Newmont Is The Last Bastion Of Value Among Precious Metal Miners

 |  Includes: ABX, AUY, FCX, GG, KGC, NEM, PAAS, SLW
by: Rick Husband


Gold is showing a little life.

Precious metal miners should be in the tank given the recent commodity correction.

There seems to be lingering euphoria and I found little value in the group with the possible exception of Newmont Mining.

With gold and silver rising, I thought I'd take a quick peak at major North American gold producers, all who have substantial reserves. First, let me explain my simple methodology. I took recent cash flow statements and calculated free cash flow in a manner consistent with the book Free Cash Flow by Christy. I use this for a 10-year cash flow projection, subtracting from year 1 recent capital and declining the remaining years by 5% per year. Then I calculate the NPV at my cost of money, which is 7%, divide by shares and compare to the stock price to see if the shares are trading at a discount or premium. If trading at a discount, the delta is my "margin of safety". If trading at a premium, I would expect to see some major projects in the works that the market is giving value to.

Note that this calculation is based on recent cash flow and does not have any new projects in it. It is also just a snapshot of what the company might be worth at this moment frozen in time. Again, I'm not representing any future projects or developments in these numbers. I did this a week ago; my results surprised me.

Symbol Pre/Disc Value Price
ABX -13% 20.8 18.02
GG 186% 9.67 27.62
FCX 9% 33.17 36.07
NEM -21% 31.92 25.19
AUY 67% 4.81 8.05
SLW 184% 9.11 25.89
KGC 112% 2.02 4.68
PAAS 63% 9.22 15.01
Click to enlarge

Most of these guys are over valued subject to the above limitations and qualifications. I'll come back to the two that are trading at discounts.

While going through this exercise, I noticed another theme on top of rich valuation: Most of these names are heavily diluted, even some of the small ones.

Now as a value investor that might want to invest in the group, Barrick Gold (NYSE:ABX), and Newmont Mining (NYSE:NEM), look attractive. ABX had high relative debt. NEM had a little more than I would like to see, but was not up to its eyeballs. NEM also has not heavily diluted its stock and it pays a dividend. The others may be ok, but I can't forecast their future cash flows, nor can I forecast NEM's, and it, according to its website, has 2 major projects in the works, so that is probably gravy. That is, NEM may be more undervalued than it appears.

Disclosure: The author is long PAAS, NEM. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.