The Gold and Silver Bets of Congressman Ron Paul

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 |  Includes: ABX, AU, EGO, EQNMF, GG, HL, IAG, KGC, NEM, PAAS, SLW
by: Investment Underground

Investment Underground staff watched Ron Paul debate in New Hampshire just a few days ago. Congressman Paul is the ultimate bear on the dollar, based off of the premise that, with the Fed printing presses running through QE2, QE1, and low Fed funds rates, the dollar is headed lower.

We think his thesis remains intact. We like that libertarian and gold standard advocate Ron Paul puts his money where his mouth is. Based upon his congressional filing from May 13, Dr. Paul owns shares in all of the gold and silver stocks below:

Hecla Mining (NYSE:HL) Hecla is the largest silver producer in the U.S., and has been mining for almost 120 years. Revenues grew by 34% in 2010 to a record of $419 million, after increasing by 62.23% in 2009. Gross margin also improved to 46.52% from 32.34%. The company has no debt on its books, and is the lowest-cost silver producer in North America. However, GAAP EPS did decline to $0.13 from $0.23.

In 2011, the Street expects non-GAAP EPS to be between $0.35 and $0.58. In 2010, non-GAAP EPS was $0.31. The next earnings release is on April 25, with analysts forecasting between $0.10 and $0.16. In comparison, Q1 2010 produced $0.07 for non-GAAP EPS.

In 2010, the company produced 10.6 million ounces of silver (-0.4%) alongside a 45% increase in the price of silver. The company projects to produce 9 to 10 million ounces of silver in 2011. However, as global economic conditions continue to get better, there is plenty of revenue growth opportunity for Hecla Mining. To add some perspective, the silver demand comes from the following segments: industrial (46%), photography (8%), jewelry and silverware (23%), coins (10%), and investment (13%).

IAMGold Corp (NYSE:IAG): Already a mid-tier gold miner — one that produced more than 960,000 ounces of gold in 2010 — growth-oriented IAMGold is poised to significantly increase its production over the next few years as new development projects come on line; these include the Essakane mine in Burkina Faso, which started production in June 2010, and the Westwood project in Quebec, which expects to do the same in 2013.

IAMGold is also the third-largest global producer of niobium, an element used in the production of specialty steel alloys; its Niobec mine in Canada produced enough of the element in 2010 to help fund many of the firm’s development projects.

We think IAG's best quarters are still ahead of it.

AngloGold Ashanti Limited ADR (NYSE:AU): If gold prices continue to be bullish, shareholders of AngloGold will be thankful that the company closed its hedge book in October 2010, removing the 8-10% discount to spot gold prices. Now fully exposed, investors only need to make sure the company produces. With gold mines throughout the world and over 70 million ounces in reserves, AngloGold should have no problem doing so.

Shares yield 0.5% and trade just above $41 per share. We think shares are cheap near their 52-week low of $38.55.

Eldorado Gold Corp (NYSE:EGO): Eldorado already has low production costs and healthy growth. And now this gold miner can brag even more now that it is the only major Western gold miner operating in China. Eldorado Gold, which trades at $13.77 a share, gained entry into China with the construction of the Tanjianshan mine and took a comfortable seat next to China’s fireplace after purchasing Sino Gold for $1.9 billion.

Now EGO is the proud owner of three Chinese gold mines, one mine in Brazil and one in Turkey. With the company’s flagship mine in Turkey, Eldorado should see a significant boost in production over the next several years. Shares trade at a modest 2.5 price-to-book ratio, which is modest for a gold miner given EGO's growth prospects.

Barrick Gold Corporation (NYSE:ABX): Barrick Gold is in the business of producing, selling, mining, and exploring gold globally. It has 25 operating mines as well as interests in oil and gas production in Canada. The current price in the $40s is down from its 52 week high in late April of $55.74. It has a steady dividend yield of 1.00%. Barrick recently announced that it will acquire Equinox Minerals Limited (EQNMF.PK), which is a mining and exploration company whose main project is a copper mine in Africa. ABX has also announced the sale of $4B in debt securities.

This capital will help finance the Equinox deal and be used for general corporate purposes. ABX is a buy. The company has shown determination to become the biggest, best, and most sustainable gold production company in the world. The increase in gold prices will only edge its production higher.

Newmont Mining (NYSE:NEM) has a ROE of 11.96% over the first 9 months of 2010, compared to 6.9% in the same period in 2009 and 14.57% in FY 2009. The peer group includes Goldcorp (GG), Kinross Gold (KGC), and AngloGold Ashanti (AU). For the first 9 months of 2010, Goldcorp’s ROE was 7.28%, and it was 1.58% for FY 2009. For FY 2010, Kinross Gold has a ROE of 5.75%, and AngloGold Ashanti earned a ROE of 3.76%. The gold sub-industry has an average ROE of 12%.

Taking into account interest expense, the ROA for the first 9 months of 2010 for NEM is 6.87%. The same item for the first 9 months in 2009 is 3.6% and 6.8% in FY 2009. Goldcorp has a ROA of 5.29% in the first 9 months of 2010. In FY 2009, it was only 1.2%. Kinross Gold and AngloGold Ashanti have ROAs of 4.70% and 1.35% in 2010, respectively.

PEG ratio for NEM, GG, and KGC are 1.5, 0.4, 2.5, respectively. 1.4 is the sub-industry’s average.

For Newmont Mining, EPS climbed 93.4% from $1.52 to $2.94 in the first 9 months of 2010 vs. the first 9 months of 2009. Goldcorp’s EPS is up by 600% in the first 9 months of 2010 relative to the same period in 2009. Kinross Gold and AngloGold Ashanti show EPS changes of 111.3% and 122.4%, respectively.

Pan American Silver (NASDAQ:PAAS) The company has multiple mining operations in North and South America, as well as in Europe. The company has a solid price/book ratio of 2.3 and a good price/sales ratio of 5.5. It keeps an operating margin of about 30% compared to an industry average of 22.7%. It does have a less-than-stellar price/earnings of 30.6 as opposed to an industry average of 21.5. We would be very wary of this stock over the long term.

PAAS is highly correlated to precious metal prices, which can be volatile. The outlook on silver is uncertain, but at the right price this is a good stock for traders.

Silver Wheaton Corporation (NYSE:SLW) SLW does not actually purchase physical silver but buys long-term purchase contracts for silver. This provides a valuable service in the silver market. It helps miners’ hedge risk against future price fluctuations and helps smooth balance sheets.

SLW recently announced a quarterly dividend of 0.03 cents per share, after a stellar first quarter earnings statement. It stands with a P/E of 33.2. It also touts a 66% operating margin and EPS growth of 30.9. We recommend a buy for this stock once silver prices settle down from current fluctuations.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.