Must-Own Miners

01/05/2016 9:00 am EST


Jason Simpkins

, Outsiders Club

The gold mining sector is in the midst of a major shakeout. Indeed, the weaker players are being weeded out; liquidated or taken over. But the stronger companies are cutting costs, reducing debt, and snapping up cheap assets, suggests Jason Simpkins in Outsider Club.

Remember, precious metals are five years into a bear market. So investing in this space isn't about chasing momentum. It's about buying up bargains.

To that end, here are some companies that are on the right track. Right now, investors really should be focused on gold mining majors.

These are the companies that have the assets, capital, and expertise to weather a challenging environment. These miners are your safest bet in a relatively risky sector.

Agnico Eagle Mines (AEM)

Agnico has lost two-thirds of its value over the past five years. But it's in relatively good shape.

The company has a market cap of $5.85 billion and offers a 1.28% dividend yield.

All-in sustaining costs (AISC) for Agnico are expected to fall between $870 and $890 for all of 2015. That's good.

Agnico is also one of the few miners out there that increased reserves while lowering AISC last year. Reserves jumped by 18%, largely due to its purchase of a 50% stake in the Malartic mine in 2014.

Agnico's free cash flow yield of about 4% over the next two years is great compared to its peers. Even better is its debt-to-market cap ratio, which is about 20%. That's well below its peers.

Agnico used some of its increasing cash flow to pay off debt this year as well.

When another good mine like the Malartic ends up on the auction block, Agnico will be in position to capitalize on the opportunity.

OceanaGold (TSX: OGC; OP: OCANF)

OceanaGold's AISC is expected to fall between $770 and $840 this year, making it one of the lowest-cost producers in the world.

Shareholders recently approved an all-share offer for Romarco Minerals (RTRAF). This deal boosted reserves and ensured that a drop in production won't occur.

Once the deal is done, OceanaGold will have about $200 million of debt, which would translate to a debt-to-market cap ratio of 30%...still relatively low.

Plus, if all goes according to plan, the combination of both companies should result in an attributable production of 540,000 ounces of gold in 2017 at an AISC of just $533 per ounce.

In short, OceanaGold is looking at a couple years of very strong profits, with the potential to improve long-term production at very low all-in costs through exploration and new mines.

It's smaller than Agnico with a $1 billion-plus market cap. Currently trading at $2.55 per share. It boasts a dividend yield of 1.57%.

Newcrest Mining (NCMGY)

Newcrest Mining—with a market cap of $6.8 billion—is Australia’s biggest gold miner, with operations in the Asia Pacific and West Africa. It uses a variety of efficient mining methods for large ore bodies.

Its group AISC is $791 per ounce, with its best-performing mine, Cadia, producing at just $182 per ounce. Two others, Bonikro and Gosowong, have AISC of $680 and $686 per ounce, respectively.

In Newcrest's last fiscal year, it generated a $546 million profit and cut its debt by 22%. However, at $2.89 billion its debt level is still an encumbrance.

Going back to the debt-to-GDP ratio, that's about 41%, which is middle-of-the-road. Still, its low costs and favorable currency dynamics bring Newcrest stability at a turbulent time.

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