Gold Miners: Will They Repeat 20% Returns This Time?

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

Given skyrocketing gold prices, you can happily invest in the stocks of gold mining companies without ever buying an ounce of gold. Since 1985, gold mining companies have achieved a strong growth of around 20% after every election year. And after disappointing returns in the past year, these miners' stocks are trading at relatively low values, thus creating a good entry point for the new investors. Therefore, I see a ray of hope for the investors who own gold stocks. Below, I've panned for three gold mining companies which could benefit from these market dynamics.

Royal Gold (NASDAQ: RGLD)

Royal Gold recently reported second-quarter results for 2013, with earnings of $0.42 per share. The royalty revenue saw an increase by around 16% year over year, to roughly $79.9 million. This increase was mainly driven by improved production at Royal's various locations, including Andacollo, Mulatos, Las Cruces, and Canadian Malartic. Also, the higher average price of gold supported this increment in the revenue. 

The current as well as the future growth of Royal Gold will depend heavily on the successful start of its various new projects. Recently, the Canadian department of Fisheries and Oceans has given permission to the company to operate the Mt. Milligan mine. Its commercial production will start in the fourth quarter.

Meanwhile, it’s working on another project: Pascua-Lama will start its production from the second half of 2014. Royal Gold has the gold stream interest of 52.25% on Mt. Milligan and net smelter royalty of 5.23% on Pascua-Lama. Both these projects should pave the way for its future growth. I estimate the revenue contribution of these projects to be around $577 million by 2015. 

Another strong fundamental for the company's future revenue is its royalty option of 2.0% of net smelter return (NSR) on the Kerr-Sulphurets-Mitchell (KSM) project. KSM is the largest undeveloped gold deposit in the world, with reserves of 2.2 billion tons. Royal Gold can exercise this option at a price of around $155 million. I believe the management will exercise this option after all material approvals will be cleared and after the permit is received.

Moreover, Royal Gold has approximately $680.7 million in cash and equivalents, and access to credit facility of $350 million. Even after considering the KSM acquisitions expense, the company is still left with heavy cash to make future acquisitions and return cash to its shareholders. 

BHP Billiton Limited (NYSE: BHP) 

As the demand slowdown in minerals persists, BHP's priority is on boosting productivity, along with cost-cutting measures. The company is aiming to save around $1.9 billion in 2013. It has managed to cut its costs of around $944 million in the first half of fiscal 2013. This move has placed BHP Billiton ahead in the cost-cutting race with other mining companies. However, approximately 60% of this reduction comes from its exploration and development budget. I expect that in the future, the company will focus more on its cost cutting from COGS as well as overheads. 

Another factor to look forward to for this company is its disinvestment strategy, which will help it to focus more on its profitable businesses. Overall, the company reported asset sales worth $4.3 billion in the first half of its fiscal year 2013. These include the selling of Nickel West for $1.2 billion, Worsley Alumina for $2.2 billion, and Outer Harbour project for $0.9 billion.

The company's decision to scale down these underperforming assets came as a big relief for its shareholders. It clearly implies the management's focus on the current projects delivery and further investment in the high margin businesses. The Company has guided capex of $22 billion this year. It will utilize majority of this capex in businesses which have shown more than 40% margin in the last five years. 

Considering these factors, I am optimistic about the company's future cash generation. I believe the focus on cost-cutting and the divestment strategy will be the key drivers for its stock. 

Newmont Mining (NYSE: NEM) 

Newmont reported solid fourth-quarter results, with an adjusted EPS of $1.11 beating the street's estimate of $0.97. Gold production for the quarter was 1.3 Moz (million ounces) at a cash cost of $720 per ounce, while copper production reached 35 million pounds at a cash cost of $2.61 per pound. For the year 2012, Newmont paid around $695 million ($1.40 per share) as dividend, making it one of the highest dividend payers in the industry. 

In 2013, the company will focus majorly on project optimization in order to generate profitable growth and robust cash flow. It already has its plans ready to invest around 40% of its total capex of $2.3 billion for 2013 in various projects. It includes the construction at Akyem, mill expansion of Ahafo, a Congo project, and expansion projects in Nevada.

Among these, the management's top priority is to complete its Akyem and Congo projects. At Akyem, the production is expected to start in late 2013, with around 7.4 Moz of expected reserves. This project is likely to increase its output of gold by two times, with an expected output of 400,000-550,000 ounces in the initial years.

In addition, some new arrangements have been made for Congo projects. Newmont has started its Congo project on water-first basis by building a water reservoir. It has agreed to supply water to the nearby areas after accepting Peruvian government conditions. Congo has a capacity to produce 350,000 ounces of gold and 120 million pounds of copper annually. This project is part of the management’s goal to reach up to 7 million ounces of gold and 400 million pounds of copper by 2017. 

I believe that with its focus on project optimization, the company remains on track to achieve its long-term goal of improved productivity. 

Conclusion

Considering the fundamentals discussed above, it is safe to conclude that all the three stocks will give promising returns this year. All the three companies have solid expansion strategies which will go hand-in-hand with the overall market improvement. 

Royal Gold looks promising, between its new projects in the pipeline and its option to acquire KSM. BHP Billiton stock will benefit from its cost-cutting plans and disinvestment strategy, while Newmont Mining’s substantial reserves will help it to improve its profitability, considering the higher prices of gold prevailing in the market. 


ShwetaDubey 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!

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