In his second recent testimony to Congress on monetary policy and domestic economic growth, Fed Chairman Ben Bernanke said that he does not expect a "double dip". Gold stocks were down on the news, since they are ideal investments to hedge against macro "tail risks". Goldcorp (GG) fell 3.3%, Yamana (AUY) fell 3%, and Eldorado Gold (EGO) fell 0.2%. The hit was also made worse by how Bernanke was quiet about another round of quantitative easing. In my view, basic material investors should look for volume growth when making portfolio decisions. Forecasting where gold prices go from here is very speculative, especially since much of it stems from fear - some would say, "unreasonable fear" - which spontaneously fluctuates. With that said, Eldorado, Goldcorp, and Yamana are decently attractive given their fundamentals and growth potential. Below, I review the pros and cons to backing each.
According to data from FINVIZ.com, the company is rated around a "buy". Greece's Supreme Court suspended tree cutting in the Skouries region and parts of Stratoni where Eldorado was operating. Eldorado is preparing the documentation necessary to prove land ownership; but, this is unlikely to be cleared until more macro headwinds clear. In the process, much of the potential value creation the gold producer could have gained will be lost.
Eldorado will be reporting 2Q12 earnings on July 27th, so there are few things investors should look for. The European Goldfields acquisition will increase the number of shares outstanding, margins will be partially eroded by greater SG&A expects and operating expenses at Stratoni, and weaker gold price sales. Going forward, investors should be focused on Eldorado's start-up in the Eastern Dragon projection and Efemcukuru commercialization.
At a respective 17.5x and 12.5x past and forward earnings, Eldorado makes for a decent investment. With a solid balance sheet and only 9.9% annual growth expected over the next 5 years after an explosive history in the past 5, Eldorado has more reward than risk right now. ROA, ROE, and ROI may all be in the single-digits, but the current price target of $19.80 is nearly double the current market value!
Several times larger than Eldorado, Goldcorp is ironically trading at a discount to its peers on a multiples basis. Goldcorp is valued at a respective 17.2x and 10.8x past and forward earnings with a dividend yield of 1.7%. There is also limited volatility on the stock with a beta of 0.56. EPS growth of 14.1% is expected annually over the next 5 years.
Management recently cut its 2012 gold production guidance from 2.6M oz 2.35M-2.45M oz while raising its cash costs from $250/oz - $275/oz to $310/oz - $340/oz. The negative revision is chiefly a result of weak operations at Red Lake and Penasquito. Many investors feel as though management is attempting to explain away operation delays - that the leadership is being disingenuous when it says it is "analyzing" the matter.
While recent performance has been disappointing, it is the future that matters and Goldcorp has put billions into North American gold assets. Moreover, the more than 18% price decline over the last month has more than accounted for weak performance. Investors should be mindful that the company's cash costs are still nearly half of the industry average and are trending downwards in the long-term. Every year through 2015, a new mine will go into production and further expand margins by spreading out fixed costs.
According to FINVIZ.com, Yamana is the least preferred on the Street of the three gold producer highlighted herein. It trades at a respective 18.7x and 9.8x past and forward earnings with a 1.5% dividend yield. Volatility is higher than many gold peers, which will allow for stronger risk-adjusted returns should operating performance hold up.
Fortunately, Yamana is a top quality brand with an excellent moat. Gross margins are strong and EPS is expected to be 10.3% annually over the next half decade. This means the company will have 2016 EPS of around $1.96. At a 13x multiple, the future value of the stock is $25.48. Discounting backwards by 8% yields a present value of $17.34 - a decent, but not incredible, 20%+ margin of safety.
I am also optimistic about the synergies that will be unlocked from the recent $414M takeover of Extorre (XG). The acquired Cerro Moro project was poorly developed despite signs of high-grade opportunities. Argentina is allowing management to repatriate the profits, which is a less of a headwind than what the market has asserted given high corporate domestic tax rates.