Battle Of The Heavyweight Gold Diggers; Who Comes Out On Top?

|
 |  Includes: AAU, ABX, AEM, AU, AUY, EGO, FB, GFI, GG, GOLD, KGC, LNKD, MGH, NEM, NG, SAND
by: Christopher F. Davis

Tale of the Tape: After receiving volumes of feedback on several of my recent gold mining articles through comments on Seeking Alpha, personal messages, outreach on Facebook, LinkedIn and by email, I have been essentially strong armed into this current 'battle royal' stock summary which is about to be presented. After I stated that it was time to pick up the gold miners, I then proceeded to illustrate which were my favorite plays [Eldorado Gold (NYSE:EGO) and Agnico-Eagle (NYSE:AEM)]. I also outlined which were my favorite highly speculative plays (Minco Gold (NYSEMKT:MGH), Almaden Minerals (NYSEMKT:AAU) and Sandstorm Gold (SNDXF.PK), and featured one oversold speculative miner in NovaGold Resources (NYSEMKT:NG) in two articles, one where I outlined reasons for possible long term ownership of NG, and another where I described reasons to be cautious should you decide to go long. In the end, I put my money into NG, as well as EGO. However, the purpose of this article is to respond to one overwhelming recurring inquiry I have been receiving, and that is, which large cap gold miner would I crown as the overall best place to invest in this sector?

At the time of this writing there are currently five gold mining stocks with a market capitalization greater than $10 billion dollars. They are listed below ranked by market capitalization:

Company

Market Capitalization ($Billions)

Barrick Gold (NYSE:ABX)

34.61

Goldcorp (NYSE:GG)

30.40

Newmont Mining (NYSE:NEM)

23.56

AngloGold Ashanti (NYSE:AU)

13.27

Yamana Gold (NYSE:AUY)

11.47

Click to enlarge

It is important to note that Gold Fields Ltd (NYSE:GFI), Kinross Gold (NYSE:KGC), and Rangold Resources (NASDAQ:GOLD) all have significant market capitalizations at $9.99 billion, $9.38 billion and $9.13 billion respectively. However, to qualify for coverage as a large cap in this article, I used a hard cutoff of $10 billion in market capitalization. Therefore, they will not be covered in the present article.

We now have our five competitors set and can begin our battle royal. May the stock with the best fundamentals and future prospects for shareholders reign supreme!

Let the battle for the heavyweight gold mining champion begin!

GG: At current share price levels of $36.25, and after having lowered their guidance for the remainder of the year, this stock may have found its bottom as the company moves ahead. The numbers for this company in Q2, and for most miners, were disappointing. GG reported a drop in Q2 profits and earlier this month the company lowered its 2012 production guidance. Profit dropped to $268 million, or 26 cents a share, in the quarter ended June 30, from $489 million, or 52 cents, a year earlier. Removing one-time items, profit dropped to $332 million, or 41 cents a share, from $413 million, or 52 cents. Analysts, on average, had expected earnings of 42 cents a share. And revenue fell to $1.1 billion in the second quarter from $1.3 billion on lower gold output and sales. It cost GG $619 to mine an ounce of gold in Q2 2012, as opposed to $553 in the comparable 2011 quarter. Both operating and profit margins have been declining in recent quarters. The balance sheet shows they have decreasing assets, but their debt to asset ratio has not increased. Their assets are impressive, at the end of 2010, Goldcorp had proven gold reserves of 23.3 million of over 23 million ounces in its existing mines. It also had probable gold reserves of 36.83 million ounces and estimated gold reserves that could be as high as 60.06 million ounces. GG also had silver reserves of 673 million ounces, copper reserves of 3.02 billion pounds, lead reserves of 4.3 billion pounds, along with 10.4 billion pounds of zinc. The 52-week range of the stock is $31.54-$56.31. They trade on average approximately 5.7 million shares per day. The quarter was a disappointment, and is about 6 points off of its all time lows two weeks ago, trading at $37.48 on Friday. GG has a world class gold mining operation, and have the capacity to buy out smaller companies with proven reserves. Definitely a contender as top dog.

ABX: As of December 31, 2011, ABX's proven and probable mineral reserves were 139.9 million ounces of gold, 1.07 billion ounces of silver contained within gold reserves and 12.7 billion pounds of copper. In 2011, ABX 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.

For 2012, ABX expects gold production of 7.3-7.8 million ounces at total and net cash costs of $550-$575 per ounce and $460-$500 per ounce, respectively. The company also expects 2012 copper production of 460-500 million pounds at cash costs of $2.10-$2.30 per pound. ABX annual gold and copper production base is expected to be over 8 million ounces by 2015 and over 600 million pounds by 2013.

The company is doing well overall but the stock is down a whopping 24% this year. Some of this decline came after generally weak earnings report. And this report centered on ABX's project in Pascua-Lama, on the border of Chile-Argentina, is expected to produce less than initially gold than projected and is expected that it will cost a lot more than previously thought. Pascua Lima has estimated gold reserves of 17.9 million ounces. ABX hopes to produce between 800,000 ounces and 850,000 ounces of gold a year at Pascua-Lama when the mine is at full operation. They are also looking to produce 35 million ounces of silver a year at Pascua Lima. Mining costs at Pascua Lima are not known, but they are expected to be high.

