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A Large Cap Gold Stock That Could Double In Price

June 7, 2011 by Leave a Comment

Many small cap gold mining companies have seen significant price gains, while large cap gold stocks have underperformed.  With fundamentals driving the price of gold steadily higher, many large cap gold mining companies are perfectly positioned to see large earnings increases that will propel their stock prices higher.

One large cap gold mining company that could be on the verge of doubling in price over the next few years is Newmont Mining Corporation (NEM).   The stock has underperformed other large cap gold mining companies despite the fact that the company’s fundamentals have dramatically improved over the past few years.  The improved fundamentals, once recognized by the market, are likely to push Newmont’s stock price much higher.

Newmont Mining is one of the world’s largest gold producers with operations in Ghana, Indonesia, Nevada, Australia, New Zealand, Peru, Canada and Mexico.  For the past three years, Newmont Mining has been positioning itself for future growth through financial and operational restructuring and is now poised for additional significant growth in revenue and profits.

Revenues have grown from $6.1 billion in 2008 to $9.5 billion for the year ending December 31, 2010.  During the past three years, gold production increased by only 3.7% from 5.2 million ounces in 2008 to 5.4 million ounces in 2010.  The majority of revenue increases over the past three years were driven by increased gold prices, but Newmont is forecasting an increase in gold production of 35% over the next six years to 7 million ounces annually.  The combination of increased gold production and higher gold prices could result in explosive earnings growth.

Newmont Mining has proven and probable gold reserves of 93.5 million ounces, equivalent to $285 per share.   Newmont is also a major copper producer with proven and probable reserves of 9.4 billion pounds, equivalent to 19.1 pounds per share.   The value of copper reserves is worth approximately $78 per share.   In 2010, Newmont produced 327 million pounds of copper.

Gold reserves are expected to increase based on the Company’s global portfolio and continual exploration efforts.

The Company paid shareholders a cash dividend of $0.50 per share in 2010 and expects to increase this by $0.20 per share for every $100 increase in the price of gold.

Newmont Mining has an extremely strong balance sheet with $5.6 billion in cash at year end 2010.   According to the Company’s annual report, Newmont offers investors the “best per-share gold-price leverage in the industry.  Every $100 increase in gold price translates into approximately $350 in additional after-tax operating cash flows, or approximately $0.70 per share.  We deliver better gold price leverage than any of our competitors.”

Newmont Mining’s stock price of $53.44 at today’s close is actually lower than five years ago when it traded at about $55 in early July 2006.

 

NEWMONT MINING - COURTESY YAHOO FINANCE

Newmont Mining trades at a low price earnings ratio of 12 and pays a 1.5% annual dividend.  Based on the Company’s recent results and bright prospects for future revenue and profit growth, it is only a matter of time before investors drive the stock price higher.  Many other major gold producers have price earnings ratios in the low 20’s or higher.  If Newmont Mining sold at a PE ratio in the low 20’s, the stock’s price would be over $100 per share.

Filed Under: Featured, Gold Tagged With: , , , ,

Gold Advances On Week, Silver Retreats As Financial Crisis II Looms

June 3, 2011 by Leave a Comment

Gold, platinum and palladium all advanced on the week while silver gave up most of the previous week’s gains.

As measured by the London PM Fix Price, gold gained $7 on the week to $1,540.00 while silver pulled back by $2.50 to $35.19.   Platinum moved up by $21 to $1,807.00 and palladium gained $13 to $770.00.  After the London close, prices of precious metals moved up strongly in New York trading, especially silver, which last traded at $36.39, up $1.20 from the earlier London closing price.

Financial markets worldwide pulled back sharply as the stock traders finally began to acknowledge the fragility of the world’s paper back financial system.  Governments that have borrowed and spent trillions of dollars to stimulate economic growth and support a fragile banking system now find themselves reaching the limits of their borrowing capacity.

