The third quarter came to a close this weekend and it was the best since Q3 of 2010. For gold and silver, it was an incredible quarter as the SPDR Gold Trust (GLD) and the iShares Silver Trust (SLV), ETFs that track gold and silver prices, were up 11.1% and 25.5%, respectively, in the quarter. The gold mining stocks outperformed gold itself in the quarter, as I suggested they might do back in July, with the Market Vectors Gold Miners ETF (GDX) and the Market Vectors Junior Gold Miners ETF (GDXJ) appreciating 20.7% and 29.0%, respectively. The move in gold and precious metals stems from two sources. First was the anticipated central bank action as gold and silver moved up on every rumor and nearly every central bank meeting. Gold and precious metals continued their ascent when central banks finally acted. First we had the European Central Bank's announcement of an unlimited bond-buying program. Following this, 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. Even the Bank of Japan recently hopped on board the central bank stimulus train and announced its own round of easing. I reiterate my stance from prior articles that I suspect other central banks will follow. China has been a wild card thus far, but I believe they will soon announce their own stimulus measures as well. Given the climate of endless currency debasement as central banks race to ease the money supply, I believe that gold and precious metals will continue to benefit. In this article, I highlight four gold stocks that you should consider in the fourth quarter as they will offer not only growth, but substantial dividends for the sector which offers some downside protection from overall market selloffs. In the event of a market selloff that hits gold and gold stocks, you will be paid to wait for the rebound, unlike some of the more speculative names in the space I have highlighted which offer no dividend. The four stocks which offer a good yield and growth potential are discussed below.
Gold Fields Limited (GFI)
GFI is engaged in gold mining and related activities, including exploration, extraction, processing and smelting. GFI is a producer of gold and a holder of gold reserves in South Africa, Ghana, Australia and Peru. In Peru, Gold Fields also produces copper. It is primarily involved in underground and surface gold and copper mining and related activities. It also has an interest in a platinum group metal exploration project in Finland. Gold bullion is its principal product, which is produced in South Africa, Ghana and Australia. GFI then sells the bullion primarily in South Africa as well as internationally. GFI holds interests in eight operating mines in South Africa, Peru, Ghana, and Australia. As of February 27, 2012, the company had total attributable precious metal and gold equivalent mineral resources of 217.0 million ounces and mineral reserves of 80.6 million ounces.
GFI currently trades at $12.85 a share and attempts to pay a dividend that is roughly 25-35% of its cash earnings depending on investment opportunities. The yield on the stock on the most recent payout shows the yield is 3.8%. It offers a fantastic return, although the dividend fluctuates based on earnings. One issue that could impact earnings on the company is the recent set of strikes that have been occurring in the South African mines over the last few weeks. Earnings could be hit as the strikes have undoubtedly impacted production. The stock has a current p/e ratio of 9.4 and a forward p/e ratio of 7.3. The stock trades on average daily volume of 5.8 million and has a 52-week range of $11.71 to $18.49.
Gold Resource Corporation (GORO)
GORO is another strong company for growth and yield. It is an exploration stage company that engages in the exploration and production of gold and silver in Mexico. It also explores copper, lead and zinc ores. During the year ended December 31, 2011, GORO produced a total of 66,159 gold equivalent ounces from the El Aguila Project. During 2011, GORO's exploration was focused primarily on developing the El Aguila Project. GORO classifies its mineral properties into two categories: operating properties and exploration properties. Operating properties are properties on which GORO currently operates a producing mine. As of December 31, 2011, GORO had a total interest in six properties, one operating property and five exploration properties in the southern state of Oaxaca, Mexico. In June 2011, GORO acquired an additional property between the El Rey property and Alta Gracia property referred to as the El Chamizo property.
According to the property site descriptions, GORO has more exploration properties than operating properties, which could mean the company can continue to grow as it explores and develops the properties. The operating properties El Aguila and El Aire concessions are part of the El Aguila Project and the La Tehuana concession consists of the Las Margaritas property. The El Aguila Project is located in the Sierra Madre del Sur mountains of southern Mexico, in the central part of the State of Oaxaca. The El Aguila Project is located in the San Jose de Gracia Mining District in Oaxaca. During 2011, the combined open pit and underground ore that it processed through the mill averaged 619 tons of ore per day and totaled 214,215 tons for the year, with an average grade of 3.43 grams per ton gold and 357 grams per ton silver.
