AngloGold a Bargain at $30
Jordo is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Gold has hit historic highs in recent years, but it recently took a tumble from its high of just over $1,900 an ounce. Because of this, gold mining stocks have taken a hit as gold declines. But this sell-off was overdone, and gold has begun to move back up. One of the stocks that have been undervalued as a result of the sell-off is AngloGold Ashanti (NYSE: AU).
AngloGold Ashanti primarily engages in the exploration and production of gold. It also produces silver, uranium oxide and sulfuric acid. The company conducts gold mining operations in South Africa; continental Africa, including Ghana, Guinea, Mali, Namibia and Tanzania; Australia, and the Americas, which include Argentina, Brazil and the United States. It also has mining or exploration operations in the Democratic Republic of the Congo, Guinea and Colombia. As of Dec. 31, 2011, the company had proved and probable gold reserves of 71.2 million ounces.
Investors should look closely at AngloGold. The company has been involved in ongoing strikes at its holdings in South Africa. These strikes have ended but they had a negative impact on production which hurt the company on its bottom line this quarter. But as the outlook on gold continues to improve amid worldwide economic uncertainty and the strong possibility of inflation there is very good reason to be bullish on AngloGold. With its weak earnings report in the third quarter this year due to the South African labor problems, now is a great time to buy this stock as it is sitting right at its 52-week low.
Comparing AngloGold with the Australian mining giant BHP Billiton (NYSE: BHP) investors will see that AngloGold is in a better position by not being overly exposed to the poor performing iron ore market. BHP has taken a hit in large part due to the declining price of iron ore. The company is also hurt by the very strong Australian dollar. These trends look to continue as the Australian dollar looks to remain strong and there remains a glut of iron ore inventory. Similarly AngloGold has not suffered the decline that Freeport-McMoRan (FCX) has seen over the last two years, where it has lost roughly 40% of its value. Declining copper prices have hurt the world's largest copper mining company. Both of these companies will benefit with rising gold prices, but not as much as AngloGold, which has a larger focus on gold than either of these two companies.
The good news is that AngloGold's rut is now behind them. The South African strike ended last month. Production has resumed at the mine, which was producing roughly 32,000 ounces per gold a week before the strike. The company's South African assets combined to produce 32% of the company's total production. Having the mine back on line will make a huge positive difference to the country's bottom line.
With the problems in South Africa receiving a great deal of press it is easy to forget that AngloGold is an internationally diverse company. It has operations not only in South Africa and the Congo, but also in Australia, Latin America, and the United States. While I am concerned about the recent problems in South Africa and the instability of the Congo region the company derives most of its revenue from the more stable areas of the Americas and Australia. Plus, stability comes with a price as well. Namely, higher labor costs. Agnico-Eagle Mines (NYSE: AEM) operates exclusively in stable areas. The company also has to pay more per ounce of gold mined in these regions due to the increased labor costs. While these increased labor costs are not in themselves reasons to abandon Agnico-Eagle they do put in perspective the problems facing mining companies like AngloGold with their mining operations in certain areas.
I look at the labor problems hitting AngloGold in South Africa as a blessing in disguise. This company is a great addition to the value investor's portfolio. For a company that produces over 4 million ounces of gold per year, $30 a share is not just a good value, it is a downright steal. Yet that is where the trading seems to be leveled out. Ashanti is geographically diversified. It is an expert in gold, which though can be turbulent, is also highly profitable.
For further proof that this company is a great buy at around $30 per share, consider that another gold mining company Goldcorp (NYSE: GG) has seen its stock increase by some 20% since hitting lows this summer. Goldcorp stock is beginning to track the price of gold more closely. This is eventually what will happen to all mining companies with a heavy emphasis on gold. As this happens AngloGold will see its stock uptick tremendously. The news of the labor problems in South Africa will begin to fade, and as the company gets production back up and running at full speed the stock could return to the $40 per share range before the final earnings report of the year. When that earnings report is published I expect the stock to really take off. This is a stock with tremendous value and tremendous upside.
jordobivona has no positions in the stocks mentioned above. The Motley Fool has no positions in the stocks mentioned above. 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!