In this article, I will look at four major gold companies (Barrick Gold, Silvercorp Metals, Goldcorp Inc. and Polyus Gold), each with a market cap of over $1 billion. Three of the four companies are among the top 10 largest gold companies in the world. All of these stocks appear to be undervalued, and I will explain why by pointing out the dwindling supply of gold against increasing demand, the problems with paper currency, and the slow growth of the world economy.
Barrick Gold Corporation (ABX) is the world's largest gold company with a market cap of approximately $47.63 billion. Barrick stock is currently trading at just under $48 a share which is almost 15% below its 2011 high. However, January was a good month for the company, with gold rising 11% during the 31 day period. Gold bugs like to extol the virtues of the precious metal every time there is an economic crisis, mainly because investors use gold as a hedge against inflation, which is currently standing at 3.01%.
Even better news is on the horizon in 2012 for Barrick shareholders as the company is likely to produce around 7.5 million ounces of gold at a cost of approximately $550 per ounce, making Barrick one of the lowest cost gold producers of all the major companies. Barrick's share price is likely to increase as its Pueblo Viejo and Pascua-Lama projects look set to enter production before the end of 2012. The combined production of these mines per annum is estimated at 1.5 million ounces. Does this sound realistic? Absolutely! The Pueblo Viejo mine alone officially contains almost 24 million ounces of gold, making it the largest ever deposit of gold reserves in the Dominican Republic. Although production was supposed to begin in the region in early 2012, the slight delay caused by floods in the country during the summer of 2011 has only delayed the projects for a few months.
Although Silvercorp Metals (SVM) is not the powerhouse that Barrick is, I find it to be an intriguing proposition. Its market cap is $1.22 billion and it currently has a share price of just over $7. Unlike many other precious metal companies, it has no debt and has extremely healthy profit margins. Silvercorp Metals has a gross profit margin of over 65%, a profit margin of over $40 and an impressive return on equity of just over 28%. If gold and silver prices continue to rise, and I believe they will (see below), you need to be investing in companies like Silvercorp Metals which have low levels of debt and a history of meeting targets.
Goldcorp Inc. (GG) has a share price of just over $45 and a market cap of just under $37 billion, making it second only to Barrick. Like Barrick, Goldcorp is a long way below its 12 month high (19% in fact). But economic pessimism is leading to optimism over the price of gold. I believe that gold shares are generally undervalued at present, especially when you compare them to last year's record highs. The price of gold has some way to go before it even gets near the all time record when adjusted for inflation. Goldcorp Inc. just released details of record revenue levels of $1.5 billion for the fourth quarter of 2011. Yet this is only the beginning, I believe. The company expects to produce 2.6 million ounces of gold in 2012 at the lowest cash costs in the senior gold sector. Like Barrick, Goldcorp Inc. have a Pueblo Vieja mine but its Red Lake mine is the real money maker. Well over 20 million ounces of gold have been taken from the Canadian mine with Goldcorp Inc., one of the chief beneficiaries.
Although it failed to break the landmark $2,000 an ounce barrier last year, gold is extremely likely to do so in 2012, in my opinion. There was a belief that the world's economy would kick start in early 2012 but this has not been the case. At present, the U.S. dollar is relatively strong against the world's currencies but with the federal government planning a quantitative easing measure of some $500 billion in the latter half of 2012, the value of the dollar may start to fall again. There is also a 50% chance that U.S. economic growth will slow to a snail-like 1% in the third and fourth quarters of this year. A lot depends on whether or not the U.S. automobile industry continues to rise (Ford (F) earned $20 billion in 2011). If banks approve more car loans (which leads to more sales), the economy may grow. If not, it will grind to a halt.
Polyus Gold (PLZL) recently jumped 37%, which was its largest rise in over 3 years. This occurred because of strong gold prices towards the end of 2011, coupled with increased output from its Siberian and Kazakh mines. It is the eighth largest gold company in the world, with a market cap of $11 billion. I would imagine that this is not the end of Polyus' jump. Worldwide gold production is falling year on year. In the last decade, the world's population has increased 15% while gold production has actually fallen by almost 5%. However, Polyus enjoyed an 8% rise in 2011, producing 1.5 million ounces of gold. The overall demand for gold is still increasing, especially in China, which imported more than 3 million ounces of the precious metal in 2011. Bear in mind that this is almost half the total global production outside of China, with Russia and South Africa the most important gold producing nations.
The world's central banks are investing in gold bullion and have not owned more since 2006. However, their overall holdings are 15% less than in 1980 when gold hit its record level. Although gold production in Russia rose last year, it was still a couple of tons below the forecasted level and far away from the overall demand. Those who own shares in Polyus will see their value rise through a simple case of demand exceeding supply.
The world's economy is still flagging and demand for gold is set to increase. At present, the average American pension has 0.15% of its assets held in gold stocks. With employees being urged to consider adding gold shares to their portfolio, it is only a matter of time before ordinary people help the demand for gold explode. By then, the economy could be in ribbons and gold will be seen as a safe haven against inflation and the devaluation of Fiat currency.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.