By Kathleen Martin
There are three gold stocks that I am keen on, primarily due to their ability to boost production at low cost. After researching these three stock picks, I have determined that we could see a price spike around their earnings announcements. I chose these three stocks because they present all major players in the gold market, and provide a great starting point in discussing the overall conditions within the gold market at the present time.
Goldcorp (GG) trades around $46, has a year high of $56.31 and a year low of $41.91. The price earnings ratio is 23:31. The company's earnings per share are $1.97. The dividend yield is 1.20%. Total cash is $1.48 billion and total debt is $7.26 million. The current ratio is 3.82 and book value per share is $25.76. The company is well positioned, with a low cost basis in its overall operations. Goldcorp's core business is its mining operations in North America, Mexico, Central and South America. The company's income from operations comes from its gold, silver, copper lead and zinc sales, but primarily this is a gold producer.
I was not surprised to find that third quarter 2011 results showed the company increased gold production to 592,100 ounces compared to 588,600 ounces in the same period 2010. The company's net cash costs were $258 per ounce, compared to $260 per ounce back in 2010. This is important, because it shows how the company has been able to decrease its production costs. The spread relative to spot price is huge. More importantly, I think the company can continue to govern costs downward as it implements ground level best practices across all of its mines.
In my opinion, Goldcorp has been capitalizing well on its South American operations. Goldcorp saw a $480 million increase in income due to realized gold prices and a $127 million increase in silver sales due to an 83% increase in silver concentrate sales. The increased volumes were from operations in Argentina which are performing to my expectations, along with a 66% increase in silver spot price and a $38 million and $12 million increase in zinc and lead sales, respectively. This shows that Goldcorp is displaying growth in international operations. I think these results bode well going forward.
I think the company needs to keep an eye on production costs, and investors should, too. Production costs increased by $120 million or 35% due to sales from Argentina. Costs rose due to administration and contract costs in the effort for higher silver sales volumes, and higher labor and energy costs at the mines. Additionally, forex between the U.S. dollar, Canadian dollar and Mexican peso added to rising production costs. The company faces currency risks, but I do not think this will be a significant issue going forward as North American currencies stabilize. Case in point: The stronger Canadian dollar and Mexican peso hit Canadian and Mexican operations by $8 million and $1 million, respectively.
I believe the real key to Goldcorp's future success lies in its development of several important operations. In the third quarter, the company continued its development of projects in Argentina, Canada, Chile, the Dominican Republic, Mexico and Guatemala. In addition to its operations and development operations, Goldcorp also holds a 41% interest in a publicly traded company Tahoe Resources which is a Guatemala-specific silver mine developer. It also holds a 35% interest in Primero Mining Corp. (PPP) which produces precious metals from its operations in Mexico. These operations will greatly benefit Goldcorp in the long run, as these expansion areas are likely to increase earnings and push some costs onto partner operators.
In 2011, Goldcorp, along with Yamana Gold (AUY) and Xstrata, acquired an exclusive four year option to Yamana's interest in further Argentina interests. Goldcorp has announced expansion at its Mexico, Guatemala and Argentina mines. I think these moves bode well for the company as it attempts to capitalize on a persistently strong gold price.
Barrick Gold Corporation (ABX) trades around $48, has a year high of $55.95 and a year low of $42.50. The earnings per share are $4.17, and the price earnings ratio is 11:54. The dividend yield is 1.20%. The company has total cash of $2.96 billion and total debt of $13.38 billion. The book value per share is $22.38. Barrick mines for gold in the U.S., Canada and Argentina, which represents 39% of the company's gold production. It also mines for copper in Argentina and Chile and the Dominican Republic. I think the company is well-positioned. It operates gold mines in Papua New Guinea and in Western Australia which represent 12% of the company's proven and probable reserves.
For third quarter 2011 Barrick had record net earnings which increased 45% to $1.37 billion or $1.37 per share compared to $940 million or $0.96 in the third quarter of the prior full fiscal year. Record earnings were due to higher gold and copper prices along with higher sales volumes of copper. Barrick is in good shape to reach its full 2011 year operating guidance in my opinion, which has production expectations of 7.6 million to 7.8 million ounces at cash costs of $460 to $475 per ounce. Copper production is expected to be 450 to 460 million pounds at total cash costs of $1.60 to $1.70 per pound for the full 2011 year.