On the latest conference call, ABX tried cutting costs by making its decision with respect to the Donlin Gold Project in Alaska, in which it partnered with NG that owns 50% of it. In its recent filing, ABX stated about Donlin Gold that it "would not make a decision to construct them at this time. However, they contain large, long-life mineral resources in stable jurisdictions, have significant leverage to the price of gold, and therefore represent valuable long-term opportunities for the company." This news coupled with the lackluster earnings and gold production costs hurt the stock, where it fell about 8%.

There are some new projects coming on line, such as its Pueblo Viejo mine this year. ABX and GG are actually partners on this project with ABX being 60% owner, and GG 40% owner of the mine. The company expects to produce from Pueblo Viejo nearly 100,000 ounces of gold in 2012 and approximately 650,000 ounces of gold in 2013. There is also the Turquoise Ridge mine in Nevada where ABX owns 75% and is in charge of daily operations at the facility. NEM is a partner on this project as well. The gold reserves at Turquoise Ridge are estimated at 5.3 million ounces

The cost of producing gold continues to rise and is currently somewhere between $550 and $575 per ounce for ABX overall. They originally projected $520 to $560 an ounce. In North America, they produced over 3.3 million ounces of gold at a cost $426 per ounce in 2011. The company expects production in North America for 2012 to be between $475 and $525.

Management actually sees the shares as a discount, as there has been some large insider buys , as the new CEO Jamie Sokalsky bought 50K shares on August 3rd at $32.59 each and a director bought 100,000 shares.

Turning to the balance sheet, they have a flat to increasing debt to asset ratio, and have a large amount of cash. As of June 2012, the company has 2.3 billion in cash and equivalents, with 13.9 billion long term debt, with about 51 billion in total assets. With this cash, they have a large 500 million dollar exploratory budget, and recently approved an increase to the dividend of 33%, raising it to 20 cents paid quarterly effective may 2012. I expect to see increased dividends if the company can thrive. The company is cheap on a p/e basis of only 8.5, and a PEG ratio of 0.1. This one could give GG a serious run for its money.

The third largest market capitalization gold miner is NEM. The company's assets and operations are located in the United States, Australia, Peru, Indonesia, Ghana, New Zealand, and Mexico. This stock has a 52-week trading range of $42.95 to $72.42, and currently is at $48 a share trading on average daily volume of 6.2 million shares, to be down over 20% on the year. NEM reported a rough second quarter on July 27th. Newmont's reported Q2 earnings per share of 56 cents was much lower than the Street's estimate of 93 cents. Attributable gold production fell 10% this quarter and costs applicable to sales increased 10%. The profit of 56 cents or $279 million, compares to $387 million, or $1.04 a share, a year ago. Revenues missed by $300 million, as they pulled in $2.23 billion versus and estimated $2.53 billion. Sales slipped 6.5% to $2.2 billion. NEM reduced its full year gold production estimate to 5 to 5.1 million ounces, from its previous 5 to 5.2 million range citing lower production at its Tanami operations in Australia. Due to a delay in its Conga project in Peru, NEM's 2012 attributable capital expenditure target was also narrowed to $2.7 to $3 billion, from $3 to $3.3 billion. In response to the quarter, analysts at Jefferies maintained its hold rating on NEM but lowered its price target from $46 to $43. The street ratings have reiterated NEM by as a hold.

Some positive signs for the company start at the top with President and COO Gary Goldberg having just bought 1,000 shares at $44.60 on July 31. While not a massive purchase, it shows he expects shares to increase. The company also pays a bountiful dividend. The current annualized dividend paid by Newmont Mining Corp. is $1.40/share, currently paid in quarterly installments, and its most recent dividend has an upcoming ex-date of 09/04/2012. The company is cheap relative to its forward growth potential trading at just a 0.15 PEG ratio, but expensive relative to current earnings at a p/e of 82. The balance sheet shows they have $1.9 billion in cash and equivalents on hand, with an increasing debt to asset ratio. However, with NEM's most recent acquisition of Hope Bay (the largest undeveloped greenfield in North America), promising exploration projects in Peru and Ghana, and the startup of Australia's largest gold producer at Boddington, Newmont is poised for long term growth. While a large company with strong potential, does it have enough to take down the likes of GG or ABX?

AU: AU is the 4th largest gold miner in the world with over a $13 billion market capitalization. Headquartered in Johannesburg, South Africa, AngloGold Ashanti has 20 operations in 10 countries on four continents, as well as several exploration projects in both the established (U.S., Australia) and new gold producing regions (West Africa, remote regions of South America) of the world. also produces silver, uranium oxide and sulfuric acid as by-products. AU reported a decent Q2. Some highlights from their report are as follows:

  1. Q2 production 1.07 million ounces of gold, beating their own guidance on strong performance from Africa and South America.
  2. Q2 total cash costs $801 per ounce (which is rather high in the space), which was better than their guidance of 825 per ounce due to improved volumes, weaker local currencies.
  3. Q2 Adjusted headline earnings of $253 million, or 65 U.S. cents a share. This was down year over year, in tandem with many other leading gold producers reporting earnings this season.
  4. Projects they are working on are all reported on budget and on schedule; Tropicana projects first gold production is expected by end of 2013.
  5. They completed acquisition of a residual 50% stake in Serra Grande mining project
  6. Record EBITDA of $1.47 billion achieved in seasonally weaker first half (Q1 and Q2).
  7. On July 23, they were granted a revolving credit facility of $1 billion, which was a refinance at competitive rates and extends maturity.

