Since July I have been recommending the gold and silver miners as excellent investment opportunities as I predicted central bank action would lead to large gains in gold and silver. A central part of my thesis is that the miners would outperform the physical metals as they came off of multi-year lows and returned to a higher correlation with the metals. In early August I authored a manuscript analyzing the five largest gold miners in the world, featuring the companies in a "battle of the heavy weight gold diggers." In this article I outline information on each stock, provide updates on the companies and ultimately recommend which stocks I believe are a buy, hold or sell.
Barrick Gold (ABX): My top choice among the large gold miners is ABX as it is the strongest company in the space in my opinion for the long-term. I think the company is a steal at current valuations even after its recent run. 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 is expected to produce over 8 million ounces of gold annually by 2015 and over 600 million pounds of copper by 2013.
The company is doing well overall, but the stock is down a whopping 11% 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 and 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. ABX is 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.
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. It originally projected $520 to $560 an ounce for production costs this year. In North America, costs are slightly lower as it 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, ABX 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 of long-term debt and roughly $51 billion in total assets. With this cash ABX has 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.
ABX's current operating margin of 45% is superior to the industry average of 30%. Further, the company is cheap on a P/E basis of only 10, compared to the industry average of 16. ABX trades at a PEG ratio of 0.18. The company trades at $40.49 a share right now and is up 14% since I first highlighted it. On average, 8.1 million shares exchange hands daily. The stock has a 52 week trading range of $31.00-$53.26. ABX will report Q3 earnings on or around October 25, 2012.
Yamana Gold (AUY): I believe AUY has a great management team and is poised for growth and I think it is a buy on any dips. AUY, while principally a gold producer, also engages in excavating other precious metals such as silver, copper, molybdenum, and zinc. The company has operations throughout the western hemisphere but mainly in Mexico, Brazil, Argentina and Chile. AUY's property portfolio includes seven operating gold mines in total, including the Chapada mine, the Jacobina mining complex, and the Fazenda Brasileiro mine in Brazil. In Chile, it operates the El Peñón mine and the Minera Florida mine. In Mexico, AUY operates the Mercedes mine. In Argentina, AUY's primary project is at the Gualcamayo mine. AUY also has a 12.5% indirect interest in the Alumbrera copper/gold/molybdenum mine in Argentina. Finally, the company holds interests in various advanced and near development stage projects as well as exploration properties in Brazil, Chile, and Argentina.
Most Q2 earnings reports in the gold mining sector were disappointing and AUY was no exception. AUY reported a Q2 miss on top and bottom lines. Net earnings came in at $43 million or 6 cents per share versus the 22 cents estimated by analysts. This was a 77% decline from the $195 million profit, or 26 cents per share, AUY posted 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 a reduced volume of copper concentrate sales impacted the quarter. The company said the decline was somewhat offset by increased sales of gold contributed by the Mercedes Mine in Mexico which was under construction a year ago.
Gross margin for Q2 was 62.5%, which was 400 basis points worse than the comparable quarter last year. Operating margin was 26.5%, which was 1,470 basis points worse than the comparable quarter last year, while 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 were up from 261,926 ounces a year prior. Copper sales fell to 37.4 million pounds from 41.6 million pounds a year ago.
The balance sheet of the company shows $698 million in cash and equivalents on hand at the end of Q2 with an increasing debt-to-asset ratio. Some of this debt results from the fact that AUY has increased its exploration budget nearly 300% over the last four years, positioning it for continued top line growth in the years ahead. AUY still has a debt-to-equity ratio of less than 0.1, whereas its larger competitors GG, ABX and NEM have taken on more debt to finance multi-billion dollar projects. 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 investments into developing its assets. It also recently announced the completion of the previously announced agreement to acquire all issued and outstanding shares of Extorre Gold Mines Limited. Further, a lot of progress has been made at most of the company's exploration and development projects. A great summary of the recent progress is outlined here.
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 the Mercedes mine in Mexico as production ramps up. For fiscal 2013, production is 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. By fiscal 2014, production is targeted to be at a sustainable level of approximately 1.75 million gold equivalent ounces. Should the company stay on track and on budget it is poised for strong growth. I presume that the company believes it will stay on budget and grow steadily because it increased the dividend 18% to 6.5 cents per share in the most recent quarter.
