Over the past couple of years, I have come across numerous commentaries mentioning gold-backed bonds as a potential solution to the eurozone's woes. While that idea has yet to come to fruition, you can purchase bonds that are, in a way, backed by gold. As someone who frequently screens the secondary corporate bond market for individual bond opportunities, I regularly come across the bonds of four well-known gold producers.
Barrick Gold (ABX) and its subsidiaries have plenty of bonds currently offered in the secondary market. This includes a few longer-dated issues being offered at yields-to-worst of over 7%. Here is a selection of those bonds as well as a few shorter-dated notes in order of highest-to-lowest yields-to-worst:
Newmont Mining (NEM) also has several bonds offered in the secondary market. Like Barrick Gold, yields top out at just over 7% for the longest-dated issue. Here is a selection of Newmont Mining's secondary market offerings in order of highest-to-lowest yields-to-worst:
Kinross Gold (KGC) provides the highest yields of the bunch (as it should, in my opinion). Here are its three issues trading in the secondary market in order of highest-to-lowest yields-to-worst:
Goldcorp (GG) wraps up the group with the lowest yields and lowest perceived credit risk. Its two bonds trading in the secondary market are:
I realize there are arguments to be made about gold prices heading lower from here and the effects that would have on the gold miners. One thing to keep in mind is that regardless of what the stock prices of these companies do, the bonds will mature at 100 cents-on-the-dollar unless there is a default. And the prospect of defaulting is not something that some of the largest gold miners in the world will take lightly. More specifically, regarding the longer-dated notes yielding over 7%, each of us will have a return on investment that we are seeking from our portfolio. If a 7% yield is sufficient from a bond-allocation perspective, and you have the wherewithal to diversify your bond holdings among many individual bonds and hold them to maturity, then some of the CUSIPs listed above may be of particular interest.
Finally, if at any point while you own one or more of the aforementioned bonds, the prospects of default begin to concern you, remember that buying put options on the stock acts as a great hedge against potential bond losses from a default. Additionally, keep in mind that when owning senior unsecured notes that go into default, there will most likely be a recovery of some sort. I usually assume recoveries of 20 to 40 cents-on-the-dollar, depending on the company. And in some cases, that is way too conservative.
Please keep in mind that this article is for informational purposes only and not a recommendation to buy or sell any securities. Only you can decide if taking the counterparty risk of investing in individual bonds is right for you.
Disclosure: I am long CUSIPs 496902AK3, 067901AH1, 651639AP1, and 651639AM8. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.