Gold prices have in general been sluggish this year, after a strong run in the second half of the last decade, as the economy has improved from very weak levels and in response, the "safe haven" trade has abated. However, Europe is just in the midst of its turmoil and the US economy is still not out of the woods yet. Just on Wednesday, the Fed minutes were released of the July 31-August 1 meeting with the Fed giving a gloomy outlook on the economy and suggesting that additional monetary stimulus may be necessary soon as the economic recovery has continued at a slow pace. The NY Times additionally noted that "with few signs of a substantial and sustainable strengthening evident this summer, the report will likely solidify investors' expectations that the bank will take new measures this fall." The market acted accordingly as gold immediately spiked $10 to $1,650/oz in response to the release with further buying taking it up to as high as $1,665/oz on the day, bringing the precious metal back onto investors' radar.
The upside for gold here is a big unknown but one report suggested that the momentum gained today should take gold to $1,790 in the coming weeks. Those placing sizable bets on gold include well-known investors John Paulson and George Soros. Furthermore, investors' in gold also include the biggest investors of all: central banks. According to a Q2 report out last week released by the World Gold Council, "official sector demand in the quarter reached a record high of 157.5t, more than double the level of Q2 2011." Barrick Gold (ABX), obviously bullish on its main source of cash flow, also noted some of the same reasons behind a higher gold price, including the buying by central banks, in a recent presentation.
The question now becomes how to capitalize on the opportunity. Well, there are the obvious ways of buying including gold bars and gold bullion. Investors can also take positions in gold ETFs such as SPDR Gold Shares (GLD) and the Gold Miners ETF (GDX). Another way would be to buy shares of stock in publicly traded companies. A few stocks I like and believe could be poised to take off with gold prices are listed below:
Barrick Gold is the gold industry leader in production, reserves, and market capitalization. The company operates globally, with a portfolio of 26 operating mines and advanced exploration and development projects located across the world, and large land positions on some of the most prolific and prospective mineral trends. What is most impressive about ABX is its expected growth rate, even at its current size. Analysts expect the company to report revenues of nearly $17 billion next year, a jump of nearly 15% y/y. EPS is expected to come in at $4.87, a jump of nearly 16%.
The improvement in earnings is expected to be driven in part by a higher gold price as well as the development of its projects. One, the Pueblo Viejo, is expected to start producing gold this month with commercial production anticipated in the fourth quarter. Pueblo Viejo is expected to contribute approximately 100,000-125,000 ounces of gold to Barrick at total cash costs of $400-$500 per ounce in 2012 as it ramps up to full production in 2013. Compared to Barrick's total gold cash cost of $613 an ounce in the second quarter, this is going to be highly accretive to shareholders.
Importantly, the company is growing because its projects are attractive instead of growth for the sake of growth, i.e. the company is very focused on its capital allocation framework. This gives investors confidence that capital will be used wisely as opposed to carelessly. ABX noted as much in its recent press release.
Barrick's renewed focus on maximizing shareholder value will be achieved through a disciplined approach to capital allocation based on maximizing returns on investment and free cash flow within the context of the prevailing economic and political environment. Under this approach, all capital allocation options, which include organic investment in exploration and projects, and acquisitions or divestitures to improve the quality of our portfolio, will be assessed on the basis of maximizing risk-adjusted returns. Our increased emphasis on free cash flow will position the company with the potential to return more capital to shareholders, repay debt, and make additional attractive return investments to upgrade our portfolio.
A wise man once said, actions speak louder than words. Barrick's management paid attention. In its Q2 release, it was noted that,
The company has recently launched a full review of its operations and projects to ensure they meet our objective of delivering appropriate risk-adjusted returns and maximizing free cash flow generation. In light of the current economic environment and this increased rigor on disciplined capital allocation, we have determined that various pipeline projects do not currently meet our investment criteria.
The last half of the last sentence proves that management is serious about its capital allocation plan.