It is becoming obvious that the financial crisis of 2008 was just a warm up act to the real financial nightmare that is looming ahead.  Despite trillions of dollars in stimulus spending, coordinated with a money printing campaign by world central banks, the economies of the U.S. and Europe have not recovered.  Unemployment continues to grow, real estate values continue to plunge, debt levels have reached unsustainable levels and real incomes for the majority of workers continue to decline.

There are numerous events that could trigger the second financial crisis  There is no way of knowing which specific event will trigger the next crisis,  nor does it matter.  What does matter is the manner in which Financial Crisis II will be dealt with by world governments and central banks.  Unable to raise taxes or take on trillions more in borrowing, monetary authorities will exercise the last resort option of money printing on a massive scale to avoid a total collapse of the world monetary system.  The gold market is already reflecting this scenario as one of the few safe havens against paper currencies that have little intrinsic value.  When Financial Crisis II gets under way, uninformed talk of a “gold bubble” will quickly disappear as investors will buy gold at any price to preserve their wealth.

Precious Metals Prices
PM Fix Since Last Recap
Gold $1,540.00 +7.00 (+0.46%)
Silver $35.19 -2.50(-6.63%)
Platinum $1,807.00 +21.00 (+1.18%)
Palladium $770.00 +13.00 (+1.72%)

Will platinum, which has lagged the price rallies in other precious metals, start to play catch up?  According to the Wall Street Journal, due to rising production costs for platinum, a price of $2,100 per ounce is necessary to encourage increased mine production.

The historical price ratio of platinum to palladium also suggests that platinum prices could rally significantly.  The Wall Street Journal notes that when palladium reached $860 per ounce in February, the ratio was 2.15 compared to 2.12 today.  The historical average of the platinum/palladium ratio is 3.0 to 4.0, suggesting that platinum is undervalued.

 

PLATINUM - COURTESY STOCKCHARTS.COM

Filed Under: Featured, Gold, palladium, Platinum, Silver, Statistics Tagged With: , , , , ,

Physical Gold Outperforms Vanguard And Fidelity Gold Mutual Funds

June 2, 2011 by Leave a Comment

Investors in gold mutual funds have dramatically underperformed the return from holding physical gold over the past three years.  For a variety of reasons, many gold mining companies have been unable to turn higher gold prices into increased earnings.   As a result, gold stock mutual funds have dramatically underperformed the price gains of gold bullion.

Over the past three years, gold has increased by 80%, from a monthly low of $853 in May 2008 to $1,535 at today’s closing price.  Holders of the physical metal have done extremely well while investors in gold mutual funds run by two of the countries largest investment companies (Vanguard and Fidelity) have dramatically underperformed.

According to the Vanguard web site, the Vanguard Precious Metals and Mining Fund (VGPMX) has a three year average annual performance of -.46%, while the price of gold has soared 80%.  Vanguard states that although this fund is not a “pure gold or precious metals fund”, it invests in companies that are ” involved in the mining or of exploration for precious and rare metals and minerals”.  The Vanguard precious metals fund invests in 50 different stocks in 14 different countries and foreign holdings total 92% of assets.  The fund has net assets of $5.8 billion.

In early May 2008, the VGPMX reached $39 per share compared to today’s closing price of $27.20.  The fund has paid out dividends which added to the overall returns of the fund.

VGPMX - COURTESY YAHOO FINANCE

The ten year return on the Vanguard gold fund, however, would have outperformed holding physical gold.  A $10,000 investment in the Vanguard Precious Metals Fund made in May 2001, would now be worth approximately $76,300.  In May 2001, an investor could have purchased almost 38 ounces of gold for $10,000 which today would be valued at $58,330.  As noted above, the dividend payments by VGPMX added to the fund’s return.

The Fidelity Select Gold Portfolio (FSAGX) has outperformed the Vanguard fund, but still trails the three year return on gold bullion.  According to the Fidelity web site, the Fidelity gold portfolio had a 3 year return of 16.2%, compared to an 80% increase in the price of gold.

