We recognize that we can’t predict the price of gold. Rather, we view gold mining companies the same way we look at any extractive industry: as operating companies that produce and sell a commodity into a deep market and generate cash flows, notes George Putnam, editor of The Turnaround Letter.
Several traits of the gold mining companies have attracted our attention recently. First, managements have improved dramatically. Skilled professionals with strong reputations for integrity now lead the major companies. Second, balance sheets have de-levered meaningfully. Also, companies are reducing costs, simplifying operations, and focusing on lower risk locations.
That’s not to say that risk is completely gone. Gold prices can be as fickle as oil prices, mines are prone to expensive problems and unstable foreign governments often eye the mines’ cash flows with envy.
Below we list five companies that look appealing. These are all major, well-run mining companies whose shares or ADRs trade on the New York Stock Exchange, with generally beaten-down valuations and prices. Providing potentially more sparkle: If the price of gold does begin to go up, the stocks of gold mining companies generally rise faster than the commodity itself.
Agnico Eagle (AEM)
Founded in 1957, with over $2 billion in revenues, Canada-based Agnico Eagle sets the industry standard for quality, with its track record for meeting its financial and operational goals, strong balance sheet and growth profile. All of its mines are located in low-risk countries: Canada, Mexico and Finland.
Production could grow over 30% by 2020 from more output at its currently-operating mines, while its pipeline for future development looks healthy as well. Costs per ounce have declined by 17% in recent years, boosting its margins as gold prices have increased.
Its mines look to be the highest quality among its peers on a grams of gold/ton basis. While the stock is more expensive than its peers, it remains 50% below the 2010 high and provides a valuable benchmark for the group.
Barrick Gold (ABX)
Based in Toronto, Canada, Barrick is the world’s largest gold mining company. Barrick’s shares remain about 75% below their 2011 highs and trade at the lowest EV/EBITDA multiple of the group.
Get Top Pros' Top Picks, MoneyShow’s free investing newsletter »
Investors worry about production issues at some mines, along with its rising capital spending profile as it struggles with longer-term production growth. Management is focused on reducing its now-reasonable debt level even further, increasing its operational efficiency and boosting its free cash flow.
Goldcorp (GG) Toronto-based Goldcorp has grown through numerous acquisitions. Currently all of its mines are located in the Americas, primarily Canada, Mexico, Argentina and Chile. The company has boosted its credibility in recent years by meeting its production and cost guidance.
Goldcorp’s balance sheet is healthy and could have zero net debt by 2021. Management has outlined a credible plan to increase reserves by 20% and reduce costs per ounce by 20% by the year 2020. Combined with its steady capital spending profile, the outlook for free cash flow looks strong.
Yamana Gold (AUY)
Founded in 2003 by its current chairman and CEO Peter Marrone, Toronto-based Yamana Gold generates about 77% of its revenues from gold. Its mines are located in Canada, Brazil, Chile and Argentina.
Recently, better operational efficiency and exits from several non-core mines have improved its profit structure while helping to reduce its moderately elevated debt.
Yamana’s large Cerro Moro mine in Argentina should start production this year, with all-in sustaining production costs of about $650/ounce. This new mine will significantly boost free cash flow as revenues increase while capital spending slows.
Disclosure Note: Employees of the Publisher of The Turnaround Letter own stocks mentioned in this article.
