Are Things Really That Bad for This Gold Miner?

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

There is a stock you just can’t miss when you look at gold miners. It is Allied Nevada Gold (NYSEMKT: ANV). Why am I so sure about that? The answer is simple: it is the stock that has been the worst performer this year. It has managed to lose 82% of its value since January. And yet, the company is not headed to bankruptcy. In fact, Allied Nevada has been profitable in the last four quarters. What is it -- an opportunity or a total disaster?

New project, wrong time

On the way up, the journey from $1,200 to $1,600 took gold more than a year. On the way down, gold tumbled from $1,600 to $1,200 in a matter of months. It is now obvious that gold miners did not expect such a pace, and such a steep drop. Some of them were caught in the middle of expansion projects.

Allied Nevada was one of them. The company has started to expand its Hycroft Mill. The latest funding that it has received for that project came from the sale of 14 million shares to a syndicate of underwriters for $10.75. The stock has lost half its value since then.

If the company wants to raise additional capital, it would need to sell more shares at current low prices. This would lead to a dilution of the share of existing stockholders. Not bullish at all, right?

Miners from the beaten club

Other beaten gold miners like IAMGOLD (NYSE: IAG) are expanding their projects, too. In the beginning of June, the company and the government of Suriname signed a deal to expand the Rosebel gold mine and extend the partnership until 2042. IAMGOLD had stated the project could cost around $185 million.

Just like Allied Nevada, the company has managed to finish the last four quarters with a profit. With a low debt level, IAMGOLD is out of the risk of running into trouble with this project unless gold prices continue to fall.

Harmony Gold Mining (NYSE: HMY) is also in the club of beaten stocks. The company has lost 62% of its market capitalization this year. As a South African miner, Harmony has country-specific problems. And these problems are severe. Labor unions are demanding as much as a 60% increase in pay. These demands have come at the wrong time for Harmony, as gold is below $1300, and below production and capital spending.

The last report came in with a surprise loss. Given that gold prices fell even lower, more loss would probably come in the next quarter. In addition to the wage problems, South Africa is known for civil unrest among workers. They go on strikes, damage equipment, and sometimes, the unrest leads to several murders. All this paints a bleak picture for Harmony’s short-term prospects.

Valuation

The magnitude of drop in Allied Nevada's price has led the stock to trade at an unbelievable 3.49 forward P/E. In the meantime, the current P/E is 11, which is not bad at all. The company's debt load is significant. The debt-to-equity ratio stands at 0.86. If the company drew more money for the Hycroft project, that money would likely come from additional stock issue, as the bond rates could be inappropriate.

IAMGOLD trades at 6.42 forward P/E, which looks more expensive compared to Allied Nevada. However, Allied Nevada’s case is different, so we can conclude that IAMGOLD is attractive if it is able to meet estimates. In addition to this, the stock currently yields 6.38%.

Harmony Gold trades at 5.82 forward P/E, but I think that it would be very hard for the company to meet these estimates. The loss in the recent quarter could mark the beginning of a very tough period, with low gold prices and workforce troubles.

Bottom line

If there was no risk, everyone would have been buying Allied Nevada and IAMGOLD. Currently, this is not happening. The risk that gold prices would stay low or even drop persists. However, I think that the potential reward in these two miners is greater than the risk. As for Harmony, risks prevail, and I would not recommend this one.

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Vladimir Zernov 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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