The Fidelity Fund invests at least 80% of its assets in companies involved in gold mining, exploration or processing.  The Fund also invests in gold bullion or coins and to a lesser degree, platinum, silver and diamonds.  The FSAGX has net assets of $4.5 billion.  The top ten holdings of the Fund at March 31, 2011 were Goldcorp, Barrick Gold, Newcrest Mining, Anglogold Ashanti, Newmont Mining, Kinross Gold, Agnico-Eagle Mines, Yamana Gold, Rangold Resources and Eldorado Gold Corp.  The total number of holdings of the Fund is 131.

FSAGX - COURTESY YAHOO FINANCE

The long term results of the Fidelity gold fund slightly trail the Vanguard gold fund.  Fidelity had a 10 year average annual performance of 22.54% compared to a return of 24.02% for Vanguard.   Both the Vanguard and Fidelity fund had returns that exceeded the increase in the value of gold over the past ten years.

Will physical gold or gold mutual funds deliver the best return going forward?

A continued rise in gold prices should eventually translate into higher leveraged profits for gold mining companies, unless the substantial costs of gold mining exceed the increase in gold prices.  Inflation is rapidly rising as central banks continue to flood the global economy with cheap money.  A continued rise in energy costs and general inflation could negate the benefit of increased gold prices for gold mining companies.  Investors who hold physical gold or invest in gold trust ETFs, rather than gold mutual funds, should expect to see continued superior investment performance.

Filed Under: Gold, Silver Tagged With: , , , , , ,

Gold And Silver ETF Holdings Show Little Change On Week

June 2, 2011 by 1 Comment

Holdings of the iShares Silver Trust (SLV) were unchanged on the week after dropping by 505.10 tonnes in the previous week.

After extreme price volatility at the beginning of May, silver prices were little changed over the previous week.  Based on the closing London PM Fix price, silver closed at $37.17 on May 25th compared to a closing price of $37.95 on June 1st.

The price of silver has now recovered by 16.7% or $5.45 from the low of $32.50 on May 12.  Silver reached a high for the year on April 28th closing at $48.70.  The price correction should be viewed as a buying opportunity since the fundamentals of the silver market have grown stronger with each passing day.

The debt crisis in Europe and the U.S. appear to be on the verge of spinning out of control.  The latest batch of economic reports show weak employment numbers, decline in the manufacturing sector and a continued collapse in U.S. real estate values.  Economies overburdened by debt desperately require higher economic growth which is simply not happening.  The prospect of continued economic weakness was finally acknowledged by previously bullish stock investors, as sellers pushed the Dow Jones down by almost 280 points for a 2.2% loss.

The latest sales figures from the U.S. Mint indicate that many investors see silver as a better store of value than paper currency.  Total year to date sales through May 31st of the Silver Eagle bullion coins totaled 18.9 million ounces, the most since 1986.  Comparable sales of the Silver Eagle for 2010 were 15.2 million ounces.

U.S. Mint sales of the Silver Eagles during May totaled 3.65 million ounces up from 2.82 million ounces in April.  If sales for the rest of the year continue at the average month’s sales volume, U.S. Mint sales of Silver Eagles would total 45.4 million ounces, valued at over $1.7 billion based on today’s closing price of silver.

GLD and SLV Holdings (metric tonnes)

June 1-2011 Weekly Change YTD Change
GLD 1,212.87 -1.21 -67.85
SLV 9,941.33 00.00 -980.24

The holdings of the SPDR Gold Shares Trust (GLD) decreased by a modest 1.21 tonnes over the past week, after gaining 22.74 tonnes in the previous week.   The GLD currently holds 38.99 million ounces of gold valued at $59.8 billion.  The price of gold gained slightly on the week, closing at $1,533.75, up $7.50 from May 25th.

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US Mint To Increase Production Of Silver Bullion Coins To Meet “Unprecedented” Demand

May 28, 2011 by Leave a Comment

The United States Mint announced that it will commence production of American Eagle Silver Bullion Coins at its San Francisco Mint.  For several years now, the Eagle Silver Bullion coins had only been produced at the Mint’s West Point facility.

In a press release this week, the US Mint noted that “Demand for American Eagle Silver Bullion Coins remains at unprecedented high levels.   Adding production at the United States Mint at San Francisco provides manufacturing flexibility across the bullion and numismatic product lines to meet customer needs.”

