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Over the past few years gold has put on a stellar performance, however gold producers have not produced the same returns for shareholders.

Gold miners now have the same low valuations that were seen during the financial crisis of 2008 and 2009, even though the price of gold has risen over 100% during the same period.

Is it now time to buy? With margins the same, if not better than they were last year and valuations at rock bottom levels - do gold mining stocks now present a decent value investment opportunity?

(click to enlarge)

This chart shows the four biggest gold producers listed on the NYSE, they are listed in order of market cap capitalization. The biggest producer is obviously Barrick Gold (NYSE:ABX). Barrick is the biggest listed gold miner in the world and as a result has extremely good economies of scale and a solid cash flow for shareholders. However, the second biggest market capitalization belongs to Goldcorp (NYSE:GG), which is the smallest producer of the group, Newmont (NYSE:NEM), produces almost double that of Goldcorp but still has a lower valuation.

Historic P/E

Forward P/E

Price to Sales

Price to Book

Barrick Gold

10.2

6.7

2.4

1.36

Goldcorp

20.5

13

5.5

1.3

Newmont Mining

113

9

2.2

1.7

AngloGold Ashanti

9

6

1.7

2

Barrick Gold has a forward P/E ratio of less than 7; this is one of the lowest earnings multiples ever placed on the firm. The ratio is defiantly the lowest placed on the firm since before 2004. Even during the credit crunch of 2009 the ratio only fell as low as 18. The same can be said for the price to sales ratio which at 2.4, is the lowest since before 2004.

All these miners are in the same low valuation situation apart from Newmont, which saw a poor Q4 last year that distorted its earnings figures. However Newmont is forecast to return to a more suitable earnings multiple this year.

AngloGold (NYSE:AU), looks like the cheapest stock of the whole bunch, although the reason for this is explained below, when we take a look at mining margins.

All the valuation ratios are all significantly below the historic ratios for the past 10 years, despite growing margins:

2011 Margins

Company

Production Cost per Oz

Gross Margin per Oz

Average Realized Gold Price

Gross Margin

Net Margin

Barrick Gold Corporation

$592.00

$1,063.00

$1,655.00

58.50%

23.70%

Goldcorp Inc.

$261.00

$1,311.00

$1,572.00

59.30%

29.90%

Newmont Mining Corp

$591.00

$971.00

$1,562.00

55.20%

5.20%

AngloGold Ashanti Limited

$728.00

$844.00

$1,572.00

51.80%

20.50%

In the full year 2011, each gold miner was generating at least $800 per ounce of gold in profit. This resulted in huge gross margins for the companies and a large free cash flow. Once again Newmont's figures were distorted by a one off bad quarter; however figures are expected to come back into line during this year. Goldcorp actually produces a stronger profit margin than its largest competitor Barrick, almost 23% higher. However, Barrick is managing to extract a higher price from its customers presumably because of economies of scale and hedging activities.

(click to enlarge)

With the gold price currently at $1,700 an ounce, margins for each producer are expected to grow even more this year. Goldcorp is expected to see profit margins of up to $1,440 an ounce, explaining the higher earnings multiple currently being placed on Goldcorp.

On the other hand all of the miners are set to become cheaper when results are released for this full year. This earnings improvement is partially down to the relatively stable gold price over the year and partially down to a significant ramp up in production.

Offering a net margin of nearly 30% Goldcorp is obviously the most cash generative firm. With such a high level of cash generation this is where I believe the gold miners are undervalued. Compared to other cash generative stocks such as tobacco the gold miners are trading on a significantly lower earnings multiple. Tobacco is trading on an average foreword earnings multiple of nearer to 15 as the market is putting a premium on it cash generative business model.

The highly cash generative nature of these gold miners has allowed them to increase EPS to record levels over the past few years and they have done this at record rates.

EPS 3-yr growth

Barrick Gold

30%

Goldcorp

100%

Newmont Mining

150%

AngloGold Ashanti

300%

Debt

This rapid growth has been funded partly through debt. However debt is still at respectable levels across all miners. The best ratio, once again belongs to Goldcorp, which has almost no debt.

Total Debt to Equity

Current Ratio

(current assets/current liabilities)

Interest coverage

Barrick Gold Corporation

0.55

1.6

29.4

Goldcorp Inc.

0.03

2.4

70.5

Newmont Mining Corp

0.46

2.1

6.1

AngloGold Ashanti Limited

0.44

2.8

13.9

Income

One of the major drawbacks of investing with either physical gold or ETFs is the lack of income, or need to fund storage costs. All the miners provide a yield that is well covered. Newmont however provides the best however it is only just covered.

Newmont's high yield is down to its dividend policy -that every $100 increase/decrease in the gold price results in a 40c increase/decrease in the payout.

Yield

Cover 2011

Cover 2012 last reported quarter

3yr growth

Newmont Mining

3.0%

1

2

49%

Barrick Gold

2.3%

8.8

3

17%

AngloGold

1.4%

11

8

55%

Goldcorp

1.3%

5.7

3

41%

Performance

With gold being one of the hottest investments of the past few years you would assume that gold producers have had a good run too. However it is not the case, gold miners have seriously underperformed both the S&P500 and GLD (NYSE:GLD) over a 1 and 5 year period.

Returns vs. S&P 500

1yr

5yr

10yr

S&P 500

13.5%

-5.3%

56.1%

Barrick Gold

-31.3%

-14.1%

120.7%

Goldcorp

-26%

10.9%

233.4%

Newmont Mining

-32%

-9.3%

69.4%

AngloGold

-33.8%

-31.5%

-2.3%

GLD

-0.5%

110.5%

270%

(click to enlarge)

Gold miners' performance over the past few years has not been amazing. Now with rock bottom valuations, highly cash generative operations and the possibility of income these miners do present a decent buying opportunity. Only for the value investor however as there is still risk associated with the stocks.

On the other hand I believe there is a more cyclical nature to these stocks and they will recover in line with other cyclical equities. Therefore if buying, I am prepared to wait, perhaps buying Newmont for its high dividend yield.

Source: Gold Miners: Are They Good Value?