The company is a solid explorer. Exploration activities in the third quarter yielded gold discoveries in Nevada. In Africa, drill activity has increased to indicate new resources as well as to expand existing production. Development of its Chile and Argentina properties during the third quarter put production on track to start in 2012 and 2014, respectively. Both projects are likely to average 1.4 million to 1.5 million ounces of gold production over the first full five years, which means that cash flows could increase 50-70% from here.
I would like to see the company increase its dividend further. Barrick raised its dividend in the third quarter by 25% to $0.15 per share. The company's strong earnings and cash flows, combined with its positive outlook on the future price of gold, enables it to continue to make high return investments in its project pipeline and also increase its dividend. Barrick's track record of increasing its dividend by over 170% on a quarterly basis over the past five years is consistent and healthy.
Kinross Gold Corporation (KGC) trades around $11. The year high is $18.25 and the year low is $9.96. Earnings per share are $0.57. Price earnings ratio is 18:85. The company has total cash of $1.88 billion and total debt of $1.44 billion. Book value per share is $13.27. The dividend yield is 1.10%. Operating cash flow results from the sale of gold, copper and silver from mines in Russia, South America, North America and West Africa.
The company's third quarter results showed increased gold production of 13% over the same period in the prior year. Revenues increased to $1.06 billion, which is a 45% increase over the third quarter 2010. Earnings were $212 million or $0.19 per share, compared with $540 million or $0.71 per share in the prior year's third quarter. The weakness means that the company has hit lower-value gold ore. This is something to keep an eye on. However I will note that production cost figures and total production look great. For this latest fiscal year the company forecasts production of 2.6 to 2.7 million ounces of gold and production costs of $565 to $610 per ounce of gold.
Kinross produced 647,983 ounces of gold in the third quarter of 2011 a 13% increase over the third quarter of 2010 as a result of a full quarter of production from the West African operations acquired by Kinross in 2010. Production cost of sales per ounce was $634 compared with $517 for the third quarter of 2010, an increase of 23% mainly due to increases in labor costs, diesel and power costs and royalties. Increased production led to record revenues from metal sales of $1,069.2 million in the third quarter of 2011 versus $735.5 million during the same period in 2010 an increase of 45%. The company realized a gold price of $1,640 per ounce in the third quarter compared with $1,190 per ounce for the same period in 2010, which means the company earnings are mirroring gold spot prices.
Net earnings were $212 million or $0.24 per share for the third quarter. The increase is due to a one time income gain in from the sale of the company's interest in Harry Winston Diamond Corporation and the Diavik mines. Capex was $395 million for the third quarter 2011 compared with $150 million for the same period last year. This increase was due to capital expenditures at all mining operations.
I think the company looks well-positioned. Kinross continues to advance its major development projects in Mexico, South America and Russia all of which are proceeding on schedule. In my opinion, further drilling and exploration mean new areas for potential growth. A $1 billion debt offering was completed during the third quarter which should raise sufficient cash for operations. Its stock is currently trading below book value.
The European economic and debt crisis had a negative impact on financial markets in 2011, particularly in the third quarter. The escalation and speculation in gold prices at the beginning of 2011 is as a direct result of the difficulties faced by Europe. As long as commodity prices remain high, I believe low cost mining producers will continue to thrive in the capital markets.
I believe in Goldcorp's strategy to provide value and returns to investors from its high quality mining assets. The company has a strong balance sheet, has a good cash and debt position relative to its peers, and is trading at less than two times book value. Like the above mentioned competitors, it has low cost gold production. Its assets are located in safe areas in North America and relatively safe areas in South America. Unlike its peers, it does not hedge its assets, which may or may not prove prudent in the current market conditions. I expect the stock price to spike again when fourth quarter and year end results are released on February 16, 2012. Prolonged recovery in Europe and any setbacks in the U.S. economic recovery could have a negative impact here, but I firmly believe these three companies will perform well even in an unstable market climate.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.