Keep an Eye on This Gold Play

Ashit is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

With the much talked about headwinds faced by the companies in the gold mining sector, the debate continues as to whether investing in a top gold grosser is still a worthwhile idea. Braving the tumultuous macroeconomic environment pressure brought on by the excessively unfavorable conditions building up in the world economy, gold mining stocks have been a subject of widespread speculation.

Kinross Gold (NYSE: KGC) is a Canadian gold mining company with operations spread worldwide. The first quarter of 2013 witnessed the company deliver a modest performance, as it produced 648,897 ounces of gold, representing a 10% year-over-year increase from last year. The growth was primarily driven by its Tasiast and Fort Knox mines.

In an effort to remain profitable in such challenging times, the company has initiated a cost reduction plan, which enabled it to reduce its production cost at a competitive $729 per ounce of gold. In addition, during the first quarter, the company achieved a 5% year-over-year increase in revenue from gold sales.

Going forward,  to make the right investment choice, it is essential for investors to comprehend the industry trends.

Industry outlook

Driven by aggressive fiscal policies followed by countries such as the United States, Japan, and Europe aimed at improving their respective economies, gold prices soared the previous year.

In addition, the increasing purchases of gold by the central banks from all over the world in an attempt to enhance gold reserves contributed heavily towards rising gold prices. According to the report published by the World Gold Council, the demand for gold in the year 2012 reached an astounding 15%, which is a five-year high.

Moving further, another determinant of the gold mining industry is the risk associated with countries where mines are located. With resource rich nations such as South Africa struggling to cope with political conflicts, mining companies face a huge risk of resource nationalism.

In the wake of turbulent times ahead, the industry players will be seen divesting non-core assets in addition to notching cost cutting initiatives.

Competitive landscape

IAMGOLD (NYSE: IAG), similar to Kinross, has operations spread across three continents. IAMGOLD is a fundamentally strong company and holds a fairly dominant position in the global gold mining market. Despite a dominant position, the company could not remain immune from the headwinds faced by the entire industry. This was exhibited by a modest performance from the company during the first quarter of 2013.

Nonetheless, despite a weak quarter, the company has maintained its gold production guidance for financial year 2013, ranging between 875,000 to 950,000 ounces. The company remains optimistic about its guidance for expected gold production through its Mouska stock-piled ore.

With a market capitalization of $ 1.57 billion, the company appears seemingly small relative to its gigantic peers, yet with a balanced operational infrastructure, it certainly has strong potential to emerge as a market leader in the years to come.

Lets examine some key ratios of the company in order to identify if it makes for a worthwhile investment. The company has a current ratio of 3.9, which suggests it has sufficient liquidity to finance its working capital needs for upcoming ­­­projects.

Furthermore, it has a trailing twelve months gross operating margin of 41%, which is relatively similar to the industry standard of 48%. With its forward P/E pegged at 6.60, lower than the current P/E of 6.93, the company looks like a sound investment alternative in the medium to longer term.

Goldcorp (NYSE: GG), is one of the world’s fastest growing gold producers engaged in the exploration, development, and acquisition of precious metal properties in the entire American Continent.

The company delivered a consistent operational performance during the first quarter of 2013 relative to the previous fiscal year, as it reported a total revenue of around $1 billion.

The net earnings during the quarter stood at $309 million. The operating cash flow for the quarter dropped marginally to $400 million as compared to $480 million during the same quarter last year.

The all-in cash cost of production was maintained at $710 per ounce. Goldcorp sold 595,100 ounces of gold during the first quarter relative to 545,700 ounces of gold in the same quarter last year.

In the wake of recent volatility in the price of gold, the company has reviewed its capital expenses and other operating costs to meet the declining prices.

The financial position of the company looks strong with cash reserves of $ 1.4 billion. With strong fundamentals, the company is set on the path of accelerated growth with committed capital spending of $ 2.8 billion on its upcoming projects in Argentina, Quebec, and Ontario during 2013. However, in the near-term, it must control costs in order to counter falling prices.

Final word

Kinross Gold, with a market capitalization of $ 6.64 billion, is a lucrative investment option for people seeking to invest in the gold mining industry.

However, the recent developments relating to suspension of the company’s Fruta Del Norte project situated in Ecuador is a severe blow for the company, as the decision will lead to Kinross paying a charge of $720 million against its earnings in the upcoming quarter.

Despite all the havoc in the gold market, the developments in production capacity through Tasiast and Fort Knox mines allows me to sustain an optimistic view on its stock. With its forward P/E pegged at 11.78, which is well below the current level of 13.98, the stock is certainly a hold, at least for now.

Gold has outshined the stock market with strong returns since 2000, but more recently has given way to big declines. The Motley Fool's new free report, "The Best Way to Play Gold Right Now," dissects the recent volatility and provides a guide for gold investing. Click here to read the full report today!


Ashit Gulati and Equity Dimensions have no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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