Thanks to both the selloff in the price of gold bullion and increased costs locked in by gold miner acquisitions, the price of all the major gold producers have lagged the market considerably over the past year. Let's take a look at a chart of five of the biggest names, Barrick Gold, (ABX) Goldcorp, (GG) Newmont Mining, (NEM) Yamana Gold, (AUY) and Franco-Nevada (FNV) and how they've performed over the past year.
Those are some ugly charts.
As gold companies have continued to sell off, I've seen other warning signs that have kept me away, including companies shuttering projects which were acquired at the top of the market, and huge write-offs, especially from Barrick.
As the price of gold has stabilized, is it time to get back in the gold miners? There's one that I think shines above the rest.
Summaries of Operations
Barrick - The company recently announced the intention of 86-year-old CEO Peter Munk to finally retire, although no timetable was given. Barrick recently announced a $3B share issue to pay down long-term debt, which underwriters are having a difficult time getting rid of. Investors have been battling the company for months, including voting down the company's non-binding proposal on executive compensation.
Additionally, the company announced a shutdown of their Pascua-Lama South American mine for an indefinite period of time, even though they've already sunk $5B into the project.
Goldcorp - Goldcorp focuses on cheap production in areas with political stability. Their cost per ounce of gold in 2012 was a mere $300/oz. Goldcorp also has all of their mines in the Americas, in areas the company considers low political risk. Since they have such low cost mines they aren't running into the cost issues that some of their competitors are.
Newmont - Even after the company sold their stake in Canadian Oil Sands during the last quarter, they blew earnings out of the water, reporting $0.46/share compared to analyst projections of $0.32/share. They have two mines they are bringing to market - one is a gold mine in Ghana and one is a copper mine in Nevada - with both mines coming in on budget. Both these mines should add to 2014 earnings. Newmont is more of a diversified mining company, but still gets the majority of its revenues from gold.
Yamana - Yamana is a Canadian producer with mines in Mexico, Brazil, Argentina, and Chile. They currently sit on proven and likely reserves of 626k tonnes of gold, 30k tonnes of silver, 399k tonnes of copper, and nominal amounts of Zinc and Molybdenum. This doesn't include reserves at the Agua Rica area, which hasn't been mined yet but shows great promise.
Franco-Nevada - Since Franco-Nevada lets other companies do the actual mining on its properties, (in exchange for a royalty) meaning the company hasn't been affected by the cost overruns which have so crippled their peers, especially Barrick. For this reason, this company is my favorite from an operational perspective.
Let's take a look at earnings over the last little while, as well as looking forward, using analyst projections found at Yahoo! finance for estimated 2013 and 2014 earnings.
|Company||P/E||Normalized P/E*||2013 P/E||2014 P/E|
*Last 4 quarters, less items
Barrick trades at what appears to be ridiculously low P/Es, but there is tremendous balance sheet risk, as we'll see later on. Newmont appears to be the most attractive based on an earnings multiple that peaks at a little past 15x 2014 projected earnings, but Yamana's 2014 P/E is projected to drop to 17.8.
Now let's take a look at the balance sheet strength for each company, looking at book value, tangible book value, debt-to-equity ratios, and cash per share.
A few major observations come from a balance sheet analysis, mainly the debt risk posed to Barrick shareholders. Yes, the company is in the process of issuing $3B in common stock, (enough to cut the debt load by approximately 20%) but that still puts Barrick's debt/equity ratio substantially higher than their peers, and that's not even factoring in the huge dilution to current shareholders which is bound to act as an anchor to the share price. Additionally, Barrick is sitting on a bunch of goodwill, which will likely be wrote off in the future.
Both Goldcorp and Yamana have rock solid balance sheets. Both trade under book value with minimal debt. While Franco Nevada does trade at a premium over book, it has no debt, a growing cash balance, and no operational risk.
Since I don't see any major recovery in the price of gold over the next 12 months - thanks to non-existent inflation risks, at least in the near term - dividends are important to any gold investor. Getting paid to wait over the next 12-24 months could make up a large percentage of total returns, depending on the price of gold. I wouldn't want to hold gold over the near term.
Let's look at the dividend rate, (based on current dividends being paid indefinitely) and payout ratios based on 2013 and 2014 estimated earnings. We're not concerned here by write-offs, since those will represent non-cash losses.
|Company||Dividend/Yield||'13 Payout ratio||'14 Payout Ratio|
Barrick's dividend could very easily be eliminated. The company recently cut their quarterly distribution from $0.20/share all the way down to $0.05/share, and they could use the capital to further pay down debt.
All other dividends look secure, but I'd keep a close eye on Yamana's, especially as they start to bring Agua Rica online. Franco-Nevada has the largest payout ratio, but this is fine since they're sitting on over $5.00 per share in cash and continue to be profitable.
If you're looking for a gold producer, I'd take a closer look at both Yamana and Goldcorp. Both companies have attractive balance sheets, are trading under book value, have little debt, and are both low cost enough producers that they can remain profitable even during environments with lower gold prices.
If you don't want to take on operational risk, Franco-Nevada is the way to go. Let other companies take on the operational risk while they sit back and collect their royalty. This is the reason why the company trades at P/E and P/B premiums to their peers. Additionally, Franco Nevada has exposure to oil assets as well, giving further protection to falling gold prices.