The exploration properties such as the El Rey property consist of concessions in another area in the state of Oaxaca known as El Rey, El Virrey, La Reyna and El Marquez. The El Rey property is approximately 64.4 kilometers (40 miles) from the El Aguila Project. As of December 31, 2011, the company had drilled 48 core holes for a total of 5,278 meters (17,316 feet) at the El Rey property. The Las Margaritas property is made up of the La Tehuana concession. It consists of approximately 925 hectares located adjacent to the El Aguila Project.
The Solaga property consists of two mining concessions totaling 618 hectares known as Solaga I and Solaga II. The property is located approximately 120 kilometers (75 miles) northeast of the El Aguila Project. The company has acquired claims adjacent to the Las Margaritas property in the Alta Gracia Mining District, namely the Alta Gracia property. These concessions consist of three mining claims, the David 1, the David 2 and La Hurradura. The concessions total 5,175 hectares. The El Chamizo Property totaled approximately 26,386 hectares (101 square miles).
GORO currently trades at $21.45 a share on average daily volume of 332,000. GORO pays a monthly dividend of 6 cents and had raised the dividend each year from 2010 to present day. At 6 cents a share monthly dividend, the company is offering a bountiful 3.4% annual yield, far higher than its competitors in the mining space. The company currently has a p/e of 16.6 and a forward p/e of 14.4. The stock has a 52-week range of $15.06 to $28.36.
Newmont Mining Corp. (NEM)
NEM is the third-largest mining company in the world. The company's assets and operations are located in the United States, Australia, Peru, Indonesia, Ghana, New Zealand, and Mexico. The stock currently trades at $56.01. This stock has a 52-week trading range of $42.95 to $72.42, and trades on average daily volume of 5.3 million. It too offers a great dividend. While not as high as GFI or GORO, at $0.35 quarterly or 2.5%, I think it has greater growth potential. NEM reported a rough second quarter, however, on July 27, 2012. NEM's reported Q2 earnings per share of 56 cents were 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 their 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.
Barrick Gold Corp. (ABX)
ABX is the strongest gold company in the world for the long-term in my opinion. At the end of 2011, ABX's proven and probable gold reserves were 140 million. It also had 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 and produced 451 million pounds of copper at total cash costs of $1.75 per pound. For the current year, ABX now expects gold production of 7.3-7.8 million ounces at total cash costs of $550-$575 per ounce. 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.
Like NEM, ABX reported a moderately weak Q2 earnings. Management highlighted some cost issues with the Pascua-Lama project as a reason for weakness. 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 18 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. While exact mining costs at Pascua-Lama are currently unknown, they are expected to be high, as discussed on the latest conference call. On that call, ABX discussed 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), a 50% owner of the gold deposit location at Donlin. The news of canceling the deal with NG at Donlin, coupled with the lackluster earnings and gold production costs, hurt the stock as it fell about 8% on the news.
ABX has some new projects ramping up, 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. NEM is a partner on this project as well. The gold reserves at Turquoise Ridge are estimated at 5.3 million ounces.
The 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 recently bought 100,000 shares. According to the balance sheet, the company has 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, it has a large $500 million exploratory budget and recently approved an increase to the dividend of 33%.
While I like all the gold miners right now, I believe ABX is superior to its larger rival NEM. It pays the lowest yield of the stocks covered in this article but is still hefty for the sector, paying 20 cents quarterly, or 1.9%. The company is cheap on a p/e basis of only 10.1 and a PEG ratio of 0.2. ABX trades at $41.76 a share right now on average volume of 8.7 million shares. It has a 52-week trading range of $31.00-$53.26.
Gold and precious metals will continue their ascent as governments and central banks continue to debase their currencies worldwide. I believe that the gold miners will continue to outperform the metals far into the next year and thus continue to recommend them. GFI, GORO, NEM and ABX offer a nice mix of growth as well as healthy dividends. I think they will deliver solid returns for investors in the long-term. Finally, with their yield, these companies have some downside protection and pay you to wait out the next major market selloff, which when it comes will be an excellent buying opportunity.