Gold Miners: Are They All Fairly Valued by the Market?
Thu, Jul 2, 2:02 PM ET, by Scott V. Nystrom
There are
several ways to value large gold producers. One of the conventional methods is
to use “price to earnings” ratio calculations, commonly referred to as “PE”. This method of analysis is the one of the most
basic valuation techniques. Lower PE
ratios suggest a company is undervalued relative to competitors. PE ratios are
best used as a “first cut” in due diligence to see how the market is valuing gold
mining companies relative to others in the industry.
As the table
below shows, current PE levels in 2010 for 14 major and mid tier gold producers
elegantly break down into two groups—those above a 20 PE and those below.
Three out of
five of the most undervalued companies based on PE ratio are South African gold
miners. This is not surprising because
of higher operational risk and political risk involved with mining in South
Africa. There continue to be miner
deaths reported this year in South Africa and investors are still stinging from
power generation disruptions last year.
Peruvian
gold and silver miner Buenaventura (BVN)
is relatively undervalued. The Company closed its hedge book back in February
2008, stumbled on low grade ore at their Yanacocha project, and reported
negative earnings in Q4 2008. More recently, work stoppages and protestors at
their Orcopampa mine have stalled production. An operationally smooth second
half of 2009 would help boost Buenaventura share prices going into 2010.
Lihir Gold (LIHR),
an Australian gold miner, is also relatively undervalued using PE ratios. This
is probably in large part due to a long history of operational challenges at
their world class Lihir Island mine (below sea level) in Papua-New Guinea.
The two
largest gold producers in the world, Barrick Gold (ABX)
and Newmont Mining (NEM)
are surprisingly relatively undervalued for conservative investment plays in
the gold mining industry. It remains curious
that Barrick and Newmont are lagging in PE valuation. Both companies are
projected to increase production at a faster rate than other gold miners listed
above with the exception of Agnico-Eagle (AEM)
and Randgold (GOLD). Fast growing mid-tier gold miners like
Agnico-Eagle and Randgold appear to have gotten a little ahead of themselves
relative to other company valuations based on PE ratios for 2010.
Goldcorp (GG)
is in a slower growth phase going into 2010 than in past years. It has several
world class mines throughout North and South America. Goldcorp is also the most
overvalued company in the table with a projected PE ratio of 44 for 2010. Of
course, longer run investors like Goldcorp’s aggressive plans to expand gold
production by about 50 percent over the next few years.
Kinross Gold
(KGC)Kinross has producing mines in Russia, Chile, Brazil, Nevada, Alaska, and
Washington State. The Russian mine is high grade. Investors are concerned about political risk
in Russia. Kinross is in a consolidationphase after considerable growth in production and with $800 million cash on
hand is probably looking to make an acquisition to expand its production
profile. The share price has had a nice run recently, driving Kinross’ PE
valuation higher.
Mid tier
producer Yamana Gold (AUY)
is coming off the heels of a sale of three high cost mines to Aura Minerals (ORAUF)
in early June. Yamana received over US$200 million and may have sold the
properties below market value. Despite the controversy, Yamana increased their
“war chest” by 200 percent with this deal. The Company is rumored to be on the
lookout for acquisitions with a lower cost profile than the assets just
sold. The share price could lag until an
acquisition is announced. That is unless, of course, a larger gold producer
decides to add Yamana’s mostly Brazilian assets to its portfolio of properties.
Companies to
watch closely are the high cash cost miners like Harmony Gold (HMY),
IAMGOLD (IAG),
Gold Fields (GFI),
Anglo-Gold Ashanti (AU),
and Randgold. These companies will likely have higher earnings growth than the
other miners if the price of gold jumps above $1,000 an ounce in the second
half of this year. Higher cash costs translate into greater leverage to changes
in the price of gold. Companies with
higher cash costs per ounce have higher cash flow growth rates than companies
with lower operational costs when the price of gold rises. Likewise, high cost
producer cash flow suffers more than low cost producers when the price of gold
declines.
El Dorado
Gold (EGO)
has the lowest cash costs of all the companies in the table at about $270 per
ounce. As a result, El Dorado has higher
quality earnings because it is less sensitive to the price of gold. El Dorado’s
producing mines are in Turkey and China and present some political risk. Nevertheless,
investors who like low cost producers find El Dorado attractive. That may be one reason why it has a 26
forward PE ratio for 2010.
We have seen
a recent price run up over the past couple of weeks for many gold mining stocks.
Despite this run up in share prices, several companies are sporting PE ratios
under 20 for 2009 and 2010. A rise in the price of gold over $1,000 an ounce in
the second half of 2009 would move the share prices higher for many large gold
producers.
Second
quarter earnings season is upon us. Keep your eyes on the larger gold
producers. Companies that beat expectations this quarter by driving down
operational costs could show significantly higher share prices in the second
half of 2009 and into 2010.
Disclosure:
No positions
SDI Glossary: "price" Definition
This Article's Word Cloud:
Companies
Dorado
Gold
Goldcorp
Kinross
South
This
Yamana
about
below
cash
companies
cost
costs
earnings
gold
growth
half
have
high
higher
into
investors
large
like
miners
mines
mining
operational
ounce
over
political
price
prices
producers
production
ratio
ratios
relative
risk
second
share
table
than
their
this
undervalued
valuation
with
world
More articles: 1 2 3 4 next »
| 
RSS