Gold (GLD) has pulled back recently, declining about 5% over the past three months. However, gold mining stocks have pulled back even more, with both senior (GDX) and junior (GDXJ) miners all down over 20%. Coupled with the fact that the miners never really joined in the gold bull market of the past couple years, this makes the mining stocks look pretty darn cheap by comparison to most asset classes, something astutely pointed out by this excellent article. While that analysis pointed out the fact that miners in general appear cheap compared to their assets, I'd like to focus on a couple specific names that illustrate this discrepancy even more.
Shunning dollars of profit over pennies of taxes
The first company is Primero Mining (PPP), which despite record gold and silver production in the most recent quarter is still languishing well below the $4.50/share that Northgate Minerals offered for the company last year before that deal was aborted due to Northgate's own acquisition by AuRico Gold (AUQ). PPP did manage to collect a tidy $25m breakup fee for their troubles, helping bring their strong cash position to $86m, which now represents over 30% of their entire market cap.
One major reason for the discount is that PPP is saddled with an onerous tax liability from when they acquired the San Dimas Mine in Mexico from Goldcorp (GG), where they're on the hook to sell a certain amount of silver to Silver Wheaton (SLW) for roughly $4/ounce yet have to pay taxes on the much higher spot price. However, PPP expects a resolution to this issue by the end of the year, and has begun reporting results assuming a favorable outcome of the tax treatment, including the most recent quarterly earnings of 21 cents a share.
If PPP hits their production guidance target of at least 100,000 gold equivalent ounces at an average cost of at most $660 per ounce, they should have no problem exceeding these first quarter results for each of the remaining quarters, especially since they've already delivered the necessary quota of silver to SLW to allow them to begin selling their remaining 50% share at the market price. This means PPP should be expected to earn at least $1 per share this year, giving them a P/E of about 3, not bad for a company that expects to double production by 2014.
You've got to raise money to make money
The next mining company that appears undervalued is Thompson Creek (TC), especially after their 25% plunge so far this week due to fears of dilution from a debt and equity issuance to fund continued development of their Mt. Milligan mine. However, I think this is an overreaction since the units sold don't convert into shares until 2015, when the mine will be producing and thus adding value and earnings to all shares. It might seem like a steep cost to raise the approximately $200m necessary to finally close the funding gap that resulted from cost overruns, but it provides the capital to finish a project that represents a tremendous value to patient shareholders, especially ones who buy shares or the equity units at these depressed prices.
Since TC recently sold an additional 15% of the expected gold production to Royal Gold (RGLD) for $270m, this gives their remaining 60% stake an implied valuation of over a billion dollars. Considering the entire market cap of TC is about $700m, it seems the market is essentially paying you to take all the potential copper production from Mt. Milligan as well as molybdenum assets that produced earnings of over a dollar a share just last year, with a new mill at their Endako mine thrown in for free, which will help overcome temporarily lower molybdenum production and higher costs. The potential of these assets more than satisfactorily makes up for a little dilution in the future when there should be more than enough equity and earnings to go around.