Two Gold Miners’ Time to Shine

Gold reached another record high yesterday, as investors bid up the price of gold futures to more than $1250.  The previous record price for an ounce of gold was achieved almost a month ago, but there is renewed interest in the yellow metal as a hedge against global currencies.  With sovereign debt issues in Europe continuing to create widespread concern among investors, gold is benefiting from the resultant flight to safety.  Many see gold as a good place to stash cash because it will benefit from further global weakness as a flight to safety, but also stands to benefit from inflationary pressure should markets regain their footing.

That being said, as with everything else in investing, “there is no such thing as a free lunch.”  The fact that gold is trading at an all-time high in not necessarily a good thing, as stabilization in Europe could send prices lower.  Also, there is rumbling that gold is in a bubble and is vulnerable to dramatic declines as so much of its demand is for investment purposes; we are not ready to join that camp but it is worthy of consideration.  However, at the very least, we know that investors are going to have to pay a premium price for an asset that may not be as safe as first thought.

For the reasons above, we think investors may be able to find a more attractive value in some gold mining stocks rather than in the metal itself.  Clearly, these stocks would be adversely affected by a decline in gold prices, but at current valuations, they may provide a more conservative approach to investors concerned with conserving capital.  Here are some of the stocks that we think have further upside if gold stays flat or continues higher, and according to our methodology, provide a margin of safety in the event of gold deflation.

  • Newmont Mining (NEM) Our favorite among the large cap gold-miners trades at a price-to-cash earnings multiple of just 11x; well below its ten year historical norms of 18.1x to 32.2x.  While they mine more than just gold, gold is clearly NEM’s primary driver producing about four-fifths of net income.  The company has seen margins and revenue greatly improve thanks to increasing gold prices (five-fold since 2001).  We believe it should be more closely correlated to gold prices, but has performed poorly despite strong growth in both earnings and revenue (five year return of NEM 48% compared to GLD 187%).  To us it appears to us to have the most favorable valuation among the major gold miners, possibly due to the swoon in copper prices.

 

  • Capital Gold Corp. (CGC) At this time, this junior minor appears to be quite cheap according to our methodology.  They announced record production in their last quarter which equated to about 23% growth over the prior year.  Management has stated that production at their El Chanate mine (Sonora, Mexico) continues to grow and, “is on track for a 70,000 ounces per year run rate.”  The mine is clearly not to that production level yet, but it is an indication of their confidence in this ultra-productive asset.  This stock is likely going to be more volatile than the bigger senior miners, but it also has greater growth and appreciation potential.  The company has maintained modest but stable profits which can be hard to find in a smaller, volatile mining stock, and we believe that speaks well to competent management.  Also of note, the company is seeking shareholder approval for a merger with Nayarit Gold (NYG) that has been in the works with little news since February.

With debt levels at extremely high levels in both Europe and the US, we think every investor should have at least some exposure to precious metals.  However, physical gold is obviously more expensive now than it has ever been which makes these two miners look like bargains in comparison.  For the amount of revenue and earnings that these companies are producing their prices are reasonable making them a suitable investment for value seekers that do not want to chase gold prices at record levels.

About Ockham Research 645 Articles

Ockham Research is an independent equity research provider based in Atlanta, Georgia. Security analysis at Ockham Research is based upon the principle known as Ockham's Razor, named for the 14th- century Franciscan friar, William of Ockham. The principle states that a useful theory should utilize as few elements as possible, because efficiency is valuable. In this spirit, our goal is to make the investing environment as simple and understandable as possible, yet no simpler than is necessary.

We utilize this straightforward approach to value over 5500 securities, with key emphasis given to the study of individual securities' price-to-sales, price-to-cash earnings and other historical valuation ranges. Our long term value investing methodology is powered by the teachings of Ben Graham and it has proven to be very adept at identifying stock prices that are out of line with fundamental factors.

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