5 Undervalued Gold Stocks On A Discounted Cash Flow Basis

Includes: AUY, GG, GOLD, KGC, NEM
by: Dividend Kings

Gold. The very word conjures up images of opulence and feelings of comfort and joy. Why is gold such an attractive investment? Because of its short supply. The entire quantity of gold in the Universe can fit into a fairly large field. And the fact that it never tarnishes or depreciates in value: it is solid and inorganic. In this article, I analyze some of my best ideas in the gold mining industry. I provide my fair value estimate based on a discount cash flow analysis, assuming a $1600 per troy ounce gold price and a 10% cost of equity.

Goldcorp Inc. (NYSE:GG): This stock is priced at around $45. Its earnings per share is 1.97%, its price to earnings ratio is 23.08, and it also yields a dividend of .40%. Its market capitalization is $36.78 billion. Its debt-equity is 3.45 and current ratio is 3.82. Its growth for the past 5 years has been impressive at 29.38% per annum. Growth for 2012 is expected at 63.5% and 2013 at 29.5%, predicted to be sustained at 43.6% per annum for the next 5 years. Goldcorp met its 2011 cash cost estimates and target gold production. This shows the high quality of their mine portfolio. On a DCF basis, shares should trade around $60 apiece. Analysts have a high target of $78.50. In my opinion, management is competent, and is right to speak in optimistic terms about production. This, along with the concrete results, instills confidence, despite the slightly high debt-equity.

Yamana Gold Inc. (NYSE:AUY): You buy one share at $16 and get an earnings per share of $0.76 and a price to earnings ratio of 20.63, with a dividend yield of 1.30%. The market capitalization is $11.69 billion. Debt-equity is 5.86 and current ratio is 2.6. Its growth for the past 5 years has been a good 24.92% per annum: it is projected as 60.7% for this year and 26.5% for 2013. All good figures. Yamana is finally giving its shareholders cause for excitement after years of lethargy in an otherwise lustrous market. This company also attained its target gold production at the expected cost estimate. I trust in this company's ability to keep up its momentum, especially because of its growth figures and sound current and price to earnings ratios. I call this a Buy. It is very close to its 52-week high of $17.47 and I hope it breaks through that for you and reaches its estimated high price target of $23.00. On a DCF basis, I value shares at $20 apiece.

Randgold Resources Limited (NASDAQ:GOLD): With an earnings per share of $3.10 and price to earnings ratio of 35.06, you will pay about $108 for this share, its 52-week range having been around $70-$120. Dividend yield is a bit low for my liking at .2%. Randgold was named as a must-own gold stock for 2012. It was a top stock in 2011, showing a 26.4% return when the industry rendered 10%. Keep it up into 2012, Randgold. On a discounted cash flow basis, shares are worth $130 apiece. Randgold management has done a good job of managing cost growth over the last few years.

Newmont Mining Corp. (NYSE:NEM): The price of its shares are approximately $63, its earnings per share is $4.39 and price to earnings ratio is 14.44. Its 52-week range was about $50-$72. Its market cap is $31 billion. Its debt-equity is 25.37 and current ratio is 1.42. Its past 5 year growth per annum was 34.8% and for the next 5 years it is projected at 15.55%. Its growth for this year is 17.4% and for 2013 is expected at 32.7%. With a high price target almost double of what it is now at $115, I call this share a Buy, despite its slightly high debt-equity. Its growth figures are great. With solid projects on the horizon, like its Minas Conga Gold Project which is to be commenced in Peru by 2015, Newmont can surely sustain its present growth and keep it going well into the future. It yields dividend of 2.2%, if you needed more incentive. Newmont is worth $70 per share on a DCF basis.

Kinross Gold Corporation (NYSE:KGC): Pay about $12 for its shares. Its earnings per share is $.57, its price to earnings ratio is $22.12, and dividend yield is .9%. Its debt-equity is 9.51 and current ratio is 4.43. 2012 growth estimate is 41.4% and 2013 is 50%, again, awesome. Past 5 years' growth per annum is 16.48% and next 5 years' is 12.31% per annum. Its third quarter record results for 2011 were impressive: revenue exceeded $1 billion, adjusted operating cash flow was up 82%, and margins increased by 50% as was reported here. At this nice low price with sound and impressive fundamentals and a high price target of $30 (even its low target being good at $16) I call this great research candidate, and hopefully it can take care of its debt which is a trifle high. On a DCF basis, shares are worth around $18 apiece and are highly leveraged to the price of gold.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

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