GuruFocus Premium Membership

Serving Intelligent Investors since 2004. Only 96 cents a day.

Free Trial

Free 7-day Trial
All Articles and Columns »

5 Gold Stocks Facing Significant Headwinds

February 24, 2012 | About:
From all angles, gold mining is a difficult undertaking. Even large producers face significant headwinds with laws stating they must operate multiple mines while maintaining a constant flow of new resources to sustain reserves and production levels. Additionally, companies face sovereign risk (like less friendly versions of eminent domain) and inflation, which also adversely affect the attractiveness of gold mining. However, one can still find opportunities in this sector from certain companies with strong fundamentals and attractive assets. I will take this opportunity to explore five gold stocks that I think are worth considering in 2012, due to their similarities of having strong fundamentals and attractive field assets.

Barrick Gold Corporation (ABX)

Barrick Gold Corporation was an under-performer last year in the market. However, this year has turned out to be a better. The stock has rebounded by around 6% since January.

A year ago, Barrick was a considered a relatively expensive company but it justified its price tag by boosting earnings by a staggering 165% in 2011. It is now being considered a good deal with a forward P/E ratio of around 8.74. However, it should be noted that Barrick is an extremely volatile stock and has a low beta of 0.43. It can thus be used as a diversifier having a low beta of 0.43. The dividend yield of the stock is 1.25% and payout ratio is around 10.95.

Barrick is expected to earn $5.99 per share in the current year, which means that the EPS growth will be nearly 9%. It is after this year that I think things will get interesting because of its potential in Chile. Barrick's revenues are projected to grow 19.8% next year. The stock is currently trading around $48 and has a forward P/E multiple of around 8.1. Analysts are expecting that the mean target price of the stock will be nearly $65 - an upside potential of 35%. I think analysts are underestimating this company and its stock. The company's 75% stakein the Cerro Casale mine in Chile will likely be a monster producer of 800,000 ounces of gold annually. Production costs are also likely to be ultra-low at below $200 per ounce, and more importantly believable, because the mine has 200 million tons of copper with the gold ore. I believe Barrick is positioned to perform well going forward, primarily due to its strong earnings and recent upward trend.

Goldcorp Inc. (GG)

It is expected that Goldcorp Inc. will achieve a growth of nearly 27% in revenue this year. It pays dividend monthly and the last dividend it paid was 4.5 cents per share. This makes the expected annual dividend to be 54 cents, which makes the dividend yield 1.2%.

The P/E ratio of the company is around 21 and in the last 5 years, it has traded between 15.5 and 119.2.

The stock is currently trading around $46 and the analysts are expecting an EPS of nearly $3 in 2012 with a P/E of 15.6. The stock is growing faster than its competitors - ABX and NEM - and hence trading at premium.

Over the past years, the stock has traded in the range of $39 - $56. It is currently trading around $46, which is both below its 200 day moving and 50 day moving averages. According to my technical analysis, the support level of the stock is around $42 and the resistance level is near $50.

The analysts believe that the mean price target of the stock is around $65, which means there is an upside of 44% - a significant appreciation. I agree. Based on this information, I rate this stock a buy.

Kinross Gold (KGC) Kinross Gold share holders enjoyed a good year in 2011 but the shocking return of -35% left them disappointed. The company pays dividend bi-annually though a meager amount of 5 cents. However, it should be noted that its dividends rate have been on the rise since 2008. Its dividend yield is 1.1% with a payout ratio of 14%. The EPS of the company is expected to grow at a rate of around 4.7%.

Kinross enjoy a good moat but has been guilty of making some poor acquisitions recently. The most notable of these was the Tasiast mine for which it paid three times its value. This has resulted in Kinross trailing behind its competitors in the gold rally of 2012.

The share of the company has experienced a drop of 19% after 17th January and according to experts, the company has now become a potential takeover target. This means that there are definite pros and cons of buying the KGC share.

The financial indicators make it an attractive buy especially if you consider the fact that despite the poor acquisitions, the balance sheet of the company has not been tainted much. Furthermore, there is also the chance of a juicy return in case of a bid war that may result from a take over. Therefore, I will say that Kinross is well worth buying but you should keep in mind the inherent risk.

Newmont Mining Corp. (NEM) Newmont Mining Corp.'s shares are trading around $64, and analysts are expecting an EPS of $6 per share in the current year with a P/E of 10.7. Its revenues are expected to grow 19.8% next year.

The 2011 earnings of the company were a 20% improvement from last year and the company holds immense potential. It has a track record of solid growth because of its highly capable management, The management of the company is regarded as among the best in the business world and has been fundamental in growing the market capitalization of the company above $30 billion.

NEM's management is some of the best in the business as it has grown the market cap valuation to over $30 billion. The stock reached its all-time high in November 2011 - $ 72.2. In my opinion, this makes it an extremely interesting prospect and a buy for me.

Yamana Gold Inc. (AUY) Yamana Gold Inc. truly stands out from its competitor because of its ability to deliver on the fronts of mine openings, exploration, and guidance.

The company is not following the herd by investing in startup exploration companies primarily; because of their excellent historical track record. The company has been able to achieve strong organic growth and it is expected that it will do so in the future.

Analysts agree that the assets of the company are fairly valued and well reflected in the share price. The expected dividend yield is around 1.4%. It is expected that the annual production of the company will increase by a staggering figure of 60% over the next 3 years. This literally makes the company a gold mine for the investors, who should take the recent sell off of the company as a good buying opportunity.

The best scenario for investors will be to buy the stock when it is on the dip. This will ensure that they will be well rewarded in the next few years.

About the author:

Dividend King
I am primarily an investor interested in creating passive income streams through dividends. I focus on finding and analyzing dividend paying stocks, MLPs and REITs that are a good fit for income investors.

I practice Judaism and my faith is very important to me. I visit family in Israel once a year, but I am educated and work in the United States where I hold an MBA and a bachelor’s in English. I am a patient man, enjoy wine but am not a connoisseur, and I listen more than I speak.

Visit Dividend King's Website


Rating: 3.9/5 (10 votes)

Comments

Please leave your comment:


Get WordPress Plugins for easy affiliate links on Stock Tickers and Guru Names | Earn affiliate commissions by embedding GuruFocus Charts
GuruFocus Affiliate Program: Earn up to $400 per referral. ( Learn More)
Free 7-day Trial
FEEDBACK