Since the latest top of nearly $1800 per troy ounce on the last day of February, the price of gold has steadily declined during the last two months nearly 12% to its current level of around $1580 per troy ounce. On the other hand, the debt clock continues to spiral ever higher and the Greek and Eurozone concerns have not had any sort of meaningful resolution. Income Investors should look at this current pullback as a potential to add to their gold related assets on speculator weakness.
Since I am an income oriented investor, I decided to take a look at three precious metal related dividend payers who I feel are currently undervalued. They are AngloGold Ashanti (AU), Freeport-McMoran (FCX), and GAMCO Global Gold and Natural Resources Income Trust (GGN).
AngloGold Ashanti
This company focuses a majority of its production effort on gold reserves. It is an Africa-centric producer with a majority of its reserves along the gold rich areas of South and Western Africa. It has consistently beat estimates for the last four quarters.
It continues to slide excessively since its recent top of 47 in late February. It is currently trading under 33.50 representing a nearly 30% drop in only two months of trading.
This has caused the company to become an accidental high-yielder. It is now yielding a lucrative 3.15% beating the 10 yr Treasury by a healthy margin. AngloGold has an attractive price-to-earnings ratio slightly under 10 and a forward ratio of slightly over 7. These are significantly lower than industry standards of 30 and 10, respectively. The company also increased revenues nearly 25% in 2011.
They also have an extremely attractive forward price-to-earnings growth rate of around 0.15 indicating it is significantly undervalued. Add to that an equity to debt ratio of around 2.75, and you have a picture of a company who is fundamentally sound.
AngloGold's credit rating was also upgraded in March by Moody's citing recognition of improvements in the company's balance sheet position and operational performance.
AngloGold focuses on gold mining and extraction, as well as silver, and mineral salts as by products. Headquartered in Johannesburg, AngloGold is Africa's largest gold producing company.
AngloGold Ashanti has 20 operations in four regions consisting of open-pit and underground mines and surface metallurgical plants in 10 countries on four continents.
It does have inherent risks. There is growing evidence that a class action lawsuit against AngloGold is on the horizon for alleged hazardous working conditions in their mines. Although they are the largest African producer, their production has declined for about the last 5 years.
As of December 31, 2011 the Company's ore reserves totaled 75.6 million ounces. During the year ended December 31, 2011, it had a gold production of approximately 4.3 million ounces. With these reserves of 75.6 million ounces and geographically diverse mines, AngloGold is positioned well in the coming years.
Freeport-McMoran
Another mining company fast growing its stockpile of major resources with a strong balance sheet and an impressive growing dividend yield is Freeport-McMoran. It is mainly focused on copper, gold, silver and molybdenum production.
It has assets in North and South America, Indonesia, DRC and also a wholly owned smelting subsidiary Atlantic Copper in Spain. Its stock price has tumbled nearly 25% since the February tops.
As of December 31, 2011, it is in possession of mining reserves totaling 119.7 billion pounds of copper, 33.9 million ounces of gold, 3.42 billion pounds of molybdenum, 330.3 million ounces of silver and 0.86 billion pounds of cobalt. The company generated total revenue of $19.78 billion in the year 2011, with a net income of $3.83 billion.
I feel this company provides a compelling growth potential if China's economy improves. It also provides an increasing income stream and a potential hedge against inflation or black swan events.
What caught my attention was a 25% increase in their dividend payment on May 1. As I did a little more research I also found this also followed a 66% payout increase the year before and an enormous 100% increase the year before that. Talk about a dividend growth rate!
Freeport-McMoRan expects higher sales from its gold, copper and molybdenum mines in 2012 . Based on current prices of metals, the operating cash flows are estimated to exceed $5 billion. This company also currently operates at a healthy profit margin of about 25% and an equally healthy return on equity exceeding 25%.
With a conservative dividend payout ratio of only 37%, the company is positioned to utilize a substantial portion of its earnings towards major projects to further enhance profitability. Looking forward, Freeport has great fundamentals in this sector, and in my opinion, it is an ideal investment opportunity at current valuations
Its exposure to Copper makes it high beta and extremely volatile. It also has plans of increasing its copper output by 25% over the next couple years. Further, the current global economic uncertainty may lead to a decline in the profitability of mining and smelting companies
GAMCO Gold & Natural Resources
Another gold related company getting cheaper by the day is Gamco Gold & Natural Resources Income Trust. GGN is a closed end fund which utilizes a covered call strategy on the majority of its portfolio holdings. This strategy generally consists of writing "out of the money call options" for each of the assets owned in the portfolio. The premiums that are collected contribute to the monthly distributions made by GGN.
This particular play on gold, precious metals, commodities, and energy offers an incredible yield of over 11% paid monthly. The payout history is very consistent and stable. GGN also offers a dividend reinvestment plan (DRIP) which allows an investor to purchase shares at a discount to market price under certain conditions.
As of the end of last year the portfolio of GGN included 45% in stocks and fixed income securities of gold and other precious metals mining companies, 43% in stocks and fixed income securities of energy companies, and 12% in stocks and fixed income securities of base metal and other commodity companies.
The current net asset value of GGN is 13.31. It is currently trading at around 14.60. This represents a 10% premium over net asset value. GGN regularly trades at a premium to NAV. I am a bit concerned with the shrinking NAV, but If they can keep leverage down I am comfortable with holding this CEF for the foreseeable future to reap the large monthly payouts.
Conclusion
I believe investors should have some form of exposure to gold related assets for the remainder of 2012 for several reasons.
- Uncertainty Surrounding November Elections
- Continuing Greek and Eurozone Concerns
- Favorable Federal Reserve Policy
- Possible QE3
- Improving Chinese Economy
- Hedge Against Inflation
- Hedge Against Unforeseen Black Swan Events
