Since the summer, gold and silver mining stocks have been outperforming the physical metals themselves and encouraged investors to buy then. The Market Vectors Gold Miners ETF (GDX), the Market Vectors Junior Gold Miners ETF (GDXJ) and the Global X Silver Miners ETF (SIL) are up 13.8%, 18.1%, and 32.1% respectively in the last six months. In contrast, the ETFs that track physical gold and silver, the SPDR Gold Trust (GLD) and the iShares Silver Trust (SLV), are only up 8.3% and 15.6% in the last six months. As all of these ETFs are off of their highs, I think they are good buys at current levels.
Picking individual stocks can offer better returns relative to the ETFs if done carefully. A good combination to look for in a stock is one in which the underlying company offers growth, as well as a decent dividend. In this article, I highlight two 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.
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 $46.62. This stock has a 52-week trading range of $42.95 to $70.96, and trades on average daily volume of 5.4 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 200. This elevated p/e stems from the last two rough quarters, but the ratio remains high because of the great expectations for this company. 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.
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 $11.78 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 $11.73 to $17.34.
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 and and NEM offer a nice mix of growth as well as healthy dividends for the long-term investor. At this point I think NEM is the better buy of the two, but I would wait until GFI releases earnings to establish a significant position in it, as I think the quarter may be in jeopardy due to the strikes. In contrast, if they manage a beat it will be a testament to the management and I think it would be a great buy. Both companies I think will deliver solid returns for investors in the long-term despite any short-term 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, and no plans to initiate any positions within the next 72 hours.