AUY recently had its price target increased from $21.00 to $24.00 by analysts at RBC Capital, who have an outperform rating on the stock. AUY has a 52 week range of $12.35-$19.65 and at the time of this writing trades at $18.46 a share on average daily volume of 6.1 million. While trading at a premium relative to GG, NEM and ABX on its current P/E multiple of 33.8, the forward P/E is still an attractive 13.4. The five-year PEG ratio is a 1.9 however, but does not reflect potential (or likely) surges in precious metal prices in the next five years. Analysts currently have a $21 price target consensus on the stock with a mean recommendation of "buy." The company reports its Q3 earnings on October 29, 2012 and with the increase in gold prices I believe AUY is poised to beat estimates.
GoldCorp: GG is the behemoth of the gold mining space. While it is more expensive than ABX and does not have the debt management of AUY, I think it is still a long-term buy. At current share price levels of $44.41 and after having lowered guidance for the remainder of the year, this stock has had a great bounce off its bottom as the company has moved 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, down from $1.3 billion in the prior-year 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 it has decreasing assets but its debt-to-asset ratio has not increased. GG's assets are impressive - at the end of 2010 GG had proven gold reserves of 23.3 million ounces in its existing mines. GG also had probable gold reserves of 36.8 million ounces and estimated gold reserves that could be as high as 60.1 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 reserves.
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 a 60% owner and GG a 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.
GG currently trades at $44.41 a share with a P/E of 28. The 52 week range of the stock is $31.54-$54.14. On average approximately 5.3 million shares trade hands per day. 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. Its next earnings release is scheduled for October 22.
Newmont: NEM is the third largest gold miner in the world. At current valuations I think the stock is a hold although I do like the stock long-term. 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 trades at $54.50 a share. NEM's average daily volume is about 6.0 million shares. NEM reported a rough second quarter on July 27. 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% in the 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 NEM 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 5.0 to 5.1 million ounces, down from its previous estimated 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 $3.0 billion, down from $3.0 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 recently upgraded NEM from a hold to a buy.
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. The company is cheap relative to its forward growth potential trading at just a 0.28 PEG ratio but expensive relative to current earnings at a P/E of 95. 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 startup of Australia's largest gold producer at Boddington, Newmont is poised for long-term growth. Regardless of this growth potential I think it's a hold at current valuations. I prefer to see the next earnings release before recommending another buy on the stock. The next earnings release is scheduled for November 2.
Anglogold Ashanti (AU): Although I like the gold mining space as a whole, I think AU is a sell as the company is facing some severe headwinds. AU is the fifth largest gold miner in the world with nearly 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 the 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) beating its 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 Q2 earnings.
- Projects AU is working on were all reported on budget and on schedule; Tropicana's first gold production is expected by the end of 2013.
- Completed acquisition of a residual 50% stake in the Serra Grande mining project.
Full year 2012 expected gold production remains 4.3 to 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 $33.80 a share with average volume of 1.75 million shares exchanging 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 it has $987 million in cash and equivalents on hand, with a flat to increasing debt-to-asset ratio.
There have been several pieces of bad news that will impact the company's profitability. First its local operations faced a situation 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 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."
The company is also being taken to court by 31 former employees who are accusing its executives of health-related negligence. The miners argue, reports Reuters, that they contracted the lung disease silicosis and silico-tuberculosis after being exposed to high levels of dust while working at the Vaal Reefs gold mine. Attorneys from Leigh Day & Co claim that gold mining in South Africa has been responsible "for hundreds of thousands of cases of silicosis over the last hundred years, even though the adverse health effects of asbestos and silica were known more than 100 years ago."
A larger issue that is definitely going to impact the next quarterly report or two is the ongoing worker strikes in South Africa. On October 1, AU stated that all its mines in South Africa remain at a standstill amid the strikes which began September 20, and it will consider shutting some mines and dismissing workers if the strike continues for much longer. Given that South African operations accounted for nearly a third of AU's total production during the first two quarters this year, this is a significant headwind that I do not believe AU can overcome to meet or beat estimates this quarter. Thus I think it is a sell at this point and recommend moving capital into another miner.
AU currently trades at $33.80 a share with a P/E ratio of 12.3. As of its last quarterly dividend payment it yields about 1.2% annually. On average approximately 2.1 million shares are traded daily. The stock has a 52 week trading range of $30.56-$49.14. The company's next earnings release is scheduled for November 8.
Bottom line: I still like the gold mining sector as a whole. For the heavy weight gold diggers I believe ABX, GG and AUY are still buys at current levels. NEM is a strong company but expensive and thus I recommend holding it for now until we see the next quarterly report. Finally, AU is facing significant headwinds, thus I think investors should consider selling this stock and moving into another.
Disclosure: I am long AUY.