After struggling for nearly a year straight, the gold mining stocks are starting to shine brightly. On average, they sold off more sharply than the price of gold in the past year. Gold prices dipped nearly 30% from their highs in 2011 to their lows in May. The gold miners, in contrast, as measured by the gold miner ETF (GDX), junior miners index (GDXJ) and Direxion Daily Gold Miner Bull 3X ETF (NUGT) were off a staggering 41%, 56% and 82%, respectively. They clearly had felt the brunt of that sell-off. Gold has traded in the $1,550 to $1,640 range since about late May, and is up 4% on the year so far.
Gold was off to the races Tuesday as it was up nearly 17 dollars an ounce, breaking the $1640 mark. The ETF (GLD) was up over 1%, yet the gold miners were up significantly higher. At the time of this writing, the NUGT was up 6%, while the GDX and GDXJ were up 1.7% and 3.5%, respectively. I have previously recommended picking up the gold miners at the start of this upswing that began in August and I am reiterating my buy recommendation on the gold miners once again. Since trading began in August, the GLD is up 2% while GDX, GDXJ and NUGT are up roughly 10% ,13% and 25%, respectively. This is primarily because I see gold prices continuing to rise due to inflationary pressures stemming from government stimulus activities and I believe the miners are finally having their time in the spotlight.
In addition to the aforementioned ETFs, I currently like the large cap gold mining stocks and I am recommending the following companies in rank order as buys right now:
Barrick Gold (ABX): My top choice in the gold space is ABX as they are the strongest company in the space in my opinion. 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 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 19% this year. Some of this decline came after a moderately weak Q2 earnings report. This report primarily centered on ABX's project in Pascua-Lama on the border of Chile-Argentina. The project at Pascua-Lama is expected to produce less gold than initially anticipated and ABX now expects that it will cost a lot more than previously estimated. Pascua-Lama contains estimated gold reserves of 17.9 million ounces and ABX hopes to produce between 800,000 and 850,000 ounces of gold a year at this site when the mine is at full operation. They are also looking to produce 35 million ounces of silver a year at Pascua-Lama. While exact mining costs at Pascua-Lama are currently unknown, they are expected to be high, as discussed on the latest conference call.
On the latest conference call, ABX tried cutting future costs as evidenced by its recent decision with respect to the Donlin Gold Project in Alaska. This project was a joint venture in which ABX partnered with NovaGold (NG) who is a 50% owner of the gold deposit location at Donlin. In its recent filing, ABX stated with reference to Donlin 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 as it fell about 8% on the news.
There are some new projects coming on line for ABX, including the joint project with Goldcorp (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 for production costs this year. In North America, costs are slightly lower as 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 3 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 with a large amount of cash on hand. As of June 2012, the company has $2.3 billion in cash and equivalents with $13.9 billion long-term debt and roughly $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 8.9 and a PEG ratio of 0.1. The company trades at $37.73 a share right now.
GoldCorp: My next recommended play is GG right now. At current share price levels of $39.44 and after having lowered their guidance for the remainder of the year, this stock likely has found its bottom as the company moves ahead in 2012. The numbers for this company in Q2 were disappointing. GG reported a drop in Q2 profits and lowered its 2012 production guidance. Profit dropped to $268 million, or 26 cents a share in the quarter that ended June 30. This is down from $489 million, or 52 cents a year earlier. Removing one-time items profit dropped to $332 million, or 41 cents a share. Analysts on average had expected earnings of 42 cents a share. Revenue fell to $1.1 billion in the second quarter from $1.3 billion on lower gold output and reduced 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, GG had proven gold reserves of 23.3 million of over 23 million ounces in its existing mines. GG 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 and 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 had 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 ounces and 85,000 ounces at total cash costs of between $400 and $500 per ounce. In its first full five years of operation, GG's share of gold production is anticipated to be between 415,000 ounces and 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 8 points off of its all time lows two weeks ago, trading at around $39.50 right now. GG has a world class gold mining operation and has the capacity to buy out smaller companies with proven reserves and I like this stock over the next 12 months.
Newmont: My third recommendation in the gold mining space 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 $49 a share. NEM trades average daily volume of 6.2 million shares and is down 19% on the year. NEM reported a rough second quarter on July 27. 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 only pulled in $2.23 billion versus an estimated $2.53 billion. Sales slipped 6.5% to $2.2 billion. NEM reduced its full-year gold production estimate to 5-5.1 million ounces, down from its previous estimated 5-5.2 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, down from $3-$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 suggests he expects share price to increase. The company also pays a bountiful dividend. The current annualized dividend paid by is $1.40 per share and NEM has an upcoming ex dividend 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. I like it right here especially with its dividend yield.
Yamana Gold (AUY): My fourth recommendation is AUY. AUY has a 52-week range of $12.35-$18.16 and currently trades at $16.00 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 a year ago, while total copper production slipped to 40.4 million pounds which was down from 70.7 million pounds a year ago. The company sold 268,441 gold equivalent ounces which was up from 261,926 ounces a year prior. Copper sales fell to 37.4 million pounds from 41.6 million pounds a year ago.
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. I believe that the company believes they will stay on budget and grow steadily as they increased their dividend 18% to 6.5 cents per share in the most recent quarter. With excellent long-term potential and good debt management, this stock is a buy.
Anglogold Ashanti (AU): My final recommendation right now is AU. It is the fourth largest gold miner in the world with over a $13 billion market capitalization. Headquartered in Johannesburg, South Africa, AU 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. AU also produces silver, uranium oxide and sulfuric acid as by-products which it sells on the open market. AU is a profitable gold miner and recently reported a decent Q2. Some highlights from their most recent report are as follows:
- Q2 production 1.07 million ounces of gold, beating their own guidance on strong performance from Africa and South America.
- 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 and weaker local currencies.
- Q2 Adjusted headline earnings of $253 million or 65 cents a share. This was down year over year, in tandem with many other leading gold producers reporting earnings this season.
- Projects they are working on are all reported on budget and on schedule; Tropicana's first gold production is expected by the end of 2013.
- They completed acquisition of a residual 50% stake in Serra Grande mining project
- Record EBITDA of $1.47 billion achieved in the seasonally weaker first half (Q1 and Q2).
- 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, 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 $34.93 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). This company is dealing with high extraction costs but has great growth potential.
Other miners I like and are worth considering as well:
Eldorado Gold (EGO)
Kinross Gold (KGC)
Goldfields Limited (GFI)
Harmony Gold (HMY)
Randgold Resources (GOLD)
Royal Gold (RGLD).
Speculative names to consider:
Sandstorm Gold (SAND)
MincoGold Holdings (MGH)
Almaden Minerals (AAU)
I see gold prices continuing to rise due to inflationary pressures over time, particularly stemming from government stimulus activities. I think the miners are poised to outperform the metal in the near future even after the recent run up. I stand by my prior buy recommendation and am reiterating it once more. I believe it's not too late to pick up a gold miner.