In the first installment of this series, I analyzed why gold stocks underperformed relative to gold bullion in 2011 across all categories. Mature gold companies, as measured by the Market Vectors Gold Miners ETF (GDX), underperformed bullion by 26 percent, while junior gold companies as represented by the Market Vectors Gold Junior Miners ETF (GDXJ) underperformed by 37 percent.
The main reasons are: shrinking profit margins due to rising capital expenditure costs for miners across the board; and the fact that mining companies got caught up in the global stock market sell-off of 2011. In this context, I believe there are some gold companies that will outperform the broader market in 2012.
New Gold (NGD) is a company I have been recommending to investors for several years now. The company has not disappointed, with a return of more than 1,000 percent between November 2008 and today. The turnaround was spearheaded by the installment of new management, which saw Randall Oliphant, previously CEO of Barrick Gold (ABX), take the helm at this junior miner.
In addition, NGD received serious support from some of the industry’s leading investors. Pierre Lassonde is a major shareholder and sits on the board; previously he was a major player in helping Newmont Mining (NEM) become the second-largest gold miner in the world. With industry insiders at the helm, NGD quickly established itself as one of the leading junior miners in the industry.
NGD went from a company with negative cash flow and one producing assets, to a company operating in multiple global mining jurisdictions with positive cash flow generation and expanding net-income margins. Currently NGD has producing assets in Australia, Mexico and the United States, with new mines coming online in Chile and Canada.
In Canada, NGD owns the New Afton property, with more than 1.67 million ounces of gold, 5.28 million ounces of silver and 1.5 billion pounds of copper resources. In addition, NGD recently purchased the Blackwater Project in British Columbia, which is a promising and upcoming gold jurisdiction in Canada. Through this transaction, NGD acquired a property in excess of 23,000 hectares, with 2 million ounces of probable gold reserves and a large exploration upside.
The stock price got caught up in the selling frenzy of 2011 that gripped the mining sector, especially in the fourth quarter of the year. As a result, NGD looks fairly valued at the moment. The company’s fundamentals are robust and I expect the company to perform well in 2012.
Gabriel Resources Limited (GBRRF.PK) is a gold mining company that’s active in Europe. Gabriel’s main asset is the Rosia Montana property, which is located in Romania. Rosia Montana is one of the largest untapped gold and silver deposits in the world, and the biggest gold and silver mine on the European continent.
Gabriel’s asset in Romania boasts a prolific deposit of more than 15 million ounces of gold and more than 65 million ounces of silver. The benefits of Rosia Montana are that it’s located in Romania, whose rich and long mining history spans more than 2,000 years. In addition, Romania is a member of the European Union and is regulated by a transparent political process with strong investor protections in place.
The main issue blocking the full-scale development of this world-class deposit is the environmental-permitting process. As a member of the EU, Romania has strong and stringent environmental laws in place regulating the mining industry. As a result, the Romanian government has not approved full environmental licensing and has not given the go-ahead to the project.
In addition, Gabriel has to contend with relocations of families who currently live adjacent to the property. Management is currently negotiating with the regulatory and environmental authorities to solve these issues. If and when these issues are resolved, management will be able to commence drilling, extraction and operational activities in Europe’s largest gold and silver mine.
AngloGold Ashanti Limited (AU) is one of the largest gold mining companies in the world. Based in South Africa, AU has operations in almost a dozen countries on four continents. AU also boasts some of the largest gold reserves in the industry, currently standing at more than 70 million ounces of proven reserves. With production of more than nearly 5 million ounces per annum, AU is a powerful cash-flow-generating machine.
Like most of the gold miners, AU got caught up in the global equity sell-off in the second half of 2011, and is currently reasonably priced, trading at about 15 times earnings. More importantly is that the company boasts operating margins of 36 percent and net profit margins in excess of 25 percent. In addition, AU is now offering investors a small dividend.
If you’re looking for a mature company, with global operations, an experienced management team and solid operational capability, then I recommend you carefully consider AngloGold Ashanti for your portfolio.
The mining industry has been on a roller-coaster ride for most of 2011. This year is looking much more interesting with potential to offer value investors good opportunities.