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. In this article, I wish to compare the second and third largest gold miners (by market capitalization) in the industry, to ultimately determine which is currently the better buy.
GG: GG is a behemoth of the gold industry as it is the second largest gold miner in the world. 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 20.6% to $43.74.
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 (pdf) 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.
GG recently had its target price lifted by Dundee Securities from $55.00 to $57.00 in a research note issued to investors on Monday. The firm currently has a buy rating on the stock. A number of other firms have also recently commented on GG. Analysts at Barclays Capital initiated coverage on GG in a research note to investors on Tuesday, October 16. They set an overweight rating and a $62.00 price target on the stock. Separately, analysts at Canaccord Genuity raised their price target from $53.00 to $62.50 in a research note to investors on Wednesday, October 10.
The 52-week range of the stock is $31.54-$54.14. It trades on average approximately 5.3 million shares per day. The prior 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 25, 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 will 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 $55.49 for a gain of 15.6%. 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 5.7 million shares. Shares are still down on the year having lost 7.5% year to date. 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. Further, NEM had its neutral rating reaffirmed by research analysts at Credit Suisse in a report released October 22, 2012. They currently have a $64.00 target price on the stock.
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 97. 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 October 26, to be strong for NEM and in turn strong for the stock.
As evidenced by the present comparison both GG and NEM are strong companies and I recommend both as buys right now at current levels. I believe at current levels GG represents the better buy. I believe that NEM has some room to run however I think GG stands for a larger percentage gain should it reach its analyst consensus estimates. While NEM has a far superior annual yield of 2.5% versus GG's 1.3%, I believe that GG has the capacity to expand this dividend should earnings grow. Given analyst commentary, fundamentals of the stocks and ability to expand globally, I would recommend GG over NEM.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.