Is it a good time to enter gold mining stocks? The short answer is yes, particularly for the long term, as I see gold prices climbing higher due to inflationary pressures rising. Right now inflation is at bay as stagflation has been a concern. However it is only a matter of time before inflation picks up, in my opinion. Those holding gold, silver and stocks in the sector as insurance against inflation will be rewarded in time. A piece of very timely news has just come out while most of us were dealing with the stress of thr holidays and the coming New Year. Of all the places to turn bullish on select gold miners, JPMorgan (JPM) has just done so. In a story that received little coverage, JPM was out with a note that suggests there are huge opportunities in 2014 in silver and gold companies. In contrast, Morgan Stanley, Goldman Sachs and Credit Suisse are all predicting a lower average price of gold and silver in 2014, so the call is a bit of a surprise. Nonetheless, I have been recommending accumulation of top names in the space on the way down since the first 20% drop in the sector began. The complete list of stocks they recommend as buys here at rock bottom prices for appreciation into 2014 can be found in table 1. In this article I will focus on Goldcorp (GG). I just got back into the stock today at $21.30 as I believe this recent news item changes the investment thesis. Investors should consider getting into positions ahead of the New Year as I see a very favorable risk-reward ratio, now validated by JPM.
Why Goldcorp?
Anyone who follows this sector knows that GG is a behemoth in the space. They have efficiently managed the terrible action in gold and silver here in 2013. Further, GG expects to start production at several mines in 2014. Surely the company must be broke as it can't possibly be making money in this environment, right? Wrong! At last look, GG finished the third quarter with almost $1 billion in cash on hand and $2 billion of an undrawn credit facility. While it is true that capital expenditures outpaced cash flow from operations in 2013, GG's efficiency stems from it remaining on the conservative side of things. For example, it did not rush its mine in Argentina, Cerro Negro, which will produce 525,000 ounces of gold once it reaches full production levels. The good news is that costs associated with this mine are expected to deliver first gold in mid-2014. The project was expected to start production by the end of this year but was delayed because of lower gold prices and inflation in Argentina, which could pressure initial start-up costs for 2014.
Table 1. JPMorgan Gold and Silver Company Buy Recommendations For 2014 Growth, In Addition to the Goldcorp Recommendation.
Company | Dividend Yield and JPM Price Target |
Compania de Minas Buenaventura SAA (BVN) | Investors are paid a 0.2% dividend. The JPM price target for the stock is $19. More information can be found here. |
Eldorado Gold (EGO) | EGO pays 1.7% dividend for investors. The JPM price target for the stock is $10. More information can be found here. |
Newmont Mining (NEM) | NEM pays investors a solid 3.3% dividend. The JPM price target is $28. More information can be found here. |
Silver Wheaton (SLW) | SLW pays 1.7% dividend. JPM has a $33 price target. More information can be found here. |
New Gold (NGD) | JPM has a price target for the stock of $8. More information can be found here. |
With Gold over $1,200 an Ounce, Goldcorp Can Turn a Profit
GG pretty much needs gold to stay above an average $1,200 for 2014 in order for this investment thesis to play out. This is because GG had all-in sustaining costs of $1,136 per ounce for the first nine months of 2013, which is higher than many of my preferred gold companies, such as Yamana gold (AUY). One property weighing on this all-in sustaining cost average is the Marigold mine, where GG owns a 66.7% interest and Barrick (ABX) owns 33.3%. The Marigold mine reported the highest all-in sustaining costs of all projects, coming in at an unsustainable $1,604 per ounce during the first nine months of 2013. GG has gone on record that they are seeking to sell its holdings in Marigold mine. Once done, this will lower overall costs. All-in sustaining costs have trended a touch lower recently for the company as a whole, from $1,279 per ounce in the second quarter to $992 per ounce in the third quarter. I maintain that gold over $1,200 is the "line in the sand" for the average gold price needed to maintain profitability. That said GG has been delivering good results. GG reported an earnings per share of $0.23 for the most recent quarter which beat analyst consensus expectations of $0.20.
Write Downs Coming?
As we know, gold mining stocks are down between 40% and 50% since late 2012 while the price of gold has dipped by 30% in the same time frame. This has pressured the miners and now they are faced with the issue of write downs being necessary. Most large mining companies are valued on the extent of their reserves. At the end of 2012, mining companies wrote down more than $50 billion in assets, most of that which were not precious metals. The write downs were more aluminum, iron ore, copper, nickel, zinc etc. Gold for reserve calculations in 2013, valued differently by the mining companies, some using as high as $1,750 an ounce. As the miners prepare their budgets for 2014, they will be forced to re-evaluate the worth of their reserves based on a gold price that is $500 an ounce less than it was a year ago which will invariably lead to the companies writing down assets. The good news? Much of this is already priced into the stocks, so those companies that write down the least amount of assets may be viewed in a favorable light, and GG has been quite transparent in this regard.
The Yield And Analyst Targets
I have always been a strong proponent of companies that pay a monthly dividend. For those reinvesting dividends the compounding rate is a touch higher than those paying quarterly. One issue for American investors holding the stock in a tax favored account is that they might not escape the foreign dividend income tax as GG is Canadian. Right now investors are paid a 2.8% dividend, but I am recommending the stock for growth. The JPM price target for GG is $34, and the consensus target is $33. GG is trading just over $21.00 at the time of this writing. A move to the target would be a 60% gain for investors.
A Word On Political Risk
The company holds mining and exploration properties in the Americas in mostly stable nations. Since it is in multiple countries, GG is exposed to the socioeconomic conditions as well as the laws governing the mining industry in those countries. Inherent risks with conducting foreign operations include, but are not limited to, high rates of inflation ,military repression, war or civil war, social and labor unrest and organized crime and hostage taking, which cannot be timely predicted and could have a material adverse effect on the company's operations and profitability. The governments in those countries are currently generally supportive of the mining industry, but changes in government laws and regulations including taxation, royalties, the repatriation of profits, restrictions on production, export controls, changes in taxation policies, environmental and ecological compliance, expropriation of property and shifts in the political stability of the country could adversely affect the company's exploration, development and production initiatives in these countries.
Final Thoughts
This timely advice from JPM could be the start of the turnaround for gold miners. I recommend a buy for the companies listed in table 1, with preference given to GG, AUY and EGO. GG has its act together and will remain profitable with gold over $1,200 an ounce. It has production ramping up in 2014 and has been working to lower all-in sustaining costs. The company has 30% to 90% upside from current levels based on its strong cash position, global presence, growth plans, dividend yield and low geopolitical risk. My sentiment is to buy under $22 and ahead of the New Year.
Disclosure: I am long AUY, GG, JPM, SLW. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article. (More...)
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