One piece of news that hurt the stock in its local operations was associated with safety, causing the company to increase expenditure on safety precautions. Safety related stoppages at the South African operations continue to pose a threat to production rates from the region. In a series of mining accidents, five employee fatalities were recorded at incidents at the Great Noligwa, Mongbwalu and Obuasi and at TauTona operations. The company has stated "it remains committed to eliminating occupational injuries at its mines through the continued implementation of its Project ONE operating model and improvement of safety and risk management protocols."

Full year 2012 expected production remains 4.3 million ounces-4.4 million ounces at a total cash cost of $780 to $805 per ounce. For the third quarter, production is expected to be around 1.07 million to 1.1 million ounces, at a total cash cost of $835 to $865 per ounce. The stock has a 52-week range of $30.70-$49.14, and currently trades at $34.75 a share, with average volume of 1.75 million shares changing hands daily. The company has a P/E of 8.68 with a PEG ratio of 0.13. The company pays an unstable (it varies quarter to quarter) dividend quarterly, currently at a 1.3% yield. Finally, the balance sheet shows they have 987 million in cash and equivalents on hand, with a flat to increasing debt to asset ratio (likely due to the refinancing discussed above). Keys to success for Au include reducing input costs, and staying on schedule and on budget as they have done. Could AU be a dark horse competitor for the crown of best large cap gold miner?

AUY: The final competitor in the large cap gold mining space is AUY. AUY has a 52-week range of $12.35-$18.16, and currently trades at $15.30 a share on average volume of 5.6 million. The company just reported a Q2 missing on top and bottom lines. Net earnings were $43 million, or 6 cents per share versus the 22 cents estimated and a 77% decline from the $195 million profit, or 26 cents per share in the same quarter a year ago . Excluding one-time items, the company said adjusted profit was 18 cents per share. Revenue came in at $536 million, down from $573 million, as lower metal prices and reduced volume of copper concentrate sales hurt. The company said the decline was somewhat offset by increased sales of gold contributed by the Mercedes mine, which was under construction a year ago. Gross margin was 62.5%, 400 basis points worse than the prior-year quarter. Operating margin was 26.5%, 1,470 basis points worse than the prior-year quarter. Net margin was 8.0%, 2,600 basis points worse than the prior-year quarter Total gold production was 288,700 ounces compared to 278,737 ounces, while total copper production slipped to 40.4 million pounds, down from 70.7 million pounds. The company sold 268,441 gold equivalent ounces, up from 261,926 ounces a year-prior. Copper sales fell to 37.4 million pounds from 41.6 million pounds.

Turning to the balance sheet, the company had 698 million in cash and equivalents on hand, with an increasing debt to asset ratio. Cash flow amounted to $241 million in the quarter, compared with the year-prior figure of $331 million. The decline stemmed from lower earnings and a lot of money is being invested into developing its assets. During the quarter, the company drilled 7,300 meters in 39 locations in Gualcamayo, Argentina. The drilling focused on extending the Rodado breccias operation to the north. Looking ahead, production for fiscal 2012 is slated to be about 1.2 to 1.3 million gold equivalent ounces, most of which will come from Mercedes as production ramps up. For fiscal 2013, production is also expected to be around 1.5 to 1.7 million gold equivalent ounces, most of which will come from full-year production from Santa Luz and Ernesto Pau-a-Pique operations. Should the company stay on track and on budget, they are poised for growth, and the company realizes this as they increased their dividend 18% to 6.5 cents per share in the most recent quarter. With excellent long term potential, the stock deserved a place in this battle royal, but may have eliminated its self with its most recent quarter and cash flow issues.

Bottom line: These are the heavyweight bellwethers of the gold mining sector. They all represent good investments in the long term, as I expect the miners to once again return to a strong correlation with the price of gold. Further, I fully expect the price of gold to continue to surge due to inflationary pressures, the likelihood of bond buying European stimulus, and the increasing reality of a QE3 in the United States. I think it comes down to the two heaviest of the heavyweights, GG and ABX. If I had to choose a winner from this battle royal of these gold diggers, I would put my money with the slight underdog, ABX, for the long term. They have proven assets, ability to grow, pay a solid dividend, have a great balance sheet, are trading very low, have huge earnings potential in the next five years, and have seen some management buying. While others are all great contenders, I tip my hat to ABX, even in light of some recent missteps, for the next five years. I would, however, bless a buy of any of these contenders, right here.

Disclosure: I am long EGO, NG, NUGT.