The second half of this year has been great for gold. Prices have jumped from a low of $1560 in July to its current $1700. Early in October, prices were knocking on $1800, but failed to get over the milestone. However, gold has seen a pullback since then, and I believe that we could see a resurging gold market after these election results. Understandably, investors have been turning to gold as a hedge against the uncertainties that the market faces such as the U.S. fiscal cliff, Europe's debt crisis and China's cooling economy.
When it comes to gold, there are a wide variety of ways to invest. For the purposes of this article, we will talk about gold miners. My favorite play is AngloGold Ashanti (AU). To be fair, AngloGold recently settled a worker strike in South Africa, which was losing the company 32,000 ounces of gold each week. However, the strike is over, and workers will be heading back to work; hopefully, the company can make up a little of that production in the coming weeks.
Lets take a look at the fundamentals to determine the strength of AngloGold Ashanti. To start, the gold miner has a forward price to earnings ratio of 6.86, PEG of 0.96 and has a reasonable debt load, with the debt to equity ratio at 0.45. I like to see a current ratio of 2.72, because that tells me that the company is in strong enough financial position to pay off any unforeseen costs or liabilities. The stock does pay a dividend, with the yield coming in at 1.87%. Looking at growth rates now, EPS are expected to see growth of 22% next year and 9% over the next five years. Management efficiency ratios tell us that management appears to be doing their job well, with a return on equity of 33%, return on assets of 16% and return on investment of 18%. The main objective to take away from AngloGold is the fact that shares are undervalued. Keep in mind that analysts are forecasting record gold prices in the first half of 2013, so this will give the gold miner increased margins and higher prices to sell its precious metals.
After looking at AngloGold, lets look at some of the miner's competitors to determine whether or not there are better ways to play miners out there. We will be looking at Freeport-McMoRan (FCX), Goldcorp (GG), Barrick Gold (ABX) and Agnico-Eagle (AEM). When comparing AngloGold to Freeport I notice that Freeport has a higher yielding dividend, but I think AngloGold has the upper hand with a more modest valuation. Right off the bat, Freeport has a forward price to earnings of 8.4, while AngloGold has a forward price to earnings of 6.86. This means AngloGold is cheaper than Freeport, compared to future earnings.
Goldcorp has great margins and growth, but I think AngloGold still has the upper hand, as it is still cheaper for the projected 2013 growth rates for earnings. Barrick Gold looks cheap initially, with a forward price to earnings of 7, but I do not like the quick ratio of 0.89 with a total debt to equity of 0.55. Barrick does pay a little higher yield, but AngloGold is more financially stable, and will better be able to meet unforeseen obligations than Barrick. Agnico-Eagle is still finding its way. The company has no regular price to earnings, but does have a forward price to earnings of 20, which is still a little pricey compared to AngloGold. Furthermore, the yield is weak, and valuation ratios point to an overbought condition. As you can see, judging from the competition AngloGold faces, it is my favorite out of the group. AngloGold is undervalued yet financially stable.
To be certain, there are some aspects of the company that should be known. Third quarter production was down. The company says this was due to the company's restructuring plan, which is designed to help increase production in the future. This has led to a first half 3% decrease in production from last year. As you can see, the company has had a bit of a pullback in production this year, but it is in the name of higher production in the future. AngloGold gets 41% of its total revenue from Continental Africa, up from 37% last year. In addition, the company is looking to begin ramping up production in Mongolia. Despite the labor problems and production upgrades, AngloGold should greatly benefit from the next leg up in gold.
Big investment bank firms such as HSBC and Credit Suisse are forecasting a nice run-up in gold. HSBC raised its 2013 price target to $1,850 an ounce while lowering 2014 outlook to $1,775 an ounce. Credit Suisse is expecting $1,840 an ounce in 2013. As you can see, gold is expected to rise over 7% according to these two banks. This price increase will help miners such as AngloGold Ashanti, Freeport-McMoRan, Barrick Gold, Agnico-Eagle and Goldcorp all be able to get higher prices for their gold production. However, with AngloGold's production upgrades and the forecasted 7% increase in gold, the gold miner should have a least a solid first half of the year.
The bottom line here is that AngloGold is the place to be if you are looking for a gold miner to invest in. Falling corporate earnings, the fiscal cliff, worries over China and the European debt crisis are all catalysts for a higher gold price, and these events very well could be the reasons why big banks are forecasting record gold prices during the first half of 2013. Whether or not you choose to take a look at AngloGold, consider the facts that the bullish thesis for gold is very strong. If you agree, attempt to gain exposure.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.