1 Stock to Own Before Ben Fires His Bazooka
Justin is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
For now, Ben Bernanke is comfortable with saying that extra accommodation with be forthcoming IF necessary. This muted rhetoric has kept gold prices contained to this point. However, further action is looking more and more likely as the global economy spirals down. Don’t be fooled by the perma-bull media, the economy is much worse than the soft-patches of 2010 and 2011. It may not resemble the disaster of the Global Financial Crisis either, but instead it lies somewhere in the middle. Also, Ben is not happy with the looming fiscal cliff and may feel compelled to act if weakness persists in the fall. Assuming he does embark on QE3, will he dribble a little more out or will he pull out the bazooka and really try to get in front of the train before any self-reinforcing, deflationary tendencies overwhelm the economy? Like many movies, where the saga usually ends after the trilogy, I think Ben will attempt to do the same thing with QE3 and bring out the bazooka.
The likely beneficiary will be gold prices and the SPDR Gold Trust ETF (NYSEMKT:GLD), the largest physically backed gold ETF in the world. And don’t forget the Market Vectors Gold Miners ETF (NYSEMKT:GDX) which I highlighted in May given that gold stocks are trading at a generational low relative to the price of gold. Now may be the time to load up on gold stocks and get the benefit of rising gold prices and a reversion to the historical mean, which would equate to significant gains. Not only is the economy weak enough to warrant QE3, but the seasonal tendencies for gold are in the sweet spot. According to Ned Davis Research, August and September are historically the best tandem months for gold prices, and in fact, generally set the stage for continually rising prices with the metal reaching its high for the year in December.
The home run stock among the gold majors (those with multiple mines) is Kinross Gold (NYSE: KGC). This former high-flying stock has lost more than half its value in the past year. The stock now resides below its panic-selling 2008 levels despite the fact that gold prices are twice as high. The growth potential for Kinross is one of the highest in the industry thanks to the 2010 acquisition of Red Back Mining for $7.1 billion. The deal allowed Kinross to gain access to the next gold growth frontier in Africa where the potential is significant. The company already produces more than 2.5 million ounces of gold annually and has more than 60 million ounces of proven and probable reserves. This enormous growth potential doesn’t fully incorporate the new Tasiast mine that came with the Red Back acquisition and has massive potential.
Right now Kinross is undergoing a litany of bad things that have completely removed any investor bullishness toward the name. First, they wrote off $2.9 billion of the Red Back purchase price because it turns out it is going to cost a lot more money to get the gold out of the ground than initially forecasted. The company has gone from a low cost producer to one of the higher cost producers in the last couple of years. Second, the company has missed on growth targets and will likely see 2012 production flat with 2011. Third, investors are waiting on a feasibility study from the key Tasiast mine in Africa to find out exactly how much gold there is and how much it will cost to get the gold in one’s hands. This test has added uncertainty given the fact that the company has already acknowledged a problem with the initial $2.9 billion write-off. And lastly, Kinross operates in higher risk countries where taxes and labor negations can notably hinder the bottom line. Currently, South America accounts for 36% of production, North America 24%, Russia 20%, and West Africa 20%.
All of these things have hammered the stock, which is now the cheapest among the gold majors despite one of the best long-term growth outlooks. This all makes Kinross highly levered to the price of gold. If it soars, then Kinross is ideally positioned to follow suit. The stock is best suited to those investors that want a higher risk, long-term play to offset some of their more traditional investments. It is possible that the referenced issues persist for a couple years and keep a lid on the stock price. Even so, the stock does have “pop” potential if you combine its extreme oversold levels with a massive QE3 announcement.
Kinross trades at just 0.7x book value, a ten-year low, and substantially below peers. Barrick Gold (NYSE: ABX), the largest gold mining company, trades at twice that level (1.4x). This is the name to own for more conservative accounts as the company doesn’t have any of the aforementioned risks that hang over Kinross. Of course, they don’t possess anywhere near the growth potential either. Even Goldcorp (NYSE: GG) which has run into its own problems of escalating cash costs and seen its stock hammered, trades at a 70% premium to Kinross on a price-to-book basis.
Bottom Line
Kinross Gold is extremely cheap and investors bullish on gold prices should find room for it in their portfolio. The time to jump in is now, before Ben Bernanke unleashes his QE3 as Congress sits on their hands. If the recent five years has taught investors anything, it is to expect the impossible with regards to the lengths policymakers will go to achieve their motives. A recession now, however modest it may be, would likely lead to new and previously unthinkable forms of monetary easing. This is bullish for gold prices and Kinross Gold.
market8 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.If you have questions about this post or the Fool’s blog network, click here for information.