In the face of huge demand for the silver bullion coins, the US Mint has been allocating orders among its authorized purchasers.  The high demand and limited production has lead to high premiums of up to $5 per coin for purchasers of the silver bullion coins.

The US Mint recently came in for criticism for its failure to meet demand for physical bullion coins.  In early April, during a hearing by the House Financial Services Subcommittee, Rep. Ron Paul criticized the Mint for its failure to meet public demand for silver and gold bullion coins.  Ron Paul linked the shortage of bullion coins to the “huge debasement” of the United State currency and said that it was “imperative” that the US Mint meet public demand for bullion coins.

The US Mint said that it has capacity to mint up to “several hundred thousand coins per week” at the San Francisco facility.  The Mint will use the same packaging and manufacturing process at San Francisco that it uses at West Point and the coins will not have a mint mark.

Although demand for the American Eagle Silver Bullion coins remain high, the purchase of 90% silver coins is becoming a more cost effective and popular way to invest in silver.  There is a very small premium or even a discount from bullion value on the purchase of 90% silver coins.

APMEX is currently selling a $1,000 face value bag of 90% silver coins which contain 715 ounces of pure silver for $27,541.80.  Based on today’s closing New York price for silver of $38.16 per ounce, the silver value of the bag of coins being sold by APMEX is $27,284.

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Precious Metals Stage Impressive Rally – Are Gold Stocks Next?

May 27, 2011 by 1 Comment

As measured by the closing London PM Fix Price, precious metals staged impressive gains this week, rallying across the board.  Ongoing concerns about the sovereign debt crisis in Europe, the debt limit ceiling stalemate in the U.S. and a weak dollar all contributed to continued fundamental demand for the metals.

After the London close, precious metals continued to gain in New York trading with gold at $1,537.00, silver at $38.15, platinum at $1,805.00 and palladium at $766.00.

The star of the week was silver which gained $2.89 per ounce for a gain of 8.3% on the week.  Although the correction of silver in early May was dramatic, the sharp pullback has provided long term investors with an opportunity to add to positions.  Silver fundamentals remain strong as detailed in a recent report by the Silver Institute in which it was noted that demand remained robust despite higher prices.  In addition, although higher prices has lead to increased mine exploration and production, new silver production during 2010 rose by only 2.5%.

Precious Metals Prices
PM Fix Since Last Recap
Gold $1,533.00 +42.25 (+2.83%)
Silver $37.69 +2.89(+8.30%)
Platinum $1,786.00 +19.00 (+1.08%)
Palladium $757.00 +23.00 (+3.13%)

Gold has recovered nearly all of its early May price correction and is now only $8 off its high of $1,541.00 as measured by the London PM Fix Price.  The trend in gold remains solidly bullish and any price corrections should be viewed as a buying opportunity.

 

GOLD - COURTESY STOCKCHARTS.COM

 

Gold stocks, many of which have trailed the returns of gold bullion, may also be viewed as attractive at this point. As measured by the Market Vectors Gold Miners ETF (GDX),  gold stocks are moving up after making multiple bottoms at the $55 support level.

 

GDX - COURTESY YAHOO FINANCE

Many of the gold mining stocks are selling at steep discounts to their gold reserves and represent solid values. Earlier this week, Kinross Gold, which sells at the equivalent of $250 per ounce, was a featured story. Value investor David Steinberg of DLS Capital Management, has a price target on Kinross of $27 per share. Kinross closed today at $16.11.

Filed Under: Gold, palladium, Platinum, Silver, Statistics Tagged With: , , , ,

Sale Of U.S. Gold Reserves Would Accomplish Little

May 27, 2011 by 7 Comments

FORT KNOX

The U.S. slammed against the $14.3 trillion debt ceiling last week with a quick resolution to the problem no wheres in sight.

Congressional authorization to extend the debt limit remains mired in ideological disputes.  Secretary of the Treasury Tim Geithner states that the U.S will default in early August if the debt ceiling is not raised.

