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Patricio Kehoe
Patricio Kehoe
Articles (164) 

Talking About Gold: One Wins, Another Loses

September 12, 2013 | About:

After reclaiming $1,400 levels and establishing a two month high in August, gold prices began to drop once again over the past weeks. This has affected stock prices and although some firms are currently a cheap buy and potentially great investments, others are not. Golden Star Resources (GSS) and Buenaventura Mining Company (NYSE:BVN) are two companies, who despite having a turbulent year, face very different outlooks.

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Golden Star Resources is a relatively small firm, which depends heavily on two mines in Ghana for its gold output. The company’s stock has been plummeting over the past weeks, almost reaching its 52-week low of $0.40 per share. With its current outlook, it comes as no surprise that Guru George Soros of Soros Fund Management decided to sell his entire stake in the firm.

At the beginning of the year some were quite optimistic about the Canadian gold mining company, which had almost doubled its output since 2007. Nevertheless, those who saw the risks involved were proven right. Looking forward, there is little change to be seen. Relying on just two mines in Ghana, with relatively high production costs, makes Golden Star vulnerable. The inherent geopolitical risk of operating in Ghana and the firm’s porr diversification makes this stock a volatile investment. Production costs are also not bound to decrease, since most of the company’s gold reserves are of the refractory type. Extracting gold from this ore requires additional processing, inevitably resulting in higher production costs.

I consider Golden Star Resources to be financially moderate, due to the large increase in debt over the past year. Also, despite stable revenue, the firm is not generating any net income. Currently the stock trades at 0.2 times its sales, resulting in a huge discount to the industry average. Due to the risks involved, the discount should come as no surprise. Considering the arguments presented, I would recommend to stay away from this stock.

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The mining firm Compania de Minas Buenaventura is primarily a gold and silver producer, with all its assets in Peru. Due to lower metal prices and reduced production, the company reported weak second-quarter earnings. The fact that John Hussman of Husmann Econometrics Advisors has a stake in the firm is interesting, since most Gurus have ignored it.

Buenaventura is an interesting investment option, with below-average production costs and several new projects coming online in the next years. What is interesting about this firm is its main asset Orcopampa. At one half ounce gold per metric ton, its ratio is considered high, even for an underground mine. Production at Orcopampa is expected to remain solid, with low cash production costs. Despite optimism surrounding its flagship operation, Buenaventura’s other assets boast low production levels and high operating costs. Furthermore, there are certain geopolitical risks in operating solely in Peru. Nevertheless, the firm’s operating history in Peru since 1953 should help mitigate these risks. Also, the company has a significant equity stake in the prolific Yanacocha gold mine and the Cerro Verde copper mine. However, these have not paid dividends in the past two years.

I consider Buenaventura to be financially strong. With no reported debt in 2013 and rising revenue, the firm has maintained steady cash levels, which will serve future projects. Since the firm is currently trading at 2.1 times its sales, there is a minor price discount to the industry average. In addition, a 3.9% dividend yield is tempting for investors. Hence, although its current performance is not great, I feel optimistic about this firm’s future.

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The advantages Buenaventura has to offer over Golden Star Resources are clear, even when compared to other industry peers. Buenaventura has a diversified portfolio and a lot of potential for future growth. Its dividend yield is attractive and its finances are in order, making John Hussman’s decision to invest in the firm more than reasonable.

[b]Disclosure: Patricio Kehoe holds no position in any stocks mentioned.

About the author:

Patricio Kehoe
A fundamental analyst at Lone Tree Analytics

Rating: 4.4/5 (5 votes)


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