On Wednesday, December 19th, Agnico-Eagle Mines (AEM) boasted the biggest YTD gain among 17 gold miners with market caps over $17B after overcoming weather conditions at its Arctic mine that sent costs soaring. Analysts say AEM has succeeded where larger peers such as Barrick Gold (ABX), Goldcorp (GG) and Newmont Mining (NEM) have failed because it is able to set achievable targets, while the others have been forced to cut forecasts. In this article, I will examine the underlying value potential each of these four companies currently present to potential investors by applying Graham's Number.
AEM data by YCharts
Based on the chart we can see that the YTD performance of Agnico-Eagle Mines is pretty impressive considering the fact shares are up over 30% thus far. The same can't be said for names like Barrick Gold, Goldcorp and Newmont Mining which are all down by an average of 28.00% on the year.
Graham's Number Defined
According to Eben Esterhuizen, the Graham Number is: "a figure that measures a stock's fundamental value by taking into account a company's earnings per share and book value per share. The Graham number is the upper bound of the price range that a defensive investor should pay for the stock. According to the theory, any stock price below the Graham number is considered undervalued, and thus worth investing in. It is used as a general test when trying to identify stocks that are currently selling for a good price."
Assessing the Underlying Value
Agnico-Eagle Mines: In the past 12 months AEM has demonstrated a negative EPS of-$2.19/share and possesses a BVPS of $19.76. Based on those numbers we cannot accurately arrive at a Graham Number since the stock has not demonstrated positive earnings. However given the fact the stock is up nearly 30% on the year and trades at 2.52x its current BVPS ($19.76), I think investors should be cautious about a position at current levels.
Goldcorp: Shares of Goldcorp have fallen 22.63% on the year, which isn't terrible when compared to such names as Barrick and Newmont; however those comparatives might be the only bright spot when it comes to determining the underlying value of shares. Based on Goldcorp's numbers shares currently have a Graham Number of $34.10/share or a downside potential of 3.04% from current levels.
Newmont Mining: When it comes to Newmont Mining this certainly has been a stellar year, shares are down 30.56% and earnings need some serious improvement after missing estimates by an average of 12.55% over the last four quarters. Given the fact shares of NEM have only demonstrated an EPS of $0.22/share over the last year and possess a BVPS of $26.90 the company's Graham Number is a mere $11.53/share which implies a downside potential of 73.21%.
Barrick Gold: Although investors have seen shares of ABX trade significantly lower (down 30.81% for the year), they may be surprised by the potential upside shares actually possess when applying Graham's Number. In the past 12 months shares of ABX have demonstrated an EPS of $3.35/share and currently have a BVPS of $25.16. Based on Goldcorp's number shares currently have a Graham Number of $43.54/share or an upside potential of 31.93%.
When it comes to examining the underlying value of firms these firms, potential investors shouldn't always judge a book by its cover. On one hand, shares of Agnico-Eagle Mines have risen nearly 30% which isn't such a bad return, but the company has yet to turn a profit this year and that makes it pretty hard to determine the value potential of the stock. On the other hand, only one of the three remaining gold miners possesses considerable upside potential and as a result I consider a long position Barrick Gold before any of the others.
For those looking to establish a position in the gold mining sector, based on each company's Graham Number, I'd look to take my profits in Agnico-Eagle and establish a long position in Barrick. Although 2013 could be a much better year for the likes of Goldcorp and Newmont, I'd still remain cautious as earnings over the last four quarters have been mediocre at best.