Gold Miners: A Buying Opportunity

| About: VanEck Vectors (GDX)

Gold miners have been hit hard because of an anticipated drop in gold prices due to bad technicals, lack of quantitative easing, a slowing economy in China and overal bearish analysts. Let's see how cheap these gold mining companies are. The following table lists the top 10 biggest gold miners by market capitalization:

Market Cap ($US billion) P/E forward P/E
Barrick Gold (NYSE:ABX) 43 9,64 7,15
Goldcorp (NYSE:GG) 35,6 20 12,77
Newmont Mining (NYSE:NEM) 26 53 9
Newcrest Mining (OTCPK:NCMGY) 22,5 20 12
Anglogold Ashanti (NYSE:AU) 14,3 10 7,3
Yamana Gold (NYSE:AUY) 11,5 21 10
Kinross Gold (NYSE:KGC) 11,4 15 8,33
Gold Fields (NYSE:GFI) 10 10 7
Eldorado Gold (NYSE:EGO) 7 22,5 13,8
Polyus Gold (OTCPK:OPYGY) 7 13 13
Click to enlarge

The weighted average of the P/E ratio is 20 (due to Newmont Mining's bad earnings). If we don't count in Newmont Mining, we get a weighted average P/E ratio of 15.

When we look at forward P/E ratios (one year from now) and assume gold is steady at these levels. We get a weighted average P/E ratio of 9,7. This means that it takes 10 years for someone to be in the money. Historically, everything under a P/E ratio of 10 is a good buy.

Let's look at the historical P/E ratios of the Gold Bugs Index (Chart 1). You can see that the P/E ratio of today (P/E = 15) is at historical lows between 2000-2012. The forward P/E ratio of 10 is even the lowest in a decade.

I consider this to be a good buying opportunity for the gold mining sector (NYSEARCA:GDX). Though, I assume gold prices (NYSEARCA:GLD) will start to rebound in a few months or so.

Chart 1: P/E ratio of Gold Bugs index

Click to enlarge


Of the stocks mentioned above, there are a few I recommend at this moment, while there are others I would avoid.

Kinross Gold is one of the most inexpensive of them when we consider its book value. Currently it is trading at less than book value. The problem is its Tasiast property, which is delayed for more than a year. When the news came out, Kinross's shares plunged 20%, and still hasn't recovered.

Newmont Mining is a nice value play if you want to have a steady dividend of 2-3%. When gold prices would go above $2,000/ounce, you can count on a dividend north of 4%. The bad earnings it posted are only due to a $1.6 billion write-down of Hope Bay. This write down is only a one time event, so net earnings should go back to $600 million/quarter or $2.4 billion a year, which corresponds with a P/E of 20. This P/E ratio all depends on the future gold price of course.

Goldfields looks cheap, but is located in Africa, which hasn't done well attracting investors because of strikes (Zimplats mine). I wouldn't recommend putting your money in Goldfields because of the political risk.

One of the best plays was Yamana Gold because of its growth story. But it has outperformed every other gold mine so far, and is at fair value. So a correction could be due.

Barrick Gold is the largest gold miner of the list and is very inexpensive. Although a good buy based on its P/E ratio, it is not the greatest growth story out there, because of the size of the company. If you really want to earn big money, I recommend to put your money in mid cap gold and silver miners like New Gold (NYSEMKT:NGD) and Endeavour Silver (NYSE:EXK).

Disclosure: I am long GLD, GDX, PHYS, PSLV, AGQ.