Digging For Gold: Part 3

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

This is the final part of my series on gold miners. In part one,  I introduced the companies and provided a quick overview of revenue and profits. In part 2, I provided a quick overview of the companies financials. In this part, I will be looking at the return of gold miners vs. both the S&P 500 and a direct investment in the yellow metal.

I recently did a study for my UK based blog on the returns of holding gold vs. investing in the equity, bond and housing markets. The results showed by far the best investment over the longer term was equities, due to the income they provide. Holding gold would have given you below average returns, as historically the price of gold has grown slower than the rate of inflation. Only recently has gold outperformed the market.

So how do the shares of the four major US gold miners stack up vs. the wider market and more importantly how do their returns relate to the price of gold?

Returns vs. S&P 500

<table> <tbody> <tr> <td> </td> <td> <p><strong>1yr</strong></p> </td> <td> <p><strong>5yr</strong></p> </td> <td> <p><strong>10yr</strong></p> </td> </tr> <tr> <td> <p><strong>S&P 500</strong></p> </td> <td> <p>14.16%</p> </td> <td> <p>-4.86%</p> </td> <td> <p>52.53%</p> </td> </tr> <tr> <td> <p><strong>Barrick Gold </strong><strong><span class="ticker" data-id="206868">(NYSE: <a href="http://caps.fool.com/Ticker/ABX.aspx">ABX</a>)</span></strong></p> </td> <td> <p>-29.78%</p> </td> <td> <p>-16.41%</p> </td> <td> <p>114.45%</p> </td> </tr> <tr> <td> <p><strong>Goldcorp </strong><strong><span class="ticker" data-id="203707">(NYSE: <a href="http://caps.fool.com/Ticker/GG.aspx">GG</a>)</span></strong></p> </td> <td> <p>19.41%</p> </td> <td> <p>26.44%</p> </td> <td> <p>268.25%</p> </td> </tr> <tr> <td> <p><strong>Newmont Mining </strong><strong><span class="ticker" data-id="204643">(NYSE: <a href="http://caps.fool.com/Ticker/NEM.aspx">NEM</a>)</span></strong></p> </td> <td> <p>-28.78%</p> </td> <td> <p>-6.17%</p> </td> <td> <p>85.15%</p> </td> </tr> <tr> <td> <p><strong>AngloGold </strong><strong><span class="ticker" data-id="206836">(NYSE: <a href="http://caps.fool.com/Ticker/AU.aspx">AU</a>)</span></strong></p> </td> <td> <p>-31.94%</p> </td> <td> <p>-31.66%</p> </td> <td> <p>2.91%</p> </td> </tr> </tbody> </table>

Over the longer term, all the firms apart from AngloGold have outperformed the market. AngloGold investors have seen almost no capital grow over 10 years! The only company to outperform the market of a 1 year time frame is Goldcorp.

What about comparing the miners performance against SPDR Gold Trust (NYSEMKT: GLD)  as the preferred method of trading the gold price.

<img src="/media/images/user_14485/miners-vs-gld_1_large.png" />

Source: Google Finance

The miners have all significantly underperformed the price of gold. Every single miner has underperformed the GLD ETF. This is not good news.

On of the main positives of investing in shares over commodity ETF’s are cash return and dividends. So seeing as these firms have no real attraction by looking at share price growth vs. the market, what kind of shareholder returns do these firms offer?

<table> <tbody> <tr> <td> </td> <td> <p>Yield</p> </td> <td> <p>Cover 2011</p> </td> <td> <p>Cover 2012 last reported quarter</p> </td> <td> <p>3yr growth</p> </td> </tr> <tr> <td> <p><strong>Newmont Mining<br /></strong></p> </td> <td> <p>3.0%</p> </td> <td> <p>1</p> </td> <td> <p>2</p> </td> <td> <p>49%</p> </td> </tr> <tr> <td> <p><strong>Barrick Gold  </strong></p> </td> <td> <p>2.3%</p> </td> <td> <p>8.8</p> </td> <td> <p>3</p> </td> <td> <p>17%</p> </td> </tr> <tr> <td> <p><strong>AngloGold  </strong></p> </td> <td> <p>1.4%</p> </td> <td> <p>11</p> </td> <td> <p>8</p> </td> <td> <p>55%</p> </td> </tr> <tr> <td> <p><strong>Goldcorp  </strong></p> </td> <td> <p>1.3%</p> </td> <td> <p>5.7</p> </td> <td> <p>3</p> </td> <td> <p>41%</p> </td> </tr> </tbody> </table>

 The four firms, in order of dividend yield. The biggest yield prize goes to Newmont.

Due to the loss in Q4 2011, I have used the previous quarters dividend cover to provide a better picture for all if the firms. All of the companies provide decent dividend growth and cover. Barrick's growth is the slowest, but it does have the best combined yield and cover.

So in summary, each firm does have its own benefits. However, compared to investing directly in gold there is no comparison. If an investor cannot invest directly in gold, then the best investment would have to be Goldcorp.

Goldcorp is the most expensive stock in the group for a reason, that is because it has been the best performer in the group over the 1,5,10 years periods vs. the market. Goldcorp has the best production margins, least debt and strong EPS growth. There is also significant scope for extra cash return for shareholders. So, out of the four biggest gold miners right now on the NYSE, Goldcorp looks like the one to buy.


RupertHargreav 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!

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