As the Treasury scrambles to avoid default, a discussion has started on the merits of selling United States gold reserves to avoid default and put the U.S. back on sound financial footing.

While the sale of U.S. gold reserves may appear to be an appealing solution, it would accomplish virtually nothing from a financial standpoint.

According to the U.S. Treasury, total gold holdings of the United States as of April 2011 were 261.5 million troy ounces.

At $1,500 per ounce, the total value of U.S. gold reserves is about $393 billion.  Sound like a lot of money?  Enough to get the U.S. out of the debt/spending crisis that we are in?  Here’s what the U.S. could do with an extra $393 billion.

  • Pay off 2.75% of the national debt
  • Pay less than one year’s interest on the national debt
  • Reduce the estimated 2011 budget deficit of $1.645 trillion by about 23%
  • Reduce this year’s U.S. budgeted spending of $3.8 trillion by about 10%
  • Pay for 40% of the $1 trillion dollar cost of the wars in Iraq and Afghanistan
  • Cover about 33% of the estimated cost of the bailing out Fannie Mae and Freddie Mac
  • Cover half of one percent of the estimated unfunded U.S. government liabilities for social security and medicare
  • Pay off about 4% of total mortgage debt held by American families

Selling the U.S. gold reserves may sound like a good idea until you take a look at the numbers.  The total value of U.S. gold reserves amounts to a mere rounding error in terms of total U.S. debt, spending, deficits and future obligations.   The United States has numerous valuable assets that it could sell, but the sale of U.S. gold reserves would accomplish little.

 

 

 

 

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The Federal Reserve Can’t Produce Oil, Food Or Jobs But They Will Continue To Produce Dollars

May 26, 2011 by Leave a Comment

Federal Reserve

No bull market goes straight up without normal price corrections along the way.  The recent sharp pullback in silver prices and the more subdued correction in gold prices are likely to be viewed in hindsight as a superb buying opportunity.

Simple trend line analysis suggests that current prices for gold and silver are in a buying range.  Using the SLV and GLD as proxies for the metals, we can see that the recent sell off has brought prices to trend line support.   Combining the “trend is your friend” theory along with solid fundamental underpinnings for gold and silver, higher prices seem inevitable.  For patient long term investors, especially in the gold market, every pullback of the last decade has simply been another opportunity to exchange depreciating paper dollars into a better store of value.

The SLV recently hit its trend line in the low 30’s.

SLV - COURTESY ETRADE.COM

The GLD’s long term trend line does not even hint of parabolic price movement, contrary to mainstream press reports warning the public of the dangers of gold investing.

GLD - COURTESY ETRADE.COM

Despite the assertions of Fed Chairman Bernanke that inflation is not a problem, any one outside of the academic inner circle of the Federal Reserve sees inflation everywhere they look.  Soaring gasoline and heating costs have decimated family budgets and retail food inflation is projected to hit 4% or higher in 2011.  Constantly higher inflation, as measured by the Consumer Price Index, has prevailed ever since the U.S. officially went off the gold standard in the early 1970’s.  (See also Why Higher Inflation and $5,000 Gold Are Inevitable).

This week we have seen announcements of higher prices by Starbucks, Smucker Co, Nestle, McDonald’s and Whole Foods.  Walmart previously warned that the debasement of the dollar was translating into higher retail prices on imported items.  The upward price spiral in the cost of necessities is especially burdensome since incomes for the majority of Americans are not increasing.

In an excellent article in the Wall Street Journal this week, Ronald McKinnon persuasively suggests that the United States is entering 1970’s type stagflation, the result of high inflation, high unemployment and stagnant demand.  According to Mr. McKinnon,  “the U.S. economy again seems to be entering stagflation. April’s producer price index for finished goods, which excludes services and falling home prices, rose 6.8%. The Bureau of Labor Statistics reports that intermediate goods prices for April were rising at a 9.4% annual clip. Meanwhile the official nationwide unemployment rate is mired close to 9%.”

