3 Cheap Gold Stocks With Strong Balance Sheets And Takeover Potential

Includes: AUY, EGO, GSS, IAG
by: Hawkinvest

Yamana Gold (NYSE:AUY) recently announced it would buy Extorre Gold Mines (XG) for about $403 million. Even though many retail investors are shunning the stock market, companies that are flush with cash are seeing depressed valuations as an opportunity to acquire solid assets for the long term. This strategy makes sense because incredibly low interest rates make it easy to finance a deal, and companies that have enough money to pay cash for a deal are often earning little on those balances in the bank. Buying a competitor on the cheap can often provide much more substantial returns when compared to what a company will earn from cash on deposit in the bank.

Another supporting factor for additional merger and acquisition deals is the fact that central banks around the world have just begun to signal more policies of easing and currency printing in the future. Interest rates in China, Brazil and Europe have been recently cut and the U.S. Federal Reserve is expected to announce additional policy steps to boost the weak economy very soon.

Easy money policies from central banks tend to push investors into gold and other hard assets because gold can't be printed by governments. Gold has been putting in a solid base around the $1,600 per ounce level, and has started to push higher. With many gold mining stocks trading near 52-week lows, it makes sense to look for bargains. It probably won't be long before another takeover deal is announced. Here are a few undervalued stocks that could be interesting acquisition targets to consider now:

Golden Star Resources, Ltd. (NYSEMKT:GSS) has been considered to be a takeover target in the past by some investors and analysts because this company has a strong balance sheet, high-potential projects, a market capitalization of just about $300 million and what appears to be an undervalued stock price. The balance sheet is strong with about $113 million in cash and around $145 million in debt. Golden Star has about $485 million in annual revenues.

The stock appears deeply undervalued as it trades well-below book value which is $1.73 per share. This company has two gold mines in Ghana as well as projects in Sierra Leone, Niger, and Brazil. It recently announced a 10% gain in production with a total of 85,183 ounces of gold produced in the second quarter end on June 30, 2012, which was up from about 77,725 ounces produced in the first quarter. Another positive is that multiple insiders were buying this stock earlier this year, when it traded around $1 per share or less.

Here are some key points for GSS:

  • Current share price: $1.16
  • The 52 week range is 90 cents to $2.78
  • Earnings estimates for 2012: 8 cents per share
  • Earnings estimates for 2013: 24 cents per share
  • Annual dividend: none

Eldorado Gold Corp. (NYSE:EGO) shares are trading near the 52-week lows. The company recently announced disappointing financial results in the second quarter in which profits dropped by 38% due to higher expenses and lower sales. The company reported profits of $46.6 million, or 7 cents per share for the second quarter, which was down from $74.9 million, or 14 cents per share, last year.

These weaker results was partially due to delays at mines in Turkey and China. However, those and other short-term issues could be resolved and the longer-term outlook is brighter. This company has a strong balance sheet with about $391 million in cash and just around $75 million in debt. It also trades for just a small premium to book value which is $8.05 per share. With the shares trading near book value and offering a solid dividend, investors could see major upside whether or not a deal comes for Eldorado.

Here are some key points for EGO:

  • Current share price: $11.02
  • The 52 week range is $9.78 to $22.12
  • Earnings estimates for 2012: 64 cents per share
  • Earnings estimates for 2013: 80 cents per share
  • Annual dividend: 18 cents per share which yields 1.7%

Iamgold Corporation (NYSE:IAG) shares now trade for about half the 52-week high and the drop seems unjustified based on the very strong balance sheet and mining operations that this company has developed. Iamgold's balance sheet has about $1.06 billion in cash and no long-term debt. This puts the company in a very strong position to develop gold production, but it also could make it an attractive target for a major gold company to takeover.

Since the company has no debt and so much cash available, it makes an acquisition deal easier to accomplish. It also means the dividend payout is solid and it has room for future increases. Iamgold has mines in Africa, North America, and South America which reduces risks for investors since the company is geographically diversified. The company is poised for more growth thanks to its recently acquired "Cote Lake" project. Iamgold offers just about everything an investor could want in a gold stock including a dividend, a very strong balance sheet, a low P/E ratio, and significant upside potential.

Here are some key points for IAG:

  • Current share price: $11.18
  • The 52 week range is $9.20 to $23.88
  • Earnings estimates for 2012: $1.15 per share
  • Earnings estimates for 2013: $1.52 per share
  • Annual dividend: 25 cents per share which yields 2.3%

Data is sourced from Yahoo Finance. No guarantees or representations are made. Hawkinvest is not a registered investment advisor and does not provide specific investment advice. The information is for informational purposes only. You should always consult a financial advisor.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.