Why I Added To My Position In This Undervalued Gold Stock

| About: AngloGold Ashanti (AU)

There was very good piece on Seeking Alpha the other day on the likely positive impact of current Federal Reserve policies for gold and gold stocks. Gold stocks have not risen in line with the increase of gold prices over the past few years, and have been disappointing performers. However, if gold prices stay at current levels or rise they should eventually be big winners. One gold stock that has not performed as expected since I bought it around $44 a share that I added to this morning at just over $38 a share is AngloGold Ashanti (NYSE:AU).

AngloGold Ashanti - "AngloGold Ashanti Limited primarily engages in the exploration and production of gold. It also produces silver, uranium oxide, and sulfuric acid. The company conducts gold-mining operations in South Africa; continental Africa, including Ghana, Guinea, Mali, Namibia, and Tanzania; Australia; and the Americas, which include Argentina, Brazil, and the United States. It also has mining or exploration operations in the Democratic Republic of the Congo, Guinea, and Colombia. As of December 31, 2010, the company had proved and probable gold reserves of 71.2 million ounces." (Business Description from Yahoo Finance)

7 reasons AU is a great long term buy at just over $38 a share:

  • It is one of the few gold stocks that provide a good dividend yield. The stock yields a solid 2.6%.
  • The stock is selling near the bottom of its five year valuation range based on P/E, P/B, P/CF and P/S.
  • AU's consensus earnings estimates for both FY2011 and FY2012 have stopped falling and both consensus estimates actually rose a penny apiece in the last week.
  • The company is projected to show fast accelerating earnings. AngloGold made $2.12 in FY2010, is scheduled to earn $4.19 in FY2011 and analysts have it making $5.16 a share in FY2012.
  • The company has crushed earnings estimates each of the last four quarters and is going for less than 7.5 forward earnings.
  • The company increased revenues about 25% in FY2011 and analysts expect 20% sales growth in FY2012.
  • The stock has one of the lowest five year projected PEG's (.15) in the market and is selling for less than 6 times operating cash flow.

Disclosure: I am long AU.