After struggling for about a year straight, I think it is time for the gold mining stocks to shine brightly. In "time to pick up the gold miners," I outlined the various reasons why I believe the metals and mining stocks, particularly with gold and silver exposure, are now buys. After recommending the miners, I featured five of the largest companies in "battle of the heavyweight gold diggers" and several of the speculative miners in a separate article. Given the feedback received and the recent run in the gold miners, I have been asked by readers if it is still a good time to enter the gold mining stocks. The short answer is yes, particularly for the long term, as I see gold prices continuing to rise due to inflationary pressures over time, particularly stemming from government stimulus activities.
My favorite direct play is the gold ETF (GLD). However, I believe the miners may offer a better percentage return as the price of gold continues to increase over time, mainly because the gold mining stock performance has far underperformed the yellow metal and the correlation between the two has been far less than average in the last year; however, I expect that is beginning to reverse. Over the last year, GLD is down 10% at current levels of $156.60, while the mining ETFs: GDX, GDXJ and NUGT, are down a whopping 25%, 43% and 69% respectively at current levels. In the last month however, the miners have far outperformed GLD. While the GLD is up 2%, GDX, GDXJ an NUGT are up 8%, 10% and 26%, respectively.
In "Why These Gold Miners Are The Best Investments Right Now," I recommended Agnico-Eagle (AEM) and Eldorado Gold (EGO) as my top picks several weeks ago. Those who bought at that time would be sitting on 6% and 14% returns. However, at current levels, I am now recommending the two largest cap stocks, Goldcorp (GG) and Barrick Gold (ABX), which I see as having the best ability to offer superior returns in the next 12 months.
GG: At current share price levels of $38.60, 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.
There are some new projects coming on line, such as its Pueblo Viejo mine this year. GG has partnered with ABX on this project with ABX being 60% owner and GG 40% owner of the mine. On August 14, the Pueblo Viejo mine in the Dominican Republic has achieved first gold production, with ore now being processed through the first two of four autoclaves. The mine is now proceeding with remaining plant commissioning activities, including the final two autoclaves, with commercial production anticipated in the fourth quarter of 2012. The 2012 gold production from Pueblo Viejo is expected to be between 68,000 - 85,000 ounces at total cash costs of between $400-$500 per ounce. In its first full five years of operation, GG's share of gold production is anticipated to be between 415,000 - 450,000 ounces at total cash costs of less than $350 per ounce.
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 7 points off of its all time lows two weeks ago, trading at $38.60 on Thursday. GG has a world class gold mining operation and has the capacity to buy out smaller companies with proven reserves. I like this stock over the next 12 months.
ABX: As of December 31, 2011, ABX's proven and probable metals and 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 C1 cash costs of $2.10-$2.30 per pound. ABX's 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 22% this year. Some of this decline came after generally weak Q2 earnings report. And this report centered on ABX's project in Pascua-Lama, on the border of Chile-Argentina, is expected to produce less gold than initially projected and is expected that it will cost a lot more than previously thought. Pascua-Lama has estimated gold reserves of 17.9 million ounces. ABX hopes to produce between 800,000 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-Lama. Mining costs at Pascua-Lama 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 NovaGold (NG) who 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%.
As mentioned before, there are some new projects coming on line, including the joint project with GG at Pueblo Viejo. 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. Newmont Mining (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 of $426 per ounce in 2011. The company expects production in North America for 2012 to be between $475 and $525. Management has been doing some large buying as well, with the new CEO Jamie Sokalsky having 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 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.
Bottom line: These are the biggest stocks in the sector and I believe they will outperform the GLD in the next 12 months. Further, I believe they will outperform their smaller peers as well, given their recent run. I believe all stocks in the gold mining space 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 increase due to inflationary pressures, the likelihood of bond buying European stimulus, and the increasing reality of a QE3 in the United States. Both GG and ABX are buys right here in my opinion, as they have proven assets, ability to grow, pay a solid dividend, have a great balance sheet, are trading very low relative to historic prices, have huge earnings potential in the next five years, and have seen some management buying.