The recent pullback in the price of gold this September has created a short-term buying opportunity in gold mining stocks. Since September 21, most mining stocks are down 10 – 20%. Prior to gold recently finding its floor, these stocks had experienced rapid price appreciations in the previous year of between 30 and 150%, depending on the company.
Purchasing stocks of gold mining companies instead of gold, the commodity, allows one to purchase physical gold much more cheaply than a commodity that has been taken out of the ground – albeit with operational risks and the need to discount for the time delay.
When choosing a gold-mining stock, look for a competently run company with low per-ounce extraction costs. Using stock price appreciation of >30% over the last 52 weeks as a selection criterion leads to around a dozen good-performing stocks. This criterion eliminates the very senior producers that have betas below 0.5, where upside is as limited as the downside.
To avoid the volatility of silver – which is both a precious and an industrial metal – companies that derive a significant portion (>35%) of revenue from silver mining are also eliminated. Finally, companies that are not yet producing gold and are still purely exploration companies are also eliminated, as these share values are overly speculative and thinly traded with extremely high betas of 2 or more.
This leaves a set of intermediate producers in the risk/reward sweet spot with a track record of both producing gold cost efficiently and exploring for gold to maintain the resource pipeline for future production. This elimination process leaves four companies that stand out as extremely interesting:
Yamana Gold, Inc. (NYSE:AUY)
Yamana is the most established of these four companies. Yamana has mining properties in Brazil, Argentina, Mexico, and Chile. Its proven, probable, measured, indicated, and inferred (PPMI&I) resources are currently 40.4 million ounces of gold, with newly found resources at least replacing its annual gold production (1.08 million oz estimated for 2011). With a market equity value of $11,585 million, this leads to $287 per gold ounce. Yamana is a producer that processes some copper and silver as well. Its 2010 revenues were 65% gold, 22% copper, and 13% silver. As a result of this mix, a gold equivalent ounce (GEO) basis is used to compute costs. The GEO extraction cost is $451 per ounce. Thus, the investor cost per extracted gold ounce is $738 on a GEO basis.
Since Yamana has been a producing company for several years, a meaningful review of earning financials is possible. Yamana currently has a P/E of 17.1, while the industry average is 18.8. Its earning per share growth is 147% over the past year and 27% over 3 years. Its free cash flow has grown 175% over the past year. Yamana currently has a price/book value of 1.5 – the lowest of this group of 4 companies. Yamana's stock beta is 0.69. As the sole company of this group to pay dividends, Yamana pays 12 cents per share of dividends annually. It had a positive earnings surprise in its Q2 reporting – $0.25 earnings per share instead of the estimated $0.238. Its cash flow from operations has been positive since 2007 and is currently $1.19/share. It devotes $0.81/share to capital expenditures, while also paying out dividends.
Richmont Mines, Inc. (AMEX:RIC)
Richmont has three primary mines in Canada and several other Canadian mining properties under exploration or pre-production. Its PPMI&I resources are currently 2.526 million ounces of gold, with an estimated 2011 production of 85,000 ounces. With a market equity value of $322 million, this leads to $128 per ounce. Richmont’s extraction cost for this gold is $850/oz. The investor cost per extracted gold ounce is $978.
Things have improved for Richmont over the past year, and the share price reflects it. The company has increased production levels at its two largest producing mines (Beaufor and Island Gold), while increasing explored reserves at the Wasamac property, which is not yet in production. It has four other properties that do not yet figure into stated reserves. Also in 2010, it increased its ownership to 100% of Louvem Mines to fully own the producing Beaufor mine and streamline costs. It also increased ownership to 100% of the Monique property, which does not yet figure into the stated resources. The earnings per share growth is 400% in the past year and 6% over 3 years, with the stock's beta at 0.70. The latest quarterly earnings per share is $0.16. Richmont has devoted $0.71/share to capital expenditures, with positive ($0.93/share) cash flow from operations. The company crossed into positive cash flow from operations in 2006 and its free cash flow growth is 128% over the past year. Like Yamana’s, its P/E is 17.1, but the price/book value is 3.1 – the highest of the group. With a share price gain of 117% over the past 52 weeks, it is questionable whether there is more upside left at the moment in this stock. The company also has the highest cost per extracted gold ounce, due primarily to its $850/oz extraction cost. Richmont does state in its annual report that cost reduction is a key goal for the future. This is the sole stock in the group with less than 50% institutional ownership. Richmont has no long term debt and a current ratio of 4.4.
Banro Corporation (AMEX:BAA)
Banro, having started production in October in the Democratic Republic of Congo (DRC), just made the selection criteria as a producing company. Indeed, this may be the most interesting stock in the group, as it has just passed into being a gold-producing company but remains priced as an exploration company. It still has a high beta of 1.87. As the first gold producing company in the DRC, its stock price also reflects the discount of operating in a country with a troubled past. The company's positive relationship with the local community and the government has not been reflected in the share price. Banro currently has PPMI&I reserves of 11.3 million gold ounces. Its first mine has begun production at an initial rate of 10,000 ounces per month. BAA's estimated gold production for 2012 is 140,000 ounces. In 2014 its second mine will enter production and the first mine is scheduled to increase production. Together these mines will produce 250,000 ounces per year starting in 2014. Two additional mining properties will enter production after 2014. These have 3.7 million ounces of inferred gold, which is included in the 11.3 million ounce company total.
With a market equity value of $771 million, this leads to Banro’s gold resources being valued at $68 per ounce. The company’s extraction costs are calculated at $450/oz., yielding an investor cost of $518 per extracted ounce. This is quite a bargain. The price/book value is 2.0. Since Banro is a less mature company, it has a mildly negative cash flow from operations while devoting $0.13/share to capital expenditures. Now that revenues have started, this mix will change dramatically, with the returns flowing to the shareholders and cash flow from operations likely crossing into the positive in 2012. Banro has no long term debt and a current ratio of 3.4.
New Gold, Inc. (AMEX:NGD)
New Gold is an intermediate gold producer with mines in Mexico, the U.S., Canada, Chile, and Australia. The company has 21.0 million ounces of PPMI&I gold resources. It also produces silver and copper from these same mines. In 2010, silver and copper revenues were each 9% of the total – leaving gold 82% of revenues. New Gold’s 2010 production was 369,077 oz. of gold, 2.14 million oz. of silver, and 14.1 million pounds of copper. With a market equity value of $5,075 million, the gold resources are valued at $242/oz. The gold extraction cost of $400/oz. yields an investor cost for extracted gold at $642/ounce. After Banro, this is the second best bargain for an investor.
New Gold has had a 70% increase in share price over the past 52 weeks and has a price/book value of 2.2. Its P/E is 23.3 with a 0.93 beta, with earnings per share growth of 113% in the past year and 26% over the past 3 years. The latest quarterly earnings per share is $0.16. New Gold's cash flow from operations became positive in 2008 and is currently $0.51/share. The company currently invests $0.31/share annually in capital expenditures.
All four of these companies are solid intermediate gold producers with good management teams in place. Richmont appears to no longer be a bargain. Yamana and New Gold are both excellent buy and hold companies in the gold mining space, where solid gains are very likely. Banro seems to have a great story: a real mispricing that allows for an unusual return without being merely a speculative bet, owing to its recent transition from explorer to producer.
(in million oz)
|Market Value per Gold Ounce||Extraction Cost per Ounce||Investor Cost Per Gold Ounce|
|Yamana Gold, Inc.||40.4||$287||$451||$738|
|Richmont Mines, Inc.||2.53||$128||$850||$978|
|New Gold, Inc.||21.0||$242||$400||$642|