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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