McKinnon argues that stagflation is being caused by the Fed’s zero interest rate policies (which besides robbing retirees and savers), has cause a global flood of hot money that has resulted in surging inflation in Asia and Latin America and a 40% rise in commodity prices over the past year.

The Federal Reserve’s policy options at this point seem limited to continuing their policies of cheap money and dollar debasement.  The Fed cannot produce oil as Bernanke recently commented.  Nor can the Fed produce food, jobs or higher housing prices.  The one thing the Fed can and has done is to produce paper dollars in extraordinary quantities.  Debt, when allowed to expand to levels that make repayment impossible, leaves the debtor with no good options – a point that we are rapidly approaching. (See also Why There Is No Upside Limit To Gold and Silver Prices).

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How Wall Street Pros Made Huge Profits On Silver ETF Crash As Small Investors Sold

May 25, 2011 by Leave a Comment

The holdings of the iShares Silver Trust (SLV) declined by a substantial 505.10 tonnes from the previous week.  The decline in SLV silver holdings from the all time high of 11,390.06 tonnes reached on April 25th comes in at a hefty 1,448.73 tonnes or 12.7%.  Silver, meanwhile, has declined in price by $8.31 per ounce or 18.3% since April 25th.

Although the price per share of the SLV tracks the price per ounce of silver very closely, the actual bullion holdings of the SLV can fluctuate, sometimes dramatically, from the underlying price movements of silver.  This same situation applies to the SPDR Gold Shares (GLD).

The reason why the physical holdings of the SLV and GLD do not closely track the price of gold and silver is due to the complex mechanism by which Authorized Participants can “create or redeem” shares in the SLV and GLD.  The silver and gold trusts are structured to allow large Wall Street investment firms to act as Authorized Participants to arbitrage against a premium or discount of the SLV or GLD share prices to the underlying net asset value of the Trusts.

Premiums or discounts to the net asset value of the Trusts occur based on normal supply and demand by investors during the course of trading in SLV and GLD shares.  The Authorized Participants routinely reap profits from their arbitrage activities based on the prevailing discounts or premiums .  According to the prospectuses of the GLD and SLV, the Trusts were structured in this manner to allow the price of the GLD and SLV shares to closely correspond to the underlying value of gold and silver bullion.

The Trusts do not directly buy or sell bullion based on investor buy or sell orders for the SLV and GLD.  The Trusts are not structured like a typical mutual fund which liquidates its holdings if there is a surge of investor redemptions.  Changes in the number of Trust shares outstanding and changes in holdings of gold and silver occur only based on the creation or redemption of shares through Authorized Participants.

Premiums or discounts of the SLV and GLD shares to net asset values are normally less than 1% but can expand dramatically when trading is volatile.  For example, on May 2nd, when silver prices were plunging, the shares of the SLV reached a huge discount of 9.87% from the net asset value of silver held by the SLV Trust.  Investors desperately seeking to liquidate their SLV shares caused the value of the SLV to trade at a steep discount to the underlying net asset value of the Trust.

At this point the lucky Wall Street pros who act as Authorized Participants were gladly buying the SLV shares and simultaneously shorting silver bullion, locking in huge profits.  Authorized Participants who arbitraged during this volatile trading profited greatly at the expense of panicky SLV sellers who sold shares of the SLV at $42.79 that were worth $47.51 based on the net asset value of the SLV.  (Pricing data on the SLV share discount was obtained from the iShares Silver Trust web site).

The Authorized Participants who bought SLV shares during the panic sell off then delivered their SLV shares to the iShare Trust and requested that they be redeemed for silver bullion which was then used to close out short positions in silver bullion.  Under this situation, the silver bullion holdings of the SLV decreased since they delivered silver bullion to the Authorized Participants in exchange for redeemed SLV shares.  This is exactly the situation that has occurred during the May silver sell off and it is therefore no surprise that the holdings of the SLV have plunged.

The average investor in the iShares Silver Trust would be hard pressed to understand the “creation and redemption” features of the SLV shares.  Although the SLV can be an easy way for an investor to participate in silver bullion ownership, my investment thesis is to avoid investments that cannot be fully or easily understood.

For investors seeking to establish investments in gold and silver without having to hold the physical metal, the Sprott Physical Gold Trust (PHYS) or the Sprott Physical Silver Trust (PSLV) offer better opportunities.  Both of these Trust hold specific amounts of physical gold or silver which do not change.  Each share holder has an unallocated interest in the precious metals held by the Trust.

All precious metal holdings of the Sprott Trusts are secured not by a bank, as with the GLD, but by the Royal Canadian Mint of the Canadian Government which is responsible for any loss or damage .  The gold or silver backing the Sprott Trusts are specifically allocated by the Mint to the Sprott Trusts.

From a total investment return standpoint, it is also important to note that the shareholders of the PHYS and PSLV are taxed at the capital gains rate of 15% (if held for more than one year) whereas shareholders of the GLD and SLV are taxed at 28%.  For further information see Sprott Physical Gold Trust Advantages Over SPDR Gold Shares Trust.

GLD and SLV Holdings (metric tonnes)

May 25-2011 Weekly Change YTD Change
GLD 1,214.08 +22.74 -66.64
SLV 9,941.33 -505.10 -980.24

Holdings of the SPDR Gold Shares Trust (GLD) increased by a modest 22.74 tonnes from the prior week to 1,241.08 tonnes.   The GLD held 1,280.72 tonnes at the beginning of the year.  The all time record holdings were reached on June 29, 2010 at 1,320.47 tonnes.  The GLD currently holds 39.0 million ounces of gold bullion valued at $59.6 billion.

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How Patient Investors Can Buy Gold At $250 Per Ounce

May 24, 2011 by Leave a Comment

It’s not often that you can buy something at an 83% discount from the market price.  Yet that’s exactly the situation when it comes to buying certain gold stocks that are now selling at huge discounts to their intrinsic gold reserves value.

In an interview with Barron’s, value investor David Steinberg of DLS Capital Management explains how his contrarian investment strategy  has lead to superior investment results.  Since the inception of DLS in 2003, Steinberg has racked up returns of 18%, far outpacing the S&P which returned 8.4%.

Steinberg told Barron’s that his investment strategy is based on valuation and he is currently invested entirely in commodity ETFs and equities.  Investing in securities that are currently out of favor but with strong valuation metrics generates superior returns over time.  Steinberg believes that gold stocks are undervalued and that “gold mining companies give an investor the opportunity to buy gold in the ground at a significant discount to market prices.”

According to Steinberg, the value of gold reserves held by mining companies is at historical disparities to the price of gold.  One gold mining company owned by Steinberg is Kinross Gold (KGC).  Kinross recently sold off as investors took a dim view of the merger of Red Back Mining with Kinross.  Investors expected that the costs of the merger would adversely impact earnings per share but this has not been the case.

Steinberg told Barron’s that “by owning shares of Kinross, we are buying gold probably at$250 to $275 per ounce, versus the current spot price of about $1,500.  Our price target is 27 and the stock is around 15.”

Kinross recently released its first quarter results which showed revenue up by 42%, an adjusted net earnings increase of 81%, margins up 29% and adjusted operating cash flow up 67%.  The company’s gold production in the first quarter was 642,857 ounces, up 18% over last year.   Kinross is forecasting full year production of about 2.6 million ounces.  The company’s production cost per ounce was $543 in the first quarter and production costs are forecast to remain within previous guidance despite industry wide cost pressures.

Kinross is based in Canada and has mines and projects in Brazil, Canada, Chile, Ecuador, Ghana, Mauritania, Russia and the United States.  Kinross has grown its reserve base by 25% per year over the past 5 years and currently has 92 ounces of gold resources per 1,000 shares.

Kinross Gold expects its equivalent gold production to increase by 77%, growing to 4.5 – 4.9 million ounces in 2015 from 2.6 million in 2011.  Of all the senior gold producers, Kinross says it has the best growth profile.

Based on the company’s operating results and forecasts, Kinross Gold stock could wind up being the big winner this year among the senior gold stocks.

Filed Under: Featured, Gold Tagged With: , , ,