What a fantastic two months for gold and gold stocks! Since I began pounding the table two months ago to pick up some exposure to the sector, the SPDR gold trust ETF (GLD) is up 12.2% while the gold miners ETF (GDX) and junior gold miners ETF (GDXJ) are up 33.2% and 35.8% respectively. In August I featured the five largest gold mining stocks in a battle royal style matchup, ultimately declaring Barrick Gold (ABX) as my favorite of the five. The other contenders considered for the heavyweight gold digger title were Goldcorp (GG), Yamana gold (AUY), AngloGold Ashanti (AU) and Newmont Mining (NEM). Since that time all five stocks have performed admirably along with the sector as worldwide central bank easing has spurred gold buying. First we had the European Central Bank's announcement of an unlimited bond-buying program. Then Ben Bernanke and the U.S. Federal Reserve announced a massive third round of quantitative easing, aka QE3, consisting of buying $40 billion in mortgage assets monthly until unemployment improves. Finally yesterday the Bank of Japan announced its own round of easing. I suspect other central banks will follow. In this race to debase currencies, I believe that gold and precious metals will continue to benefit. That said, I would like to revisit two of the larger gold miners, which I have received numerous inquiries about from Seeking Alpha readers, GG and NEM, and ultimately weigh in on which I think is the better pick at current levels.
GG: I originally highlighted this stock at share price levels of $36.25 shortly after it lowered guidance for the remainder of the year. I suggested this stock may have found its bottom as the company moved ahead. The numbers for this company in Q2 like 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 a year earlier. 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. However, since recommending the stock it has risen 29.3% to $46.88.
The balance sheet of GG shows it has decreasing assets, but its debt-to-asset ratio has not increased. The assets are impressive, at the end of 2010, Goldcorp had proven gold reserves of 23.3 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. It trades on average approximately 5.7 million shares per day. The quarter was a disappointment but I think rising gold prices will feed right into the bottom line in the quarters ahead for GG. The next quarterly report is due October 22, 2012. GG has a world class gold mining operation and has the capacity to buy out smaller companies with proven reserves should it need to generate growth and I think it be a winner in coming quarters.
NEM: NEM is the third-largest mining company in the world. When I recommended the stock it was trading at $48. Now the stock has ballooned and is trading at $56.85 for a gain of 18.4%. Recall that 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 trades on average daily volume of 5.3 million shares, to be down over 20% on the year. NEM recently reported a rough second quarter on July 27, 2012. NEM'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 with $387 million or $1.04 a share a year ago. Revenue missed by $300 million, as it 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 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 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 had an ex-date of 09/04/2012. The company is cheap relative to its forward growth potential trading at just a 0.2 PEG ratio, but expensive relative to current earnings at a p/e of 98. The balance sheet shows it has $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 start up of Australia's largest gold producer at Boddington, Newmont is poised for long-term growth. Given the rise in gold prices, I suspect the next few quarters beginning with Q3 results, due 10/26/2012, to be strong for NEM and in turn strong for the stock.
As evidenced by this summary both GG and NEM are strong companies and I recommend both as buys right now. Although I like them both I believe at current levels NEM represents the better buy given the run GG has had relative to NEM since my initial recommendations (29.3% vs. 18.4%). I believe that NEM has some room to run relative to GG. Further, NEM has a far superior annual yield of 2.5% versus GG's 1.2%. Thus, in a market sell-off, NEM would have the larger dividend protection and also pays the investor to wait. Further, GG is only at 13% of its 52-week high, whereas NEM is 21% off its 52-week high. Price action suggests that NEM still has a relatively higher percentage room to run versus GG as the gold miners return to a high correlation with gold prices in my opinion, thus I would be a buyer of NEM over GG at these levels.