In a world of surging oil prices, why not gold for under a buck a share?
Deep-value investor Donald Smith (Trades, Portfolio) expanded his position in a handful of gold mining companies and welcomed a newcomer. Eldorado Gold Corp. (EGO, Financial) was the guru’s only buy in the first quarter of the year. And he bought the low-cost gold producer super-cheap. Vancouver’s Eldorado stood at under $1 a share in early afternoon trading on Wednesday, down 1.53%.
The guru is obviously staring down favorable results from a recent arbitration ruling that is allowing it to move forward with some promising large-scale mining operations in Greece. The projects are expected to take two to three years to produce results, but investors like Smith are striking while the stock is trading cheaply and at a strong discount.
Smith has made a career out of making bets on cheap stocks of companies that have earnings potential. His firm seeks out companies whose sale of tangible assets, like buildings and equipment, can comfortably cover the cost of the shares.
The guru has 67 stocks in his $3.7 billion portfolio.
In the first quarter, he also boosted a stake by more than 38% in Gold Fields Ltd. (GFI, Financial). He increased his ownership in the gold mining company to 2.12%, now holding almost 20 million shares. Alamos Gold (AGI, Financial) also takes up more room in his portfolio after the first quarter. He now holds 1.33 million shares of the miner, increasing the holding by almost 78%.
The overwhelming majority of the portfolio is invested in financial services, industrials, basic materials and technology stocks. The remaining 15% is made of up stocks in the energy, utilities, real estate and consumer defensive sectors.
Smith is the chief investment officer of the firm by the same name, Donald Smith & Co. Inc. Its headquarters are on the 22nd floor of the Carnegie Hall Tower on 57th Street in New York City.
Deep-discount investing
Less than one-tenth of 1% of all money managers invest in the lowest 10% of stocks by price-to-tangible book value, and Smith is one of them.
The ratio spells out a relationship between the share price and the tangible book value, which is to say for how much the real estate, bricks and mortar, physical equipment and saleable inventory could be sold. Smith would likely expect the sale of these tangible assets to cover the cost of the shares.
GuruFocus provides this ratio for the stocks it covers. Subscribers can locate it in the right column of the Summary page.
According to Smith & Co.’s website, a 2015 study by Compustat showed that stocks with the lowest price-to-tangible-book values outperformed both the market and other deciles.
Eldorado Gold
The mid-tier gold producer has a market cap of $781 million. It operates mines in Turkey, Greece and Brazil. GuruFocus shows it produced almost 300,000 ounces of gold at a total cash cost of $534 per ounce last year. It has roughly 17 million ounces of proven and probable reserves.
It has a price-to-tangible book ratio of 0.21. The industry median is 2.2. It has a price-sales ratio of 1.82 versus an industry median of 1.78. The forward price-earnings ratio is 49.02 versus a median of 14.18. The enterprise to earnings before interest, taxes, depreciation and amortization is 14.78 times versus an industry median of 9.9 times. The stock’s 52-week range is 80 cents to $3.76 a share. It reported revenue of $311 million in 2017. Estimates from analysts show estimated revenues of $540 million in 2020.
It saw some improvements in revenue and net income in the first quarter. It reported first-quarter revenue increases of 17.9% and a rise in net income of 28% year over year. But the company's all-in sustaining costs, which is a measure of costs for precious metal companies, jumped to $878 per ounce of gold compared to $791 per ounce in the prior year.
GuruFocus shows the miner’s revenue per share in the final months of the year reached 52 cents per share from as high as $2 a share in 2011. In net income, the company reported a loss of $9 9 million in December 2017 compared to a loss of $344 million the prior year.
GuruFocus rates the company 5 in financial strength and 4 out of 10 in profitability and growth.
It has drawn attention from guru investors Mario Gabelli (Trades, Portfolio), Pioneer Investments (Trades, Portfolio), First Eagle Investment (Trades, Portfolio), Ray Dalio (Trades, Portfolio), Jim Simons (Trades, Portfolio), Joel Greenblatt (Trades, Portfolio) and Ronald Muhlenkamp (Trades, Portfolio), who bought shares over the last six months.
The minor may have to engage in a reverse stock split to avoid getting delisted from the New York Stock Exchange because its stock price has fallen below $1.
Other `gold’ stocks
Positions in other gold miners remained unchanged. For example, Smith owns 50.2 million shares of Kinross Gold Corp. (KGC, Financial), representing a 5% stake. The investment reported an estimated loss of 4.6%.
Yamana Gold Inc. (AUY, Financial) sits in 4.35% of the portfolio and has produced an estimated loss of 5.29%. He holds almost 59 million shares of Yamana.
Iamgold Corp. (IAG, Financial) has been among his top performers in the metals and mining sector. He holds 40.6 million shares of the miner, which has produced a 5.49% estimated gain since he started buying shares.
A total of 2.1 million shares of Coeur Mining Inc. (CDE, Financial) represents 0.46% of the portfolio. The investment has produced an estimated gain of 9%.