Pershing Gold (PGLC) is a speculative play that has been mentioned on Seeking Alpha a number of times, especially for a microcap, and there is a good reason for that. For some background, PGLC is a newly formed gold exploration and development company uniquely positioned to create shareholder value by capitalizing upon the record-high gold price, a near-term opportunity to put the Relief Canyon Mine back into production, opportunities to acquire exciting gold exploration properties with exceptional gold discovery opportunities in an under-explored part of Nevada - Pershing County. PGC's business model is to build a portfolio of properties strategically located in Pershing County, Nevada. This under-explored portion of northern Nevada holds much promise for discovering new mineral deposits. Our anchor property in Pershing County is the Relief Canyon Gold Mine, a 1980s-vintage gold mine located in a significant gold and silver trend.
A recently completed private placement shows that the assets of the company are real as it issued equity stocks to two notable entities. On June 20, the company announced that Coeur d'Alene Mines (CDE) purchased 10,937,500 shares of Pershing Gold Corporation Common Stock in a private placement priced at $0.32 per share. Dr. Phillip Frost, an existing shareholder of Pershing Gold, joined Coeur in this private placement through Frost Gamma Investment Trust, purchasing 1,562,500 shares of Pershing common stock under substantially the same terms and conditions as Coeur.
Newmont Mining (NEM) is in a similar spot as ABX as it is a gold major whose stock has struggled this year. However, there is a lot to like in the stock. It has a dividend that over the past 4 quarters has yielded $1.40 per share to shareholders or a dividend yield of 3%. The company has assets all over the world that provide it geographical diversification and therefore, more stability in financial results as shown in a recent presentation.
NEM has also put together industry leading results, with industry leading figures in gold reserves per share, attributable gold production per share, operating cash flow per share, and dividend paid per share.
Recent quarterly results have been sluggish for the giant as it reported that sales revenue decreased 6% y/y to $2.2 billion while adjusted EPS fell 34% to $0.59 due to second quarter annual planned mill maintenance in Nevada and lower gold and copper production from Batu Hijau in Indonesia. Nevertheless, the company did make some positive progress in the quarter on costs. Richard O'Brien, Chief Executive Officer, said that "we also expect our advanced projects, exploration and G&A expenditures to collectively be approximately $100 million lower this year. As we continue to optimize and refine our plans, we expect to deliver further efficiencies and cost savings for 2013 and beyond."
Liberty Gold (LBGO.OB) is a speculative name with projects located in Arizona and Alaska. The Arizona project represents estimated resources of ~8.09 million gold equivalent ounces. When including the discovery of indium, gallium and rare earth metals, total resources for blocked out, assayed and geologically inferred ore potentially amounts to $16.70 billion. The Alaska project is surrounded by major gold projects and production, including International Tower Hill's Livengood Project (resource estimate of 20.6 Moz gold), Kinross Gold's (KGC) Fort Knox mine (currently producing > $1M of gold equivalent per day), and the Pogo mine (produced 324,722 troy ounces of gold in 2011).
Recently, the company had a number of major announcements. First, it announced positive results following initial sampling and processing for visible gold on the company's Domestic Portfolio. Initial samples were collected from 5 different locations within the Domestic Portfolio holdings to determine whether, once processed, visible gold was present at 3 different screen sizes: 100 minus, 50 minus and 25 minus. Samples from each of the 5 different locations resulted in the detection of visible metallics while 1 of the locations resulted in the detection of visible metallics and gold, as outlined in the table below.
Earlier in August, LBGO announced that it staked 19 additional Alaska State mineral claims to increase the size of its McCord Creek Property to 33 claims (4,620 acres). The Company also approved proceeding with an approximate $190,000 exploration program in 2012 for its McCord Creek Property gold project in central Alaska's Tolovana Mining District. The 2012 agreed program includes additional power auger assisted soil sampling, rock sampling, possible trenching and geophysics, with the objective of defining drill targets for the 2013 field season. Crews have now been mobilized and have commenced the sampling program. Endurance Gold Corporation is managing the 2012 exploration program and Liberty Gold is funding the 2012 activities on the McCord property.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.