A Golden Trio

08/04/2017 2:54 am EST


Jack Adamo

Editor, Jack Adamo's Insiders Plus

Jack Adamo, editor of Insiders Plus, is a leading expert focused on both growth and income stocks. Within his model portfolio, he also maintains several gold holdings, and offers this update on 3 of his buy-rated gold miners.

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We got another excellent report from Newmont Mining Corp. (NEM); Q2 saw gold production climb 13.6% from last year, while copper production grew 6.9%. The Average Realized Price for gold slipped less than 1%. ARP for copper rose 23%.

Net sales for all products rose 12.3%. GAAP EPS were up 725% from 4¢ to 33¢, while adjusted EPS rose 58.6% from 29¢ to 46¢. In this instance I consider the adjusted earnings more accurate.

The difference has to do with future tax deductions that are unsettled for now, but in my opinion likely to turn out favorably for the company. They are based on whether Newmont will have enough future earnings to use past losses to offset future profits. It seems clear to me it will.

I've not yet posted quarterly dividends for our companies from Q2, yet; that will slightly boost all our results. Currently we are up 33% in Newmont in our 15-month holding period. Newmont Mining Corp. is a buy on pullbacks to $35.

It was a challenge to analyze earnings for New Gold (NGD) this quarter. Lots of moving parts. Operating earnings fell 16%, but net earnings rose from a $14 million loss last year to a $23 million gain. EPS rose from a 3¢ loss to a 4¢ gain.

The very large discrepancy came mostly from foreign exchange. Last year the strong U.S. Dollar hurt the company, which reports earnings in dollars.

This year the rapidly weakening dollar boosted results coming in from Canada, Australia, etc. Of course, a weak dollar helps gold prices in any case, but when earnings made in other currencies are translated to greenbacks, the effect is amplified.

Operating cash flow was about 3.5x earnings, which is excellent, although free cash flow was slightly negative due to the continued investment in the Rainy River mine expansion. That situation should reverse starting in Q4, assuming the project is completed on time. It looks on track so far.

The bottom line is that New Gold's earnings in our currency were much higher, and that's good.New Gold is still expensive, even on a forward P/E basis, but there's a lot of faith in this company's prospects and I think it's well-founded.

We saw this kind of pricing early in the turn of the century and it turned out to be prescient, as earnings grew in the coming years to validate the stock prices. I expect the same now.

Between our in-the-red 2% position and our profitable 4% in New Gold we are at breakeven. Given seasonal factors and the rapidly sliding greenback, we should be well in the black by the end of Q3. New Gold, Inc. is a buy at current levels.

Goldcorp (GG) announced Q2 earnings up 278% from a 9¢ loss to a 16¢ gain on a 9.2% rise in revenues, yet the stock fell 4.9% on the news. Operating cash flow slid 32.5%, but that can't be the cause for the slide.

The chances that most investors (or financial media reporters) even know what cash flow statements are, much less analyze them, is more remote than the rim of the known universe.

In any case, the reason for the GAAP shortfall is due to accounting conventions for projects in the development stage. Adjusted OCF was up 57%. Something in between that and the GAAP figure seems a reasonable number to work with.

Gold production rose 4%; silver production rose 40%; average realized gold price slipped 2%, but was offset in spades by a 25% drop in All-in Sustaining Costs.

We are still quite a bit underwater in both our Goldcorp positions, but I believe we'll make a lot of progress in remedying that in the next few months, and will cure it by year-end 2018. Goldcorp Inc. is a buy at current prices.

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