Gold Miners Analysis - Part 4

And here is the last part of my gold miner analysis.

Newmont Mining Corp (NEM)


Newmont has gold operations in the USA, Australia, Peru, Indonesia, Ghana, Canada, New Zealand and Mexico. It also operates copper mines in Indonesia and Australia. Newmont has a market capitalization of $27.47 billions.


NEM was up a healthy 28% in 2010 but is down close to 8% for 2011. This is about average for this group.

Newmont was over-performing gold most of the year, but the correction of the last 2 months have brought back the stock closer to gold's performance.

The technical picture for NEM is very similar to most miners. I rank them a 2. The price is below all the MA (15, 50 and 200). All the indicators but for the long term trend point downward. There is support around the $54 line and then around $52. 

With a current P/E of 13.66 and a forward P/E of around 11, Newmont is one of the cheapest miners in the group. Net profit margins are high, projected earnings growth for the next 5 years is a healthy 21%. Good numbers overall!


US Gold Corp (UXG)


US Gold is a valuable mineral (gold, silver and others) exploration company operating mainly in the USA and Mexico. As such it is not your standard gold miner. It is quite small with a market capitalization of only $888 millions.


US Gold is clearly the star performer here - it was up over 230% in 2010. It's down 8% this year, but who is counting!

Not surprisingly, UXG is running well ahead of gold!

The indicators are giving a mixed picture - long and medium term trend indicators are positive (long term in a "super" trend) but short term indicator points to a correction in progress. Not surprising after a 200% run! There is support around the 50 day MA at $6.8. I give it a rank of 6.

Earnings are not explaining the current run - P/E is at -30 and forward P/E is at -33. Clearly, like IVN, this is a play on expectations - UXG is counting on its silver discovery in Mexico and gold exploration in the US for long term potential. As with mineral exploration, there is always risk of high expectations.


Conclusion


The first conclusion is that investing in these companies is not for the faint of heart. They are very volatile given their relationship with the price of the main source of their revenues - gold! Second, they pay virtually no dividend so forget buying them for income!


I was actually very surprised to see that these companies are not more profitable. With gold up over 40% in the last 18 months, I was expecting to see bigger margins from these companies. A couple of them are actually losing money! Tough to say what would happen to them if gold decided to correct! And that is the issue right now. Some believe that gold is in speculative bubble now, others think that we are in a secular bull market that could take gold all the way to $3500/ounce. At that price, all these companies would see their revenues and profits increase dramatically. I myself do not believe that gold will achieve these numbers for structural reasons, but if gold could stay within 10% of the current price some of these companies could make an interesting trade for the next couple of years. Below is a comparison table of fundamentals for these companies. 

What company stands out from this comparison. As a straight investment, Newmont strikes me as the best bet - good margins, good projected growth rate, all the key ratios amongst the best in the industry. Not only are they the cheapest of this list, but historically speaking, they are cheap with a P/E at a 10 year low. It is of course helped by the fact that gold is so expensive at this time. On a technical basis, NEM is very weak, but so is everyone else. And it seems to be in a channel between $55 and $65  since August. And it sits right at the bottom of that channel now. Earnings for the last quarter will be announced in 2/24/2011. NEM has a mixed record when it comes to earning surprises so I would wait until after that enter a trade. But the stock is certainly cheap now.


There are 3 very speculative plays in this list - IAG, IVN and UXG:

• IAG is the most expensive of all the companies listed there but it has great earning growth potential. They have grown earnings by 40% over the last 5 years and it is predicted to increase. They report 2/14/2011 but they have a bad track record with earning surprises so I would also wait until after the next earning reports. 
• IVN is losing money, they project to lose money in the foreseeable future, there is no valid growth projection for the next 5 years, few analysts cover the stock and yet, the stock is on fire! I believe it is all based on the Mongolia deposit that they own with Rio Tinto. If their findings proves correct, they could be standing on the biggest untapped gold and copper find in the world. But this is highly speculative! No ratio can justify the current or future prices. This one is a complete leap of faith!
• UXG is another leap of faith. Not a straight mining operation or even a pure gold play. The stock is on fire right now which makes me leery. And there is just not enough information available as far as I am concerned. A big gamble, but big gamble sometimes pay big. And sometimes, you roll a snake eyes!

Other companies with relatively interesting numbers are GFI and ABX. Their forward P/E are amongst the lowest, their key ratios are very good and they have good growth prospect. They are more expensive than NEM, but within reason. As with the others, I would wait to see the next earning report. HMY has also some nice numbers, but I am bothered by their margin reports. I would need to see more recent numbers to render a better judgment. GG is also interesting, good margins, decent key ratio, but they are expensive relative to the others on a forward basis and I don't like their Price to Sales ratio. This is the hardest number to "fudge" and it is high compared to my other favorites.


This is it for this analysis. I will try to update it as earnings are released this quarter.