This Fast Growing Gold Company Could Make You Rich

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

Gold prices have declined significantly since the highs created in October. But because there is still no remedy for the debt-ridden European countries, the bull run on gold is far from over. Additionally, India is the world’s largest importer of gold, and the precious metal holds a cultural value in the country. In 2011-2012, its gold imports stood at an estimated $57.5 billion, which is up by nearly 50% YoY, and there’s still no sign of weakening demand. Moreover, even when Indian gold imports were peaking, reports were popping up claiming that China’s gold imports would surpass India’s imports in 2012. This presents a bullish picture for the gold mining industry, and the companies under the scanner are Goldcorp (NYSE: GG), Royal Gold (NASDAQ: RGLD), Barrick Gold (NYSE: ABX), and Newmont Corp (NYSE: NEM).

The Numbers Game

The basic idea is to pick the fastest growing company with positive triggers to fuel its rally. Let’s begin by comparing the financial metrics of these companies.

<table> <tbody> <tr> <td> <p>Company</p> </td> <td> <p>Forward P/E</p> </td> <td> <p>PEG</p> </td> <td> <p>Debt/Equity</p> </td> <td> <p>Net profit margin</p> </td> <td> <p>Current Ratio</p> </td> </tr> <tr> <td> <p>Royal Gold</p> </td> <td> <p>28.82x</p> </td> <td> <p>4.96x</p> </td> <td> <p>16%</p> </td> <td> <p>35.25%</p> </td> <td> <p>19.24x</p> </td> </tr> <tr> <td> <p>Barrick Gold</p> </td> <td> <p>6.77x</p> </td> <td> <p>2x</p> </td> <td> <p>55%</p> </td> <td> <p>23.85%</p> </td> <td> <p>1.61x</p> </td> </tr> <tr> <td> <p>Newmont Corp</p> </td> <td> <p>9.13x</p> </td> <td> <p>1.18x</p> </td> <td> <p>46%</p> </td> <td> <p>6.58%</p> </td> <td> <p>2.07x</p> </td> </tr> <tr> <td> <p>Goldcorp</p> </td> <td> <p>14.87x</p> </td> <td> <p>90.16x</p> </td> <td> <p>3%</p> </td> <td> <p>29.92%</p> </td> <td> <p>2.43x</p> </td> </tr> </tbody> </table>

Source : Finviz

From the first look, Royal Gold appears to be overvalued and should be passed on right away. But it should be noted that low P/E and PEG multiples don’t necessarily mean that a stock will move higher. From the table we can see that Royal Gold has impressive debt/equity and current ratios, and the company enjoys the highest net profit margin amongst its peers.

The Growth Game

<img src="http://media.ycharts.com/charts/86036a49b829af3fa2f8327d1bf93290.png" />

GG data by YCharts

(1 year comparative Price Chart)

Additionally, shares of Royal Gold have outperformed those of its peers over the last 1 year. Over the last 5 years, shares are up by a whopping 147.7%, whereas Goldcorp has remained flat and its other peers are in the red. This is one of the reasons why Royal Gold appears to be overvalued, while its peers appear as bargains.
 
But are they really bargains?  I don't think so.
 

<img src="http://media.ycharts.com/charts/a61bc36818498d34249140072a800c29.png" />

GG Free Cash Flow data by YCharts

(3 year comparative FCF chart, 5 year data unavailable)

It should be noted that the shares of Royal Gold have not rallied due to speculative reasons, but because of its solid bottom line growth. From the above chart, we can see that its Free Cash Flows have risen in excess of 150%, whereas its peers are struggling with shrinking cash flows.

Free Cash Flow = Operation Cash flow – Capital Expenses

Free cash flows are one of the most useful metrics to gauge the health of a business, but the FCF metric should not be used alone while analyzing a company.
 

<img src="http://media.ycharts.com/charts/f53bc9a00bc118578c6a7e401d545f8c.png" />

Over the last 5 years, the net income of Royal Gold has by nearly 650%, which again has outperformed its peers.

 

<img src="http://media.ycharts.com/charts/844a5f45908d8ae05c29d45c14d60994.png" />

Since this article is focused on growth, missing out on margins would not be a good idea. Gross margins of Royal Gold have improved by 80% over the last 5 years, and management expects the improvements to continue.

<img src="http://media.ycharts.com/charts/45ff5378e7d7c08d8c46c204a1e32a5e.png" />

GG Total Assets data by YCharts

Moreover, its total assets have increased significantly, which ensures higher production levels in the future. The management just announced that its top 12 assets account for 82% of its total revenues, compared to the top 9 assets last year. This spreads the operational risks involved in mining somewhat, and obviously makes it easier for the management to swiftly ramp up its production.

Conclusion

This article is purely focused on financial metrics and the strengthening balance sheet of Royal Gold. The focal company is much smaller in size compared to its peers, which justifies its rapid growth. I believe that shares of Royal Gold will continue to outperform its peers due to solid fundamentals, but this does not imply that its peers need to be avoided.


PiyushArora has 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!

blog comments powered by Disqus