These Metals Stocks Still 'Priced To Buy'

by: Marc Courtenay

"One only gets to the top rung on the ladder by steadily climbing up one at a time, and suddenly all sorts of powers, all sorts of abilities,which you thought never belonged to you--suddenly become within your own possibility..."--Margaret Thatcher (British Prime Minister, 1979-1990)

What an encouraging ending to the first quarter of 2012. Ironically, as Fed Chairman Ben Bernanke keeps dropping hints that the economy is not as robust as some think, the hope for more QE3 style stimulus increases.

As Reuters reported on Monday, Marc 26th:

"Stocks have benefited not just from the upbeat economic data, but from speculation that the Federal Reserve could add further stimulus to the economy.

"What may have driven some of this sustained support for the market is continued indications from the Fed that QE3 is not out of the question. That would certainly be extremely negative for anybody who has a short position on U.S. equities," said Natalie Trunow, chief investment officer of equities at Calvert Investment Management in Bethesda, Maryland."

Many stocks keep moving higher and are becoming quite exorbitant, selling at rich multiples to earnings and sales. Yet there still are a good number that have not yet participated in this 2012 market rally and appear to be fairly priced and undervalued.

The precious and semi-precious metals sector have consolidated off their recent lows and have been moving higher as the 3rd quarter's end draws near.

Below is a 6-month chart comparing the Global X Copper Miners ETF (NYSEARCA:COPX) with the Market Vectors Gold Miners ETF (NYSEARCA:GDX) and the Global X Silver Miners ETF (NYSEARCA:SIL).

Chart forGlobal X Copper Miners ETF (<a href=

SIL and especially GDX have significantly underperformed COPX. So therein lies a powerful insight to which stocks are ridiculously cheap and may be on the verge of playing "catch up".

The same could be said for a major component of the COPX, Freeport-McMoRan Copper and Gold (NYSE:FCX). It continues to trade at only 7 times forward earnings, 4 times cash flow.

Ironically, it's the silver streaming company Silver Wheaton (NYSE:SLW), which is one of the top ten holdings in GDX, that again has captured my attention.

This brilliantly managed enterprise recently reported that their quarterly revenue growth (year-over-year) has doubled and their quarterly earnings growth (yoy) increased a jaw-dropping 450%. Yet its price-per-share is still below $34.

Check out their key financial statistics to see a company with an 88% profit margin that's cash-rich and yet has a PEG ratio (5 year expected) of only 0.71.

I don't know when, but sooner than later the price of SLW stock should be going much higher. When silver's price tests the $50 level and the earnings of the company continue to grow, their 1.1% dividend will be going up as well. Their latest dividend declaration is worth reading.

The gist of it is..."Under the Company's dividend policy, the quarterly dividend per common share is equal to 20% of the cash generated by operating activities in the previous quarter divided by the Company's outstanding common shares at the time the dividend is approved, all rounded to the nearest cent."

Another top-ten holdings of GDX is Barrick Gold (NYSE:ABX). As their web site reminds us...

"Barrick is the gold industry leader, with a portfolio of 26 operating mines and advanced exploration and development projects located across five continents, and large land positions on some of the world's most prolific and prospective mineral trends.

"The Company also has the largest reserves in the gold industry, with about 140 million ounces of proven and probable gold reserves. In addition, Barrick has 12.7 billion pounds of copper reserves and 1.07 billion ounces of silver contained within gold reserves as of December 31, 2011.

"In 2011, the Company produced 7.7 million ounces of gold at total cash costs of $460 per ounce or net cash costs of $339 per ounce and produced 451 million pounds of copper at total cash costs of $1.75 per pound."

In calendar year 2012 ABX anticipates gold production of 7.3-7.8 million ounces at total cash costs of $520-$560 per ounce or net cash costs of around $400-$450 per ounce. The Company also expects 2012 copper production of 550-600 million pounds at total cash costs of $1.90-$2.20 per pound, well below the current $3.89 spot price.

Barrick pays a 1.4% dividend, and has an inexplicable PEG ratio (5 year expected) of only 0.25. Selling near their 52-week low, the world's largest gold producer appears to be extremely undervalued.

Yes, I do believe the precious metals sector is in the process of putting in a "stealth bottom". With the Federal Reserve and other major central banks continuing to signal that major monetary easing will continue, we're also likely to see companies like Goldcorp (NYSE:GG), Newmont Mining (NYSE:NEM) and Yamana Gold (NYSE:AUY) finally getting the respect and valuations they deserve.

The time to begin accumulating a very profitable sector of the stock market is when it's truly out of favor. The precious metals sector has met that description for quite some time.

If you're an investor who is willing to be patient while collecting modest dividends now's a reasonable time to consider accumulating this sector. When, not if, these stocks "pop" the average investor will be surprised and unprepared. The move higher will be breathtaking.

More conservative investors might want to wait for that to happen and be confirmed before buying. Many of the above stocks mentioned will again exceed their 200-day moving average, retest it and then move higher.

Disclosure: I am long ABX, GDX, FCX, SLW, NEM, GG, AUY.