Gold has broken over $1,600 per ounce and gold stocks have become hot again. Of the many choices available, three producers stand out above the rest for different reasons. Investors should keep a close eye on these three stocks as earnings begin to roll in later this week.
1. Goldcorp (GG) – This is one of the world’s top gold producers, with production for 2011 expected in the 2.65-2.75 million ounce range. Costs, net of by-products, came in last quarter at $188 per ounce, almost $100 per ounce under full year guidance. At $1,500 gold, this indicates massive profits for the second quarter even if costs rise to the level of full year guidance. Goldcorp’s star mine producer, Penasquito, is expected to generate 350,000 ounces of gold production at negative cash costs in 2011.
Delays from the shutdown of the Musselwhite Mine due to a nearby forest fire and heavy rains causing damage to the tailings area at Pueblo Viejo may cause a pullback shortly but this should be looked upon as a buying opportunity for investors.
2. Yamana Gold (AUY) – Recent drill results indicate the potential for significant expansion of resources at Chapada, Mercedes and El Pinon. Also, there's the recent dividend increase of 50% and new mines opening in the next 21 months which will increase production by 40%.
Despite having operations in two inflationary environments - Brazil and Argentina - Yamana has been able to show excellent cost control in the first quarter of the year, closing losses from forex and derivatives from $60 million in the first quarter of 2010 to $1.5 million in the first quarter of 2011.
3. Newmont Mining (NEM) – Newmont is in the process of switching to a growth profile expanding production by 1 million ounces per year. In the meantime, shareholders get to reap the rewards of a gold-price linked dividend with the third quarter dividend expected to be $0.25 per share based on current prices. This translates into an almost 2% annualized yield, putting a floor under the stock price. If gold was to break out from here it is expected that the dividend will follow suit, raising the floor underneath the stock price.
If one was to go back to 2003 near the beginning of the bull market for gold, Newmont earned $1.23 per share, $2.6 per share in cash flow, and paid out $0.17 in dividends on $3.2 billion in revenues with a closing high during the year of $50.28. Fast forward to year end 2010 and Newmont earned $4.61 per share, $8.31 in cash flow, and now has a gold price linked dividend expected to pay out at in the neighborhood of $1 per share in 2011 on $9.54 billion in revenues.
Disclosure: I am long GG, AUY.