Gold Miner is “Undervalued Stock of the Month”

By Travis Johnson, Stock Gumshoe, April 9, 2009

Nathan Slaughter edits the Half-Priced Stocks newsletter for StreetAuthority, which is a publisher that puts out a bunch of relatively inexpensive newsletters (you can see reviews of them here, if you’re curious — or add your own reviews).

And as one of their advertising strategies, many of their newsletters write up “stock of the month” type ads — Carla Pasternak puts out “income security of the month” ads that tease a high dividend stock each month (March’s income stock of the month got a bit of attention in this space, for example), and Slaughter’s version is apparently the “undervalued stock of the month” — a pick that highlights a stock that he thinks is trading at a discount to its real value.

I haven’t looked at one of these in quite a while — this same service highlighted Getty Images, Broadcom and Time Warner in 2007, just to give some idea of the types of stocks they’ve touted.

But today, it’s all about a gold miner — the “undervalued stock of the month” for April is apparently a leading miner of the popular yellow stuff, here are the clues they provide:

“This company can get gold from the ground to market for a total cash cost of just $305 per ounce. It’s the lowest-cost producer so it rakes in much fatter profits than its competition for every ounce sold — and it will sell over 2.3 million ounces this year.

“With 45 million ounces waiting to be dug up, this firm is the perfect size — large enough to have reliable income, but still nimble enough for future production growth to really count ….

“… reserves have grown steadily larger for five consecutive years.

“Nearly three-fourths of this company’s reserves are in stable NAFTA countries, not geopolitically risky parts of Africa.

“…. this firm is unhedged, which means the company will be fully leveraged and gain the maximum benefit from stronger bullion.

“Thanks in part to a recent discovery in Mexico (which contains over 17 million ounces), this company’s future production growth will more than double that of two significant mining rivals.”

Sounds pretty good, no? So who matches these clues?

This would have to be … Goldcorp

Goldcorp has indeed reported costs of about $305 per ounce recently, and they do claim the mantle of “lowest cost producer.” Most of their production is in North America, though they also have an interest in one big mine in Argentina (Alumbrera) — some of their other projects are in slightly less stable non-NAFTA countries like the Dominican Republic and Guatemala, but the majority, as teased, are in the US, Mexico and Canada.

The big recent discovery in Mexico of over 17 million ounces, by the way, is the Penasquito mine — it gets a fair amount of attention, so many folks have heard of this one. Goldcorp is now really a major miner, only slightly smaller than Barrick Gold and larger than most of the oft-touted competitors like Agnico-Eagle (AEM), Yamana (AUY), Newmont (NEM) and Kinross (KGC). And they’ve seen stronger growth than many of them, the relatively low cost, growing, large gold companies that I usually hear touted are Yamana Gold and Goldcorp, and GG appears, at least, to be a bit safer to me.

So — should you rush out and buy Goldcorp? That’s your call, of course — Slaughter’s math says that the “real value” of the shares is $50, which would be a very nice gain of about 60% or so from here, but I have no idea whether or not he’s right about that valuation, or whether the market will recognize his wisdom on this. Analysts currently guess that the shares will hit $40, though the highest estimate is $51.

Of course, the biggest driver of future success for Goldcorp will be … the price of gold. Since they are unhedged, they may be hurt more than some other miners if gold falls precipitously, even though their costs tend to be significantly lower. On the flip side, if gold prices rise they get all the benefit, and their low costs mean the margins should be higher.

And that, indeed, is a big part of Slaughter’s argument — he thinks that Goldcorp is undervalued thanks to its large reserves base, growth, and low cost of production, but you wouldn’t ever recommend a gold stock if you thought gold would be falling substantially. He repeats the arguments made many times, by many people, that US inflation (maybe even hyperinflation) in the future is inevitable thanks to the massive debt increase to pay for stimulus, bailouts, and all the rest of the money printing that’s being done to try to stave off a depression. The idea being, of course, that gold is the only “real money” and that it will hold its value when paper currencies tumble. That’s certainly common wisdom these days, though deflation remains the larger concern for many prognosticators, at least in the near term … and there are still plenty of folks who remember the decades-long crash of gold prices after the last time we worked our way through hyperinflation, so questioning your assumptions is always a good idea.

This is a chance to buy a company that has a world class mine just beginning production late this year (Penasquito), and with a fairly broad portfolio of other producing and exploratory assets in mining-friendly countries, but of course that’s no guarantee of success. They have generally done better than their peers over the past couple years — while the shares move almost exactly with the Gold Miners Index (GDX) on any given day, they have outperformed that index considerably over the last two years.

Gold miners as a group tend to move more radically than the price of gold, overreacting both on the high and low sides, but one way that investors track this is to look at the Gold/XAU ratio (the XAU is another index of major gold stocks) — historically that ratio has been around four or five for most of the past decade, but it spiked up to well over ten last year, which made gold miners a “no brainer” way to buy undervalued gold. Since the mining stocks got a lot of attention with our more recent gold run-up to $1,000, the ratio has fallen substantially and now stands right around 7 — still historically high, but not as out of wack as it was last Fall. Mining stocks have recently also benefited from investor recognition that their costs are falling — gold miners are massive consumers of energy, so when oil and gas prices collapsed as gold prices remained historically very high, margins should have improved for almost every gold miner.

I do own shares of several smaller gold miners, but do not have an interest in Goldcorp (though one of my holdings, Royal Gold, does have a royalty interest in the Penasquito mine that I mentioned above).

So … are you a friend or foe of gold? Any thought about your favorite miner, be it Goldcorp or someone else? Please share with a comment below … and happy investing, everyone!

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21 Comments on "Gold Miner is “Undervalued Stock of the Month”"

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Monnie
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Monnie
April 9, 2009 11:13 am

Anyone familiar with Mark Skousen’s “Greatest Buying Opportunity of All Time”?

fabian
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fabian
April 9, 2009 11:17 am
Gold is in the lower band of the trading range. I sold my GG this month even if this holding saved my porfolio during these trouble times. I think gold went up for a flight to safety reason not so much for a fear of hyper inflation. Inflation is far away for the moment. If gold breaks supports (and it is tickling support now), GG should drop with the rest of the sector. Of course, gold and GG are a good hedge against any bad new lurking around but, for the moment, the flight to safety trade seems to lose… Read more »
Mary Ann
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Mary Ann
April 9, 2009 11:26 am

I hold GG; like it a lot for the reasons listed. I keep selling call options on it and it just keeps paying off.

I think everyone should have a little gold miner in their portfolio for hedging.

I use the same technique with GDX, the gold miners ETF.

I’m not a day trader, but when the gold stocks shoot up I sell call options on them. If they get called, it’s ok with me as I’ve already made a profit. I keep doing it over and over again.

hungrybill
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hungrybill
April 9, 2009 11:32 am

If you think the price of gold is going up, you should buy the Highest Cost producer, not the lowest. The earnings per share are what determines a stock price, and the leverage on earnings is better on high cost producers.

john sloan
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April 9, 2009 10:27 pm
I have had a sizable (for me) position in GLD for some time and smaller positions in Yamana, Kinross, Novagold and GG. All the miners are under water at the moment. 2 days ago I did a trend line comparison between GLD and DGL both versus GDX. GLD and DGL are virtually the same over one year – slight gradual trend up. But GDX is down a lot. I bought with a 5 year horizon so am simply standing pat for now. My view is that we are in a serious deflation that will last into 2010 but after than… Read more »
krishna
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krishna
April 10, 2009 8:26 am

If you like GG, check out their warrants – exercisable in 2011…dyod. more than one way to skin this beast

Myron Martin
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Myron Martin
April 10, 2009 11:06 am
Have made very good money on Goldcorp and believe LONG TERM it is still one of the better investments in the gold sector. Selling covered calls IS an excellent strategy and makes holding G (Canada) worthwhile in this manipulated market. If there were a true free market gold would already be at about $2200. to reflct the inflation adjusted price at which it peaked in 1980-81! What many investors do not realize is that there is a contest going on between GOLD BUGS who believe, (and I believe correctly) that Gold and Silver are REAL MONEY and the International Banksters… Read more »
john sloan
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April 10, 2009 1:00 pm
Myron Martin in my opinion is 100 percent right on – my addition is that fractional reserves is not only or even principally the policy of the banksters. It is government itself with creation of FED and other central banks to create steady inflation that is behind it. The banksters are just facilitating the government policy for a nice fee. The central issue today is that the ‘welfare state’ MUST have steady inflation for even a hope of survival. With the end of a century of inflation and the advent of deflation governments are panicing and desperately trying to generate… Read more »
Truthpeeler
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Truthpeeler
April 10, 2009 2:08 pm

Problem with your analysis is the fact that the price of gold has outpaced the price of miners for awhile now. I’m still waiting though for the day when the miners catch up and exceed the ascent of the hard stuff. But I may be waiting forever. It really is a crap shoot.

Mort T
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Mort T
April 10, 2009 6:07 pm

Silver has since the beginning of the year been an interesting play, since it’s price ratio to gold has been significantly lower than average. I bought SLV at $10.08 in January, sold it at $3.25. It’s since moved down and bounced, if gold moved up again could go to $16.

Mort T
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Mort T
April 10, 2009 6:08 pm

Sorry, sold at $13.25

Sam
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Sam
April 10, 2009 7:24 pm

Another similar gold miner I would like you to comment on is Eldorado Gold Corporation (AMEX: EGO) it boasts a $298 per ounce cost and 58% profit margin and is unhedged. Growth plans are 800,000 an ounce each year up to 2013.

medstuff
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medstuff
April 11, 2009 10:23 am

I am a gold fan but it looks like I’m preaching to the choir here. I have a fixed % of my net worth in gold bullion “as the ultimate insurance policy” against a global meltdown; this is constant and not a tradable position. I “trade” about 2-3% of my net worth in gold stocks and GG is my favorite major. AZK is my favorite minor.

Monnie
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Monnie
April 9, 2009 12:14 pm

Hungrybill,

Pls explain. This seems counterintuitive.

SageNot
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SageNot
April 9, 2009 12:32 pm

Take a bow Mary Ann, that strategy is “right on,” Congrats!

Mahkel
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Mahkel
April 9, 2009 4:04 pm

Sounds great, Mary Ann…
I take it you sell Out-Of-The-Money options with the closest expiry-month, right? How about the killer-fees when you get exercised? Any wisdom there for a beginner?

John
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John
April 9, 2009 1:48 pm

Gold miners are a leveraged bet on the price of gold. If gold goes from $1000 to 1100, you have a 10% profit. For a miner with costs of $500, the same change increases profits from $500 to 600, a 20% increase. For a high cost miner at $900, profits increase from $100 to 200, a 100% increase. Of course, down moves are similarly leveraged.

Truthpeeler
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Truthpeeler
April 10, 2009 2:04 pm
Gravity Switch
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April 10, 2009 2:16 pm

GGN is leveraged also, and has a fairly high expense ratio (not that unusual for a closed end fund). It does have a big distribution, but a lot of folks are afraid of leveraged funds right now, regardless. I don’t know much else about that one, but do keep in mind that it’s about 60/40 mining and energy-related stocks at the moment. More info at http://www.cefa.com/FundSelector/FundDetail.fs?ID=99613 if anyone’s interested in this one.

caren pereira
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caren pereira
April 10, 2009 7:04 pm

What is your opinion of investing in ‘prospect generators’ i.e., Azimut or Almaden Minerals, as compared to investing in the major producers? Do you feel there is more potential upside for the prospect generators?

John Sanders
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John Sanders
April 13, 2009 3:38 pm
have to give you a little of my experience at trading. I started with 12,000 and got in the stocks right at the fall of the market. i lost 7,000 before i made the moves i had to to save some of my money. really did alot of studying and put what i had left back in the market in mostly gold mine stocks, i have been making a considerable amount of my loses back rideing two gold mine stocks that i started with at UXG .78 and drooy 3.50, Anns strategy is great and im sure she would have… Read more »
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