Despite the crash in gold prices over the last few months, it still remains an excellent investment hedge against inflation. However, some experts believe that prices could drop to $1000 per ounce due to continued market intervention by the government and a lower level of confidence on the part of investors. However, if you are pessimistic about investing in gold mining stocks and want to avoid holding gold bullion yourself, you could consider bullion investments such as the SPDR Gold Shares (GLD), which owns assets valued at over $60 billion and has one of the best risk-adjusted performances of any gold ETF. Another ETF investment worth considering is Market Vectors Gold Miners (GDX), which owns a portfolio of some of the best North American gold mining stocks and could provide downside protection against sharp declines in gold prices while avoiding some of the liquidity problems associated with mutual funds.
Gold mining stocks
If you are considering direct equity investments, I suggest that you take a good look at Newmont Mining (NEM). It provides the same kind of insurance against inflation and while the growth potential is not exciting there are advantages as an investment. The company is a major producer of gold from operations in countries such as the United States, Peru, Australia and Ghana and is now the largest producer of gold in the world. In addition, it also produces significant quantities of copper. For the first quarter of 2013, the company reported attributable net income from operations of $315 million, ($0.63 per share) a decline of 44% from $561 million ($1.13 per share) in the previous year period. As expected, results for the quarter as compared to the same quarter of 2012 were affected by the processing of lower grade resulting in lower recoveries at Carlin and lower grade at Twin Creeks while shipping delays led to lower sales of concentrate. Adjusted net income was $354 million ($0.71 per share) compared to $578 million ($1.17 per share) for the same quarter of the previous year.
Production at Newmont
Attributable production of 1.165 million ounces of gold and 38 million pounds of copper were down 11% and up 9%, respectively year over year and attributable gold and copper sales of 1.142 million ounces and 31 million pounds were down 11% and 16%, respectively. Attributable all-in costs declined by 7% or $92 million compared to the same quarter of the previous year. Gold and copper costs applicable to sales of $758 per ounce and $2.19 per pound grew by 22% and 11% respectively year over year.
Consolidated spending declined by $217 million, or 13%, in comparison to the same quarter of 2012. 2013 capital expenditure guidance has been reduced by $100 million while costs are expected to be at approximately the same level.
Attributable production of gold in Nevada, for the quarter was 381,000 ounces at a cost attributable to sales of $774 per ounce. The company continues to expect to produce between 1.7 million and 1.8 million ounces in 2013, at a cost attributable to sales of between $600 and $650 per ounce. The company will also spend approximately $400 million on the Turf/Leevile vent shaft, which is expected to be completed in 2015. Attributable production of gold at La Herradura in Mexico was 55,000 ounces at cost attributable to sales of $717 per ounce during the quarter. In 2013, the company expects to produce between 225,000 and 275,000 ounces at a cost attributable to sales of between $650 and $700 per ounce. Attributable gold production at Yanacocha in Peru, was 147,000 ounces for the quarter at a cost attributable to sales of $568 per ounce. In 2013, the attributable gold production is expected to be between 475,000 ounces and 525,000 ounces at a cost attributable to sales of between $600 and $650 per ounce.
The bottom line
The problems in the gold mining industry have pushed the prices of Newmont down making it worth considering as an income investment solely because of its dividend yield of 4.1%. The dividend should be sustainable for quite some time yet because the payout ratio is only around 45% and Newmont has the highest operating margins in the industry. In addition to this attractive dividend yield, there is the potential for some capital appreciation as well because analysts have a mean target price of $41.65 and a median target price of $41 on the stock while the stock currently quotes at around $32.81. It is true that gold prices could keep declining to the $1000 per ounce level that some people are expecting but this is a risk well worth taking.