Gold Miners Are Cheaper Than Gold
Andrés is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
In the following chart we compare the performance over the last two years of three ETFs that are related to the price of gold. SPDR Gold Trust (NYSEMKT: GLD) tracks the performance of the shiny metal, Market Vectors Gold Miners (NYSEMKT: GDX) invests in a basket of big capitalization gold miners, and Market Vectors Junior Gold Miners (NYSEMKT: GDXJ) is focused on mid and small cap gold producers.
It looks quite clear that mining companies have lagged in tem of price performance over the last months, and that could mean they have some catching up to do. From this perspective the mining companies are a cheaper alternative than the metal itself.
Better yet, these companies provide additional ways to earn money besides increases in the price of gold. Production growth can be very substantial in many cases, and that should benefit investors over the long term. Of course there are extra costs and uncertainties attached with growing exploration and production, but well managed companies with solid track records could be a very profitable approach to investing in gold.
Also, many mining companies have recently decided to start paying a dividend, in some cases linked to the price of gold. Those dividends are not too high compared to the yields available in other sectors, but it could be nice to get paid while you wait for prices of these stocks to better reflect the price of gold. Besides, dividends could serve as a catalyst to bring more attention to these companies in the future.
The biggest company in the sector is Barrick Gold Corp. (NYSE: ABX), which pays a 1.2% dividend yield -- not that big, but it's growing. Over the last five years, Barrick increased dividends by 170 percent, and management is optimistic about the prospects for more increases in the future. Last quarter the company increased dividends by 20% and also moved from a semi-annual dividend payment to a quarterly one.
Newmont Mining (NYSE: NEM) is the second largest gold producer in the world, and it recently announced that it will increase dividends in response to changes in gold prices. The company pays a 2.2% dividend yield at current prices, and metal production is expected to increase substantially in the following years. Newmont projects a 35% increase in production by 2017.
Yamana Gold (NYSE: AUY) is a mid-sized gold producer with a strong presence in Latin America, mostly in Chile but also in Brazil and Argentina. The company pays a 1.3% dividend yield, and has attractive growth prospects. Management expects to produce between 1.2mm and 1.3mm ounces of gold in 2012, 1.5mm to 1.7mm ounces in 2013, and more than 1.75mm ounces in 2014. Those plans are ambitious and certainly risky, but if the company is successful investors could be very well rewarded.
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