Gold prices topped out in the third quarter of 2011 above $1,900 per ounce. While prices have fallen nearly 20% since then, any sign of instability, economic or political, will cause gold costs to rise. I am going to analyze five gold-related issues. While gold mining stocks have much in common, there is enough to distinguish them to offer recommendations. Without further ado, some gold issues.
Kinross Gold Corp. KGC
Canadian mining company Kinross is among the West's largest miners of gold, but also extracts silver and copper from sites including in North America, Russia and South America. Its stock was trading recently at about $13 per share, near the low end of its narrow 52-week range of from $18.25 to $12.80. It has a P/E of 22.4, and a market capitalization of $14.6 billion. It pays a quarterly dividend of 3 cents per share, for an annual yield of 1.0%.
Kinross has taken advantage of the historically high price of gold by buying gold producing assets. In late 2010, Kinross bought Red Back Mining in a $7.1 billion dollar deal. That, and some smaller purchases, allowed Kinross' gold sales to rise through the first nine months to rise from 1.84 billion ounces in 2010 to 2.01 billion ounces in 2011. The pace of the increase from a year ago is widening too as the recent acquisitions are brought on board. The gross sales increases, combined with the rising price of gold, fueled a revenue increase of 44% through the first nine months of 2011, to $2.99 billion. This drove earnings from continuing operations up 77% through three quarters of 2011.
Kinross' fundamentals are just fine; its stock chart is a disaster. It has been on a general downward trend for 30 months now. Recent acquisitions will nearly double Kinross' mining capacity toward mid decade, and if gold prices are the same, or likely, higher than today, Kinross stock will eventually kick into gear. From a value investor standpoint, Kinross is trading now at just a 5% premium to its book value. Patient investors should be rewarded.
Goldcorp Inc. GG
Goldcorp is one of the world's largest mining companies, with operations strictly in the Americas. It develops, in decreasing orders of revenues, gold, silver, copper, lead and zinc. Goldcorp was trading recently at a little under $46 per share, near the midpoint of its 52 week range of from $56.31 to $39.04. It trades at a P/E of 23.3, and has a market capitalization of some $37 billion. It pays monthly dividends of 4 ½ cents per share, more than double what it was a year ago, and that represents an annual yield of 1.2%.
Goldcorp has reported excellent revenue gains. Gold prices have increased 73% since Jan. 1, 2009. Yet, the price of Goldcorp is now pretty much the same as it was four years ago. One reason is the company's operating margin has fallen from the 60% range a few years ago to just over 50% at present. Another reason is stock dilution from a series of acquisitions Goldcorp made. There are nearly five-times more shares outstanding now than in the early 2000's. Per share statistics are still doing alright, as in the third quarter of 2011 revenues were up 48% from the year earlier, to $1.308 billion. Profits from continuing operations were up 35% to $0.42 per share.
Goldcorp has a strong pipeline of operations coming online the next few years. As its annual profits grow to and pass $3 billion or nearly $4 per share within a few years, will its stock price reflect those earnings, or continue to languish? Goldcorp is a cornerstone of the gold mining business, yet it is trading at a rich premium from a P/E standpoint to other gold companies. On balance, Goldcorp is probably my favorite company in this group for the long-term investor.
Barrick Gold Corp. ABX
Barrick Gold is the West's largest gold producer with 26 active mines across the Americas, Australia and Africa, and it has investments in other metals as well. Its stock was trading recently at almost $49, up 5% from where I last recommended it, near the midpoint of its 52 week range of from $55.95 to $42.50. It has a P/E of 11.7, and has a market capitalization of almost $49 billion. It pays a quarterly dividend of $0.15, for an annual yield of 1.2%.
Like other precious metals companies, Barrick is leveraged to gold prices, which ensured some level of success in 2011. Though the first nine months of the year, revenues were up 32% to $10.52 billion, and profits were up 40%, to $3.51 billion, or $3.51 per diluted share.
Other than rising gold prices, the centerpiece of Barrick's 2011 was its $7.7 billion purchase of copper producer Equinox Minerals LTD. Efficiencies have widened Barrick's operating margins out to the low 60s percentages this year, further expanding this year's profitability. I do not know that Barrick can improve upon that margin, and that leaves Barrick more fully exposed to metals' prices. Barrick is moving to increase its volume, but at a steep price not just for acquisitions, but also a $5 billion per-year capital budget. A bet on Barrick is a bet on the future price of gold and copper.
Newmont Mining Corp. NEM
Newmont is the only American based company on this list, and is among the largest mining companies in the world. It likes to refer to itself as the largest mining company that operates in five continents. Its stock was trading recently at about $64 per share, near the midpoint of its 52 week range of from $72.42 to $50.05. It is trading at a P/E of 14.6, and has a market capitalization of $31.7 billion.
Newmont's unique dividend policy deserves some explaining. Its quarterly payout is pegged to the price of gold. That amount is $0.80 annually if the average quarter gold price is $1,300 - $1399; $1.00 per year if the price is $1,400- $1499, and up another $0.20 for each $100 increase in the average gold price, pegged quarterly, up to $1,699. Then, for every hundred dollars that average gold prices increase, the dividend rises $0.30 cents per year. The dividend will rise at the rate of $0.40 per year, if the price of gold exceeds $2,000 per ounce. Newmont paid a $0.35 dividend for the third quarter of 2011. It is expected to be the same for the fourth quarter of 2011. The program is a tremendous hedge against runaway gold prices.
Otherwise, things seem relatively calm at Newmont. Production was down in the latter part of the year due to a maintenance project at a large mine. And several other projects are underway that auger well for Newmont's future. Much of its energy this year was digesting its 2011 purchase of Frontier Energy.
Analysts are mildly positive about Newmont with a 2.3 rating. But those same analysts forecast a 15.5% growth rate over the next five years, below average for the industry. Therefore, despite the impressive dividend policy, I urge you to pass on Newmont.
ASA Gold and Precious Metals Ltd ASA
ASA is a Bermuda-based, closed-end mutual fund, which by its charter must invest at least 80% of its assets in rare metal or mineral mining companies. As of mid-2011, among its three largest holdings are Barrick Gold and Goldcorp. ASA was founded in 1958, and was intended to provide Americans with a means of investing in South African gold companies at a time when direct investments were impossible.
In late 2011, 79% of ASA's holdings were gold equities, and a hodgepodge of other precious mineral equities accounted for another 18%. Canadian-based companies were its largest geographic setting with 38% of the assets. South Africa had for many years been the dominant country for held companies, but that country's share of ASA's holdings has fallen from as much as 45% a few years ago to just 10% more recently.
ASA's shares were trading recently at about $27.60. Its 52-week range is from $33.81 to $25.31, and it has a market capitalization of about $540 million. Its P/E is 5.3, and it has a history of making two dividend distributions per year, a small one in June, and a larger one reflecting year end conditions in November. The sum of the distributions has been declining, from $0.76 in 2007, $0.66 in 2008, $0.46 in 2009, and $0.34 in 2010. It ticked back up to $0.36 in 2011, for an income yield of 1.3%
ASA is trading at about a 33% discount to the fund's asset value. But its very reason for existence makes me question an investment in it. It is a non-diversified fund, so it does not limit risk by much, and anyone can invest directly either in gold or in mining companies from their home computers. I do not recommend ASA.