This article is a continuation of my article 5 Gold Miners Yielding More Than The 10 Year U.S. Treasury Bond. Gold mining stocks have languished over the past year and a half as gold prices have consolidated. Yet given the Federal Reserve's easy monetary policy I am of the belief that the bear market in gold mining shares is only temporary. Consequently investors should consider purchasing shares in the companies I discuss below as well as those I discuss in the previous article.
There are a few things that distinguish the companies I discuss here from those I discuss in the previous article. First, investors should note that most of the companies I discuss here, unlike those I discuss in the previous article, have mines located in politically unstable regions: primarily in Africa and some parts of South America such as Columbia and Peru. While this has created opportunities for value investors (especially in the case of Gold Fields (GFI), investors should be aware of the fact that these companies come with a higher risk of mine shutdowns, labor strikes, and government confiscation. Second, Pan American Silver (PAAS) is primarily a silver miner with some exposure to gold. However many of the reasons that make gold an attractive investment apply to silver. Finally, I decided to include Kinross Gold Corporation (KGC) despite the fact that, depending on the day and the current yield on the U.S. 10 year Treasury Bond, the company may or may not yield more than the U.S. 10 year Treasury Bond. Nevertheless, I included it here for several reasons. First, Kinross basically fits in with the other companies I mention as a dividend company in the gold mining sector. Second, dividends are taxed at a lower rate than Treasury Bond income for most investors, and so Kinross actually does have a higher yield than the 10 year U.S. Treasury Bond. Third, given that Kinross has had a history of raising its yield in recent years, investors who purchase the company now should expect to receive a dividend greater than that of the 10 year U.S. Treasury Bond.
Gold Fields Limited
Gold Fields Limited is a gold mining company with most of its assets in South Africa, although they have assets in Ghana, Peru and elsewhere. They recently spun off some of their assets into a new company called Sibanye Gold (SBGL) and so their 2012 dividend payout of $0.48 will probably not reflect what their 2013 payout will be, although the 2012 dividend was roughly 4% assuming a $12 share price before the spin-off.
Before the spinoff Gold Fields produced 3.5 million ounces of gold and they intended to grow production to over 5 million ounces in 3 years; the new numbers are probably closer to 2.75 million ounces produced in 2013 and 3.75 million ounces produced in 2015.
Gold Fields is a high risk/high reward stock. On the one hand they have well over 100 million ounces of gold reserves. Yet they have high production costs exceeding $1,100 per ounce, and so the company will give investors additional leverage to rising gold prices but also additional leverage to declining gold prices. Furthermore, as I mentioned, a lot of Gold Fields' assets are in Africa and South Africa in particular which is not a mining friendly jurisdiction. Consequently Gold Fields has a market capitalization of less than $6 billion, while a company with less resources such as Newmont Mining (NEM) is valued at nearly $20 billion. Gold Fields' shares will never reach a valuation that reflects their extensive resources given the political risk shareholders take on, but at the same time if Gold Fields does not suffer labor issues or conflicts with the South African government then they will be able to pay out a high dividend or use their cash flow to invest in projects in more mining friendly jurisdictions.
Kinross Gold is a globally diversified gold miner with projects in North America, South America, West Africa and Russia. Kinross currently produces around 2.6 million ounces of gold per year and they can take this production to over 4 million ounces over the next few years. In addition to production growth, Kinross has low cash costs of just over $700 per gold equivalent ounce.
One thing that should be somewhat worrisome for investors is that Kinross has some exposure to high risk political jurisdictions, but not enough to ruin the company in a worst case scenario. Its mines in South America are in Brazil and Chile which are generally safe places to mine. While I am nervous investing in Ghana and Mauritania the company's exposure to West Africa is minimal as their production in these regions makes up less than 20% of total production. Also mines in these regions are generally undervalued. Some investors might worry about Kinross' Chukotka mine in Russia although I do not share these concerns.
Given the company's 60+ million ounces of gold equivalent reserves and resources the market capitalization of $9 billion might seem a little rich when compared to Gold Fields, but I am willing to pay a higher price for the relative safety of the company's North American, Chilean and Brazilian mines.
DRDGOLD (DRD) is a gold mining company with projects in South Africa and Zimbabwe. It is by far the smallest company that I have covered in these two articles with just three small producing mines. The company currently has a market capitalization around $280 million and it issued a dividend of 2.8% in 2012 on the current share price of $7.45. The shares currently trade at just over 9X 2012 earnings. Given its small market capitalization the company has a lot of resources at 11 million ounces. They also have around 140,000 ounces of annual production.
These metrics seem very impressive given DRDGOLD's valuation, however there are reasons that the stock is so inexpensive. First the company has limited plans to grow production beyond its current level. They may be able to grow 10,000-30,000 ounces per year but nothing more unless they find something on their exploration properties in Zimbabwe. Even if they do it will take several years to bring these mines into production. Second, all of the company's production is in South Africa. South African mining companies have faced opposition from the government and from laborers, and while DRDGOLD has not suffered thus far they are highly vulnerable given that they only have three producing mines.
If you believe that the political risks facing mining companies in South Africa are overestimated by the market and if you want to own shares in a company that will likely have stable production for many years and pay a nice dividend then you should find DRDGOLD to be an attractive investment.
Compania de Minas Buenaventura
Compania de Minas Buenaventura (BVN) has the most base metal exposure of any company I discuss here, yet more than half of sales come from gold and about three quarters come from gold and silver. The company currently pays a 2.4% dividend and has a relatively low P/E ratio just above 8.
The company has 20+ million ounces of gold reserves and resources and over 300 million ounces of silver reserves and resources which is not a lot given their $6.4 billion market capitalization given the location of their mines.
BVN is geographically diversified and the company has producing mines on every continent except Europe. However they have several mines in high risk regions in Africa such as Tanzania, South Africa, Mali, Ghana, and so on. This should push the value of the company lower given their reserves and resources, but one thing that the company has going for it is low production costs. They currently produce gold at under $600/ounce and silver at $17.60/ounce. Consequently this is a company to consider if you want to protect yourself against the risk of short-term lower gold and silver prices and if the locations of their mines doesn't concern you. I would personally look elsewhere.
Pan American Silver
Pan American Silver has a fully diluted market cap of $2.5 billion and a dividend yield of 3%. It owns and operates 8 silver mines predominantly in Latin America, although it has a few exploration properties in the United States. Since this is an article dealing mainly with gold miners I should note that Pan American Silver does get 20% of its sales from gold. Like with gold miners, as silver prices increase PAAS should offer decent leverage to the price of silver. Investors who are familiar with gold but not silver should look at my article Buying And Owning Silver Part 1: Arguments for Silver Ownership, in which I make many arguments for silver ownership, one of which is that silver is undervalued relative to gold.
Pan American Silver produced approximately 25 million ounces of silver in 2012 and it anticipates growing production to 30 million ounces or so by 2016. The company has extremely strong cash flow and $542 million in cash, so it is in a position to make acquisitions. While the company will not likely grow production rapidly they have 1.2 billion ounces of reserves and resources (valued at just over $2.10 per ounce) which means that they do not have to worry about running out of silver any time soon.
As with several of the other companies I list in this article Pan American Silver faces political issues as they have several mines in Peru, Argentina and Bolivia. Yet like with IAMGOLD (IAG) (see part 1 to this article), they are planning so that in the future they will be producing in more mining friendly countries such as the United States and Mexico.
Disclosure: I am long PAAS.