaxaca. The El Aguila Project is located in the San Jose de Gracia Mining District in Oaxaca. During 2011, the combined open pit and underground ore that it processed through the mill averaged 619 tons of ore per day and totaled 214,215 tons for the year, with an average grade of 3.43 grams per ton gold and 357 grams per ton silver.

The exploration properties such as the El Rey property consist of concessions in another area in the state of Oaxaca known as El Rey, El Virrey, La Reyna and El Marquez. The El Rey property is approximately 64.4 kilometers (40 miles) from the El Aguila Project. As of December 31, 2011, the company had drilled 48 core holes for a total of 5,278 meters (17,316 feet) at the El Rey property. The Las Margaritas property is made up of the La Tehuana concession. It consists of approximately 925 hectares located adjacent to the El Aguila Project.

The Solaga property consists of two mining concessions totaling 618 hectares known as Solaga I and Solaga II. The property is located approximately 120 kilometers (75 miles) northeast of the El Aguila Project. The company has acquired claims adjacent to the Las Margaritas property in the Alta Gracia Mining District, namely the Alta Gracia property. These concessions consist of three mining claims, the David 1, the David 2 and La Hurradura. The concessions total 5,175 hectares. The El Chamizo Property totaled approximately 26,386 hectares (101 square miles).

GORO currently trades at $14.73 a share on average daily volume of 360,000. GORO pays a monthly dividend of 6 cents and had raised the dividend each year from 2010 to present day. At 6 cents a share monthly dividend, the company is offering a bountiful 4.9% annual yield, far higher than its competitors in the mining space. The stock took a massive hit back in October when the company revised its production guidance lower. From the company's original target of at 120,000 gold equivalent ounces the company now only expects between 85,000 and 100,000 gold equivalent-ounces. The blood bath in the shares now presents an amazing buying opportunity. The stock currently has a p/e of 11.6 and a 52-week range of $14.56 to $28.36.

Newmont Mining Corp. (NEM)

NEM is the third-largest mining company in the world. The company's assets and operations are located in the United States, Australia, Peru, Indonesia, Ghana, New Zealand, and Mexico. The stock currently trades at $47.19. This stock has a 52-week trading range of $42.95 to $70.96, and trades on average daily volume of 4.9 million. It too offers a great dividend. While not as high as GFI or GORO, at $0.35 quarterly or 3.0%, I think it has greater growth potential as a company. NEM reported a rough second quarter, however, on July 27, 2012. NEM's reported Q2 earnings per share of 56 cents were much lower than the Street's estimate of 93 cents. Attributable gold production fell 10% that quarter and costs applicable to sales increased 10%. The profit of 56 cents or $279 million compares with $387 million or $1.04 a share a year ago. Revenue missed by $300 million, as it pulled in $2.23 billion versus an estimated $2.53 billion. Sales slipped 6.5% to $2.2 billion. The company reported another tough quarter earlier this month, primarily based on rising costs of business. Net income dropped 26% to $367 million, or 74 cents a share, from $493 million, or 98 cents, a year earlier. The company's earnings per share, excluding costs related to restructuring and other one-time items, were 86 cents, missing estimates of 89 cents. Sales also fell 9.6% to $2.48 billion. Further, NEM said costs applicable to sales were $693 per ounce of gold and $2.38 a pound of copper, compared with $622 and $1.10 a year earlier.

Some positive signs for the company start at the top with President and COO Gary Goldberg having just bought 1,000 shares at $44.60 on July 31. While not a massive purchase, it shows he expects shares to increase. The company also pays a bountiful dividend. The current annualized dividend paid by NEM is $1.40/share, which is very high for the sector. The company is cheap relative to its forward growth potential trading at just a 0.2 PEG ratio, but expensive relative to current earnings at a p/e of 70. The balance sheet shows it has $1.9 billion in cash and equivalents on hand, with an increasing debt-to-asset ratio. However, with NEM's most recent acquisition of Hope Bay (the largest undeveloped greenfield in North America), promising exploration projects in Peru and Ghana, and the start up of Australia's largest gold producer at Boddington, Newmont is poised for long-term growth. Given the rise in gold prices, I suspect the next few quarters to be stronger for NEM than the last two, and in turn, strong for the stock.

Bottom Line

Gold and precious metals will continue their ascent over the long term as governments and central banks continue to debase their currencies worldwide. I believe that the gold miners will continue to outperform the metals far into the next year and thus I continue to recommend them. While facing their own individual difficulties in the short term, GFI, GORO and NEM offer a nice mix of growth as well as healthy dividends for the long-term investor. I think they will deliver solid returns for investors in the long term despite the difficulties faced this year. Finally, with their yield, these companies have some downside protection and pay you to wait out the next major market sell-off, which when it comes will be an excellent buying opportunity for these stocks.

Disclosure: I have no positions in any stocks mentioned, but may initiate a long position in GORO over the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.