After the recent sell-off, gold has become oversold. Gold has had corrections like this a few times since its bull run in 2002. Every time it hit the oversold level, Gold would rise back up and make new highs.
I think that this current correction in gold is a consolidation before a run up to $2,000 per ounce. I believe this because nothing has changed that would cause gold to drop on a long-term basis. There are no strong dollar policies, risk of recession is still on the table (the fear trade), and physical demand for gold will exceed its supply in the long-term.
I also think that the recent sell-off has created a lot of value among small gold miners. The larger gold miners such as Barrick Gold (ABX), Goldcorp (GG), Newmont Mining (NEM), Anglo Gold (AU), Kinross Gold (KGC) and Rio Tinto (RIO) are in a good position to take over the well-valued smaller miners, which would increase their mining footprint without the expense of exploring for new mines themselves. With this in mind, let’s explore the prospective takeover targets among the small gold miners.
Minefinders (MFN) is a Vancouver-based small-cap company that explores, develops and mines precious and base metals. Its primary project is the Dolores gold and silver mine. Minefinders is well valued with a PE of 10.16 and a super low PEG of 0.27. The stock trades at 3.5 times book value per share. They have a total cash figure of $221.18 million compared to $79.74 million in debt. They have a nice operating cash flow of $80.38 million and a balance sheet that has a 4.06 current ratio (current assets divided by current liabilities). They are expected to grow earnings annually at 52.4% for the next five years. If they hit these expectations, the current stock price of $13.92 should be over $100 five years from now.
New Gold Inc. (NGD) is a mid-cap company involved in the exploration and mining of gold, silver and copper. Its properties include the Mesquite gold mine in the U.S., Cerro San Pedro gold-silver mine in Mexico, and the Peak gold-copper mine in Australia. Although the forward PE and PEG ratios look a little high at 15.59 and 4.57, respectively, New Gold’s stock price is trading at only 2.17 times book value per share (a stock trading under 3 times book value indicates a nice value). They have total cash of $490.45 million compared to $246.69 million in debt. The operating cash flow is $212.64 million and they have a profit margin of 45.98%. New Gold has grown quarterly revenue at 52.8%. However, they are expected to grow earnings annually at only 5% for the next five years.
Northgate Minerals (NXG) is a small-cap company that explores and mines for gold and copper in Canada and Australia. The producing assets are in the Fosterville and Stawell Gold mines in Australia and the South mine which is located in British Columbia, Canada. The forward PE of 15.71 and PEG of 8.99 makes them look overvalued on the surface. However, the stock trades at only 1.99 times book value per share which is a very nice value. They have total cash of $244.47 million compared to $157.21 million in debt. Northgate’s operating cash flow is $96.41 million. Although they’ve experienced negative earnings growth that averaged -$29.71% the past five years, their outlook looks bright for the future as they’re expected to grow earnings annually at 36.8% for the next five years.
Taseko Mines (TGB) is a small-cap company involved in the exploration and operation of mineral properties in British Colombia, Canada. Its key assets include: 75% owned Gibraltar Copper-Molybdenum Mine, the New Prosperity Gold-Copper Project, the Aley Niobium Project, and the Harmony Gold Project. With a forward PE of 5.8 and with the stock trading at only 1.11 times book value per share, Taseko is a good value – ripe for the picking. They have total cash of $377.7 million compared to $210.35 million in debt. Their balance sheet looks excellent with seven times more current assets than current liabilities. They have a profit margin of 11.89% and an operating margin of 25.16%. Taseko Mines is expected to grow earnings at 57.1% next year. However there are no current analyst earnings expectations for the next five years.
Royal Gold (RGLD) is a mid-cap company involved in the acquisition and management of precious metal royalties. Royal Gold has royalty interests in 184 properties on six continents – this includes 36 producing mines and 21 development stage projects. The current stock price of $64 is trading at only 2.42 times book value per share, which is a nice value. They have a total cash figure of $114.15 million and debt of $226.1 million. Operating cash flow of $146.96 million will easily pay down debt. Royal Gold’s balance sheet is healthy with 5.87 times more current assets than current liabilities. They have a nice profit margin of 32.98% and an operating margin of 54.94%. Earnings have averaged 11.95% annually the last five years and are expected to average 12.9% for the next five years. You have to love that consistency.
Gold and the small gold miners are clearly oversold after the recent correction. They typically do not stay oversold for long. The large miners have a great opportunity to acquire smaller miners at these prices to increase revenue. The standout miners are Royal Gold, Northgate and Minefinders due to their strong five year earnings projections. These would be great stocks to buy regardless of whether they become taken over or not.
“The desire for gold is not for gold. It is for the means of freedom and benefit.” – Ralph Waldo Emerson
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.