The New York Times recently ran a piece on the appreciation of the Gold ETF (GLD). It was an interesting article. What struck me was that during the time period that the gold ETF doubled, gold mining stocks only climbed an average of 12%. Since everything eventually reverts to the mean, and gold mining stocks have some intrinsic values an ETF cannot provide (dividends, increasing production, share of a growing company, etc.). I think the play here is to buy several high quality gold mining stocks that are currently selling at very reasonable valuations. For more intrepid investors, this investment could be paired with a short of the Gold ETF (GLD) as a play on mean reversion.
Valuation and Price Targets – Barrick Gold sells for 10 times this year’s earnings and just 9 times consensus 2012 EPS. It sells at the very bottom of its five year valuation range based on P/E, P/S and P/CF. It is projected to grow revenue this year at over 17% and in 2012 by over 9%. It sells for a projected PEG of just .54 and provides a dividend of a little over 1%. Consensus earnings estimates have significantly increased for 2011 and 2012 over the last three months. Despite this and the rise of the price of gold, ABX sells within 10% of its 52 week low. ABX goes for just under $44 a share. Price targets are $63 at Credit Suisse, $75 at S&P and JP Morgan is at $66.
Goldcorp (GG) - Goldcorp Inc. engages in the acquisition, exploration, development, and operation of precious metal properties in Canada, the United States, Mexico, and Central and South America. It produces and sells gold, silver, copper, lead and zinc. The company was founded in 1954 and its headquarters is in Vancouver, Canada.
Valuation and Price Targets – Goldcorp is selling at just over 21 times this year’s earnings and a little over 17 times next year’s consensus estimate. The company has a PEG of less than .5 and earnings estimates for 2011 and 2012 have been consistently raised over the last ninety days. The company recently announced a doubling of gold reserves in its mine in Argentina to 4.3mm ounces. Cost to produce an ounce of gold in that mine is in the $200s, which will provide a huge boost to revenues and margins for short and medium term and will be a key driver of earnings growth when the mine opens in mid-2013. GG is selling for just under $48. Price targets are $68 at JP Morgan and $60 at Deutsche Bank.
Rangold Resources (GOLD) – Randgold Resources Limited, together with its subsidiaries, engages in the exploration and mining of gold mines in west and central Africa. It holds 80% controlling interest in the Loulo mine, located in western Mali; Morila mine in Mali; 89% controlling interest in the Tongon mine located in the neighboring country of Côte d’Ivoire; 83.25% controlling interest in the Massawa project in Senegal; and 45% interest in the Kibali project, which is located in the Democratic Republic of Congo, as well as a high grade gold deposit at Gounkoto in Mali.
Valuation and Price Targets – GOLD sells for just over 19 times projected earnings but under 13 times 2012 consensus EPS. Earnings estimates for 2011 and 2012 have been raised by analysts over the last couple of months. Production should increase to 760,000 ounces in 2011, from 440,000 ounces in 2010. Analysts are banking on continued increased production from its Loulo mine, new production at its Tongon mine, and development of other properties. This is the highest risk equity of the three profiled in my opinion. The company has over 16mm ounces of proven reserves, and as long as gold prices stay elevated this should be a profitable play. GOLD sells at $76 a share. Price targets are at $110 at S&P and $111 at HSBC.
Disclosure: I have no positions in any stocks mentioned, but may initiate a long position in ABX over the next 72 hours.