Gold stocks are as cheap as they have been in over a decade. Hard to believe given the rocketing gold price, but shares have been left behind. As any investor knows, buying stocks in any company is a leveraged play on the profitability of its prime business. In the case of gold we have been in a decade of sharply rising prices. For the miners, the cost of production is generally covered at between $800 and $1000 per ounce. As the price rises above that, and it is currently sitting very much higher than that point, the remainder is pure profit.
If you believe, as I do, that governments around the world will continue to interfere in markets and try to bail out their near-bankrupt countries, then gold stocks are going to the moon. If you don’t have a few of these in your pockets, then jump in now. As a point of disclosure I should note that I do own several of the stocks below, though at the point of writing only the majors.
The following are my top choices from the XAU index. Note that these are all US listed. UK Gold shares follow.
- Freeport-McMoran (FCX)- Freeport-McMoRan is within 10% of the 52-week low and has a dividend payout ratio of 17%. The P/E ratio is at a modest level of 7 times earnings. Value Line indicates that FCX is selling at least 35% below historical fair value. Since 2004, FCX has traded up to its estimated fair value and then retrenched. Investors in FCX should expect to sell at the $62 level and rotate into other relatively underpriced gold stocks at that time.
- AngloGold Ashanti (AU)- At the end of last year (2010) AngloGold’s total reserves amounted to 71.2 million ounces. The stock is within 15% of the 52-week low and has a dividend payout ratio of 13%. The trailing P/E is 22 but it is expected to grow earning next year, which brings the forward P/E to 9.5. According to Value Line, AU is trading only 6% below its historical fair value. Using the 5-year historical book value of 4 as a benchmark, the current book value of 3.8 suggests a 5% discount to the average.
- Kinross Gold (KGC)- Kinross operates in the Americas, Africa, and Russia. At the end of 2010, its proven reserves were 62.4 million ounces of gold, 90.9 million ounces of silver, and 1.4 billion pounds of copper. The stock is currently trading just 1.3x its book value. If the 5-year history is any measure, the stock should rise 77% and trade at 2.3x book value. The company continued to increase its dividend over the years. Started in 2008, Kinross paid $0.08 per share and now it pays $0.10. The current payout ratio of 10% along with current gold price implies that dividend increases may be around the corner.
- Gold Fields (GFI)- Gold Fields engages in acquisition, exploration, development, and production of gold. At the end of 2010, gold equivalent reserves stood at 78 million ounces. The company’s P/E of 40 is high and price-to-book ratio is fair. While the current dividend yield of 1.7% appears to be high for a gold stock, that dividend is heavily dependent upon the profitability of the business. GFI’s dividend policy is to pay out 50% of its cash earnings depending upon investment opportunities.
- Barrick Gold (ABX)- According to Value Line investment survey, Barrick Gold is fairly valued at 10 times cashflow. With an estimated 2011 cash flow of $6.10 per share, Barrick Gold (ABX) is selling 13.72% below fair value as of September 13, 2011. Despite having a low dividend yield, Barrick has a sustainable dividend payout ratio of 12%, allowing for a substantial decline in earnings if necessary.
And for UK listed shares I recommend buying a selection of the below:
- Rangold Resources – Randgold Resources is an African focused gold mining and exploration company with listings on the London Stock Exchange and Nasdaq. Major discoveries to date include the 7.5 million ounce Morila deposit in southern Mali, the 7 million ounce Yalea deposit and the 5 million ounce Gounkoto deposit, both in western Mali, the 4 million ounce Tongon deposit in the Côte d’Ivoire and the 3 million ounce Massawa deposit in eastern Senegal.
- African Barick Gold – ABG is Tanzania’s largest gold producer and one of the five largest gold producers in Africa. Mineral reserves have been calculated using an assumed long-term average gold price of US$1,000.00 per ounce, a silver price of US$16.00 per ounce and a copper price of US$2.00 per pound, leaving ample room for fat profits.
- Oxus Gold – A much smaller AIM listed Gold stock, with the offers of huge returns, but consequently much higher risk. Oxus is the only publicly listed gold mining company with its main operations inside the Republic of Uzbekistan.
- Goldstone Resources Ltd – GoldStone is an AIM listed exploration company based in South Africa with exploration skills that focus on gold in West and Central Africa.
- African Consolidated Resources Plc – ACR began with a focus on gold in Zimbabwe. The strategy rapidly evolved to a multi-mineral approach and now encompasses the acquisition and development of a diversified portfolio of mineral holdings in Zimbabwe with prospects in Zambia and Mozambique. Such acquisitions and exploration when measured against global comparatives are expected to be extremely cost-competitive.
- African Eagle Resources Plc – African Eagle is developing the major Dutwa nickel project in Tanzania. The Company discovered Dutwa in 2008 and is now conducting a feasibility study. The Company is evaluating a second promising nickel deposit at Zanzui, 50km south of Dutwa. African Eagle also holds significant interests in several “legacy” mineral ventures, acquired before it discovered Dutwa. These include copper in Zambia, gold in Tanzania and uranium.
- Ariana Resources Plc – Ariana Resources plc is an AIM-listed and PLUS-traded gold exploration and development company. Ariana’s advanced projects are located in western Turkey. Production is currently scheduled to start in 2012 on the Red Rabbit Gold Project.
- Cambridge Mineral Resources Plc – Cambridge Minerals operates Gold mines in a number of countries including Colombia, Bulgaria, Serbia, Spain and Peru. This is definitely one of my higher risk preferred choices. I like the diversity of the countries and the aggressive nature, which will return you a hugely leveraged multiple on gold if the price stays high or climbs.
- Cluff Gold Plc– Cluff Gold is a gold developer-producer with assets in West Africa. The Company generates cash flow from its producing asset, Kalsaka in Burkina Faso, which produces 70,000 ounces of gold per annum. The Company strives to become a mid-tier producer through the development of its wholly-owned Baomahun project in Sierra Leone, which is expected to contribute an additional 157,000 ounces of gold per annum, with significant exploration potential along strike.
- Condor Resources – Condor Resources Plc is a UK based AIM listed exploration Company with a strong focus on the exploration and development of gold and silver resources within Central America. The Company owns outright a portfolio of high quality concessions prospective for high-grade epithermal gold and silver in Nicaragua and El Salvador in Central America.
- Eurasia Mining Plc -Eurasia Mining Plc is an international mineral exploration company, listed on the Alternative Investment Market, currently operating in Russia. Eurasia’s stated objective is to explore for the platinum group of metals and gold through self-funded own exploration targets and joint venture partnerships with strategic operators and local partners. Operations are funded from the company’s own equity funds and funded joint venture agreements.
- Mercator Gold Plc – Mercator is now called ECR. ECR Minerals plc is a mineral development company with interests in Argentina, the USA, Indonesia, Thailand and Australia. Our projects and interests encompass a range of commodities with a particular focus on gold and base metals. ECR shares are listed on the Alternative Investment Market (AIM) of the London Stock Exchange with the symbol ECR and are also traded on PLUS Markets. ECR’s American Depositary Receipts (ADRs) are traded in the USA on an over the counter (OTC) basis with the symbol MTDGY
- Shanta Gold – Shanta Gold Limited is an exciting gold exploration and development company, engaged in greenfields to advanced exploration in highly prospective under-explored areas in Tanzania. Shanta boasts a strong board and an experienced mining and exploration management team, combined with influential Tanzanian shareholders and partners
Gold may well correct further, but with the problems in the Euro and sovereign debt far from easing, I would expect these stocks to go much much higher over the next 5 years.
Which gold stocks do you own? Will stocks continue to be a good investment? Leave your comments below.