Choosing a Gold Company

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

In recent years, many investors added to their portfolio precious metals as a safe haven investment. Assuming you have already decided to include a gold related investment in your portfolio, you will need to decide whether you wish to invest in gold or a gold company (e.g. a royalties company, gold producer, etc). Investing in gold could include a gold ETF, such as SPDR Gold Shares, the largest gold ETF with a market cap of around $70 billion. It could also include a gold miners ETF or a specific gold company. For those of you who are considering a gold company, let's examine several leading gold companies and compare them. In this comparison, we should consider some key factors that will help determine the strength and weakness of each company. These factors include: financial risk, expected growth, profitability, and dividend payment.

Financial Risk

One way, among many, to examine a company's financial risk is by examining its debt ratio (total debt/total assets). The lower the debt ratio, the lower financial risk. The table below examines the debt ratio of five gold companies: Barrick Gold Corporation (NYSE: ABX), Yamana Gold (NYSE: AUY), Goldcorp (NYSE: GG), Royal Gold (NASDAQ: RGLD) and Primero Mining (NYSE: PPP).

<img src="/media/images/user_12845/gold-debt-ratio-dec_large.jpg" />

As seen, the three gold companies with the lowest debt ratio are Goldcorp, Yamana and Royal Gold. This means of the above mentioned companies, these three companies have the lowest financial risk, based on the debt ratio.

Growth

During the year, gold companies vary with their stocks' performance. As a baseline we can examine these companies' growth compared to the price of gold and the S&P 500 index. During the year, the price of gold increased by 4.3%; the S&P500 index, by 11.9% (year-to-date). Of the above mentioned companies Primero's stock had the steepest increase as it spiked by nearly 87.1% year-to-date. In comparison, Royal Gold and Yamana rose by 12.5% and 10.6%, respectively. Shares of Goldcorp and Barrick, on the other hand, declined during the year by 20.2% and 28.8%, respectively.

Another factor worth examining is the expected growth of these companies in the forthcoming year. To that end, let's examine these companies' forward P/E ratios. Based on this measurement, Royal Gold has the highest forward P/E at 28, followed by Goldcorp, Yamana, Barrick and Primero. The table below shows the forward P/E and P/E for all five companies.

<img src="/media/images/user_12845/gold-pe-ratio_large.jpg" />

As seen when examining the forward P/E compared to P/E, the ratios of almost all these companies are expected to fall. This could suggest these stocks, except Primero, will do worse in 2013 compared to 2012.    

Profitability

Let’s examine three major precious metals companies: Goldcorp, Yamana and Royal Gold. These companies have had the highest profit margin of the five gold companies listed above in the recent quarter.  

The chart below shows the average quarterly price of gold and the operating profitability of Goldcorp, Yamana and Royal Gold. 

<img src="/media/images/user_12845/royal-gold-operating-profitability-dec-2012_large.jpg" />

In terms of operating profitability Royal Gold has consistently done much better than other gold companies. Moreover, Royal Gold's profitability didn't vary as the profitability of Goldcorp and Yamana did during the past couple of years.

Dividend

In terms of dividends, all major gold companies don't provide high yields, and most of the gain for equity investors is expected to come from the appreciation of the stock. Royal Gold paid the lowest dividend of $0.2, which comes to an annual yield of 1.03%; Yamana paid a dividend of $0.06 per share, which means a yearly yield of 1.56%; Goldcorp, much like Yamana, offered a dividend of $0.05 per share, which is a yearly yield of 1.51%; Barrick paid in the last quarter a dividend of $0.2, which comes to an annual yield of 2.41%;  

The Foolish Bottom Line

Choosing a bullion company isn't simple and a lot more research is required. Nonetheless, I hope this analysis will get you started and provide you some points worth noticing before entering into such an investment. As indicated above, based on the parameters I have listed it seems that Royal Gold is doing better or as good as other gold companies in most of the parameters tested, even though Primero's stock might surprise again and spike in 2013 as it did in 2012.

For further reading:

Gold and Silver Prices Outlook for December

Will Gold Continue to Dwindle?

 

 


liorc has no positions in the stocks mentioned above. The Motley Fool owns shares of Primero Mining. 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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