Has This Industry Lost Its Luster?
Masam is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Many investors in gold bullion have become increasingly worried due to the lack of price appreciation lately. Although there has been an aggressive monetary policy initiative by the Federal Reserve, gold bullion and mining stocks in the sector have declined. In this case, I have briefly three stocks two of which are recommended as buys and one is recommended as a short.
Newmont Mining (NYSE: NEM)
The Street forecasts a 4Q12 gold production of 1.25Moz at a cash cost of $686/oz and copper production of 39Mlbs at $2.15/lb cash costs.
While, the bulls believe that the company will easily beat street’s estimates on 2013 earnings, bears are much more focused on 2013 guidance and NEM's longer term production profile. Credit Suisse’s EPS estimate is likely above the Street’s consensus estimate on lower exploration, R&D and G&A assumptions (with CS estimates reflecting NEM cost cutting programs taking effect).
2013 estimates reflect a slight decline in gold production to 4.8Moz and higher costs at $720/oz. In the long-run, the company is expected to reach the peak production estimate of 5.6Mozs in 2017, which excludes Conga, Cerro Quilish and the Yanacocha extension in Peru, as well as the Tanami shaft, Subika underground and Waihi Golden Link projects. However, some investors may still expect 6Mozspa from NEM by 2017.
However, it should be noted that this is one of the prime examples of those gold stocks that are holding massive amounts of debt and yet are trading at a premium. This company has over $6.0 billion in debt, which is a debt/equity ratio of 37.1 and trades at a premium with a price-to-book ratio of 1.7, even though revenues and earnings are declining.
Osisko Mining (NASDAQOTH: OSKFF)
The Street forecasts 4Q12 gold production of 104.61koz at a cash cost of $948/oz
OSK has already released October & November production numbers, and the Street expects to receive December production, as well as 2013 guidance, ahead of its February 1 analyst day. 2013 guidance should be the main focus of the investors. The Street is estimating 549kozs at $780/oz (CAD) cash costs. With OSK indicating grades should be just over 1g/t on its Q3/12 conference call, the investors are more focused on throughput (estimate is 51.6ktpd based on 90% availability) and cash costs.
This company has recently seen some intensive insider buying which has sent bullish signals to the market.
Yamana Gold (NYSE: AUY)
Yamana previously reported Q4 production of 322.8k GEO (gold equivalent ounces). Total cash costs were guided for 2012 to be $245 per GEO on a by-product basis, implying $210/oz in Q4. Q4 sales tend to lag production; thus the reported EPS number could be below the consensus estimates.
With Yamana's production and costs pre-guided for 2012, investors are focused on the update to its reserve/resource update and development project progress. Yamana has a strong track record of reserve replacement, while it maintains a lower than average gold price cut-off ($950/oz for 2011YE's update, vs. $1,200/oz peer average). Maintaining a lower gold price cut-off allows the company to effectively manage its margins and deliver lower cash costs per ounce.
The Street continues to like Yamana for its strong adjusted operating cash flows and growth profile (+20% YoY in 2013).
Yamana will also likely update reserves and resources and has a solid track record of delivery in this area.
In an uncertain gold market, investors still have bright spots like Yamana Gold and Osiska Mining in this industry that look like sound investments on the back of strong valuations and insider buying.
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