Digging For Gold: Part 2

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

In this series, I am reviewing four major gold producers to see which one would be the best investment if a direct investment into gold was not possible. In part one,  I introduced the companies and provided a quick overview of revenue and profits. In this part, I will be comparing the financials of each firm.


<table> <tbody> <tr> <td> </td> <td> <p>Historic P/E</p> </td> <td> <p>Forward P/E</p> </td> <td> <p>Price to Sales</p> </td> <td> <p>Price to Book</p> </td> </tr> <tr> <td> <p><strong>Barrick Gold  <span class="ticker" data-id="206868">(NYSE: <a href="http://caps.fool.com/Ticker/ABX.aspx">ABX</a>)</span></strong></p> </td> <td> <p>10.2</p> </td> <td> <p>8.8</p> </td> <td> <p>2.43</p> </td> <td> <p>1.36</p> </td> </tr> <tr> <td> <p><strong>Goldcorp  <span class="ticker" data-id="203707">(NYSE: <a href="http://caps.fool.com/Ticker/GG.aspx">GG</a>)</span></strong></p> </td> <td> <p>22</p> </td> <td> <p>20.5</p> </td> <td> <p>6</p> </td> <td> <p>1.48</p> </td> </tr> <tr> <td> <p><strong>Newmont Mining <span class="ticker" data-id="204643">(NYSE: <a href="http://caps.fool.com/Ticker/NEM.aspx">NEM</a>)</span></strong></p> </td> <td> <p>212.7</p> </td> <td> <p>12.3</p> </td> <td> <p>2.6</p> </td> <td> <p>1.72</p> </td> </tr> <tr> <td> <p><strong>AngloGold Ashanti <span class="ticker" data-id="206836">(NYSE: <a href="http://caps.fool.com/Ticker/AU.aspx">AU</a>)</span></strong></p> </td> <td> <p>11.5</p> </td> <td> <p>9.4</p> </td> <td> <p>1.72</p> </td> <td> <p>2.06</p> </td> </tr> </tbody> </table>

Let’s look at the standard P/E, P/S and P/B ratios.

We can see Newmont has an extremely high historic P/E, this is due to an extremely poor Q4 2011, where Newmont took a loss of $2 per share. Staying with the historic figures, Goldcorp seems to be the most expensive in the group. Moving to the forward P/E figures, we can see Newmont moving back into line with the rest of the group. However, both Barrick (NYSE: ABX) and AngloGold (NYSE: AU) look even cheaper!

When we look at the P/S & P/B figures, we develop a better picture of how these companies are valued. We can see, even though Barrick appears cheap looking at the P/E ratio, it is relatively expensive looking at the price to sales ratio. Goldcorp is overvalued versus the group in both P/E and P/S ratios, but is the cheapest in the group based on P/B analysis. The cheapest in the group appears to be AngloGold. It has the second lowest P/E in the group and the lowest P/S ratio.

EPS 3-yr growth

<table> <tbody> <tr> <td> <p><strong>Barrick Gold  </strong></p> </td> <td> <p>0%</p> </td> </tr> <tr> <td> <p><strong>Goldcorp  </strong></p> </td> <td> <p>49%</p> </td> </tr> <tr> <td> <p><strong>Newmont Mining <br /></strong></p> </td> <td> <p>-51%</p> </td> </tr> <tr> <td> <p><strong>AngloGold Ashanti  </strong></p> </td> <td> <p>64%</p> </td> </tr> </tbody> </table>

The EPS 3-yr growth supports the argument for AngloGold. The growth rates also show why Goldcorp is so highly priced - it has produced the second biggest growth rate in the group. All of the miners are forecast this year to have negative YoY growth.


I have already looked at margins per Oz of gold mined in part 1 .What about the business margins? How efficient is the management and how much of the margin generated from the sale of gold is returned as profit to the business?

<table> <tbody> <tr> <td> </td> <td> <p><strong>Gross Margin</strong></p> </td> <td> <p><strong>Net Margin</strong></p> </td> </tr> <tr> <td> <p><strong>Barrick Gold  </strong></p> </td> <td> <p>58.50%</p> </td> <td> <p>23.70%</p> </td> </tr> <tr> <td> <p><strong>Goldcorp <br /></strong></p> </td> <td> <p>59.30%</p> </td> <td> <p>29.90%</p> </td> </tr> <tr> <td> <p><strong>Newmont Mining <br /></strong></p> </td> <td> <p>55.20%</p> </td> <td> <p>5.20%</p> </td> </tr> <tr> <td> <p><strong>AngloGold Ashanti  </strong></p> </td> <td> <p>51.80%</p> </td> <td> <p>20.50%</p> </td> </tr> </tbody> </table>

Even though the gross margins between each firm are in the same range, the net margins have a wide range. This further supports the high valuation placed on Goldcorp, who has the highest net margin in the group and a great cash flow. Thanks to its poor Q4 2011, Newmont’s net margin came in at 5.2%, the lowest in the group. Barrick and Anglo both have decent net margins over 20% producing a decent cash flow.


The last financial area I want to look at is the debt of each firm. Nothing can be more constricting for growth and shareholder returns than debt. A high debt level will mean a lower level of free cash flow due to high interest payments. This will translate in to poor returns for shareholders.

<table> <tbody> <tr> <td> <p> </p> </td> <td> <p><strong>Total Debt to Equity</strong></p> </td> <td> <p><strong>Current Ratio</strong></p> <p><strong> (current assets/current liabilities)</strong></p> </td> <td> <p><strong>Interest coverage</strong></p> </td> </tr> <tr> <td> <p><strong>Barrick Gold Corporation </strong></p> </td> <td> <p>0.55</p> </td> <td> <p>1.6</p> </td> <td> <p>29.4</p> </td> </tr> <tr> <td> <p><strong>Goldcorp Inc. </strong></p> </td> <td> <p>0.03</p> </td> <td> <p>2.4</p> </td> <td> <p>70.5</p> </td> </tr> <tr> <td> <p><strong>Newmont Mining Corp</strong></p> </td> <td> <p>0.46</p> </td> <td> <p>2.1</p> </td> <td> <p>6.1</p> </td> </tr> <tr> <td> <p><strong>AngloGold Ashanti Limited </strong></p> </td> <td> <p>0.44</p> </td> <td> <p>2.8</p> </td> <td> <p>13.9</p> </td> </tr> </tbody> </table>

All firms have a suitable level of debt. Barrick Gold has the highest gearing level with debt making up 55% of current shareholder equity. Goldcorp has the best balance sheet. With almost no debt, further supporting is high valuation ratio.

I have included the current ratio in the analysis so I can see if the firm would be able to pay off all of its current liabilities from current assets - in the worst case scenario. All the firms have a score greater than 1, so they all pass. Lastly the interest coverage, all companies interest payments are well covered through earnings, however, Newmont only has a debt coverage of 6 times, although this could be effected by that bad Q4 2011.

So in summary we can see financially Goldcorp appears to be the best company for investment. Although, it is the most expensive company, it has a strong balance sheet, the best margins and a 3yr EPS growth rate of 49%. On the other hand, value investors could consider AngloGold Ashanti, who has a cheap looking forward P/E ratio, 64%  3yr EPS growth, a solid balance sheet but lower net margins.

So those are the financial ratios. Stay tuned for part 3, where I will take a look at shareholder returns and company performance vs. the price of gold and the S&P 500.

Sources: www.barrick.com, www.anglogold.com, www.goldcorp.com, www.newmont.com, Motley Fool